Polaris Inc. (PII) Q2 2014 Earnings Report, Transcript and Summary

Good morning. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. [Operator Instructions] Thank you. Mr. Edwards you may begin your conference.

Thank you, Simon and good morning, everyone, and thank you for joining us for our second quarter 2014 earnings conference call. A slide presentation is accessible at our website at www.polarisindustries.com/irhome, which has additional information for this morning's call. The speakers today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer and Mike Malone, our Chief Financial Officer. During today’s call, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels and other matters, including more specific guidance on our expectations for 2014, 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 projected in the forward-looking statements. Now I’ll turn it over to Scott Wine. Scott?

Good morning and thank you for joining us. Over the years, I've learned not to underestimate what our Polaris team can accomplish, which matches with my consistently high expectations. With tremendous energy being expended to built new plans, grow internationally, drive our LEAN transformation and prepare for launch of an awesome array of new products, it was impressive to our see North American team deliver 15% retail sales growth in the second quarter. As we get ready to celebrate our 60th anniversary, there’s no better way to honor our history than by demonstrating it through the Polaris tradition of passionate execution, perseverance, teamwork and innovation, we can overcome a lackluster economy and increasing competition. With broad strength across our portfolio of global businesses and brands Polaris' second quarter sales increased 20% to just over $1 million, representing accelerating growth both sequentially and year-over-year. It was encouraging to see our best retail performance in two years precede the launch of an outstanding lineup of Model Year’15 vehicles and a welcome surprise to report quarterly sales growth in EMEA and Asia Pacific, Latin America outpaced growth here in North America. In line with our emphasis on profitable growth, earnings outpaced revenue in the second quarter with net income increasing 21% to $96.9 million yielding record earnings per share of $1.42, up 26% over the prior year period. Despite continued pressure from the Canadian dollar, we delivered a small 20 basis point improvement in gross profit margin, supporting our second consecutive quarter of 24% growth in operating income. Mike and Bennett will provide details on this outstanding quarter shortly. While there is a minimal impact on our results, we are keenly aware of the turbulence and uncertainty in many parts of the world and remain skeptical of the outlook for the U.S economy. With many improving trends in our own retail sales and market share gains throughout the first half and undoubtedly our best year of product innovation yet to be unveiled, we are encouraged as we approach the final six months of 2014. We are maintaining our outlook for moderate and mid-single digit growth in the overall powersports industry and anticipate that share gains will continue to drive our growth. As we work to deliver just over $2.5 billion in revenue in the second half, we are increasing our full-year sales estimate to be up 16% to 18% over 2013. Correspondingly, we are raising full-year earnings per share projections to $6.48 to $6.58, a 20% to 22% increase. During our extensive preparations for next week's 60th anniversary dealer show, we have many opportunities to reflect on our progress over the past six decades. We still benefit greatly from the spirit of innovation and hard work that Edgar and Al and the team and David Johnson instilled in the company in 1954. And we proudly follow the trail they blazed with that first snow wheel by continuing to take risks, build new products and create new markets. From Edgar, Allen and David’s humble beginnings arose in Minnesota we have grown to accomplish 12 plants and over 6500 employees around the world, not to mention more business units may had vehicles. But we strive to maintain the humility that was their hallmark. Confidence and comparatives are also key attributes of our Polaris culture and certainly contribute to the innovative products and excellent execution that enables us to be clear number one in a highly contested powersports industry. We have in our model of vehicles to provide excitement, get the hardest work done and bring families and friends together. From our legacy snow products to our new Indian motorcycles, we are constantly building our heritage with industry-leading style and performance. Our new ACE vehicle is a great addition to our pioneering RZR, Rangers Sportsman ATVs and we are far from done pushing the industry forward. Strategy will play an even larger role in assessing Polaris over the next 60 years as we position ourselves to compete in new markets, in new parts of the world with new technology. We remain committed to our five strategic objectives, with the expectation that we will create shareholder value by delivering on our goal of building a highly profitable $8 billion global enterprise by 2020. Whether it’s continuing to express our lead in the best in car sports plus or expanding our adjacent market business with international acquisitions, we will win with people. We have talented competitive hardworking employees, and I’m energized by what they do every day to make Polaris a better company. From the passion and ingenuity of our sales team to the tireless efforts of our operation staff, we are embracing LEAN and improving every aspect of Polaris, while fulfilling the significant customer demand that drives our business. We will surely have more facilities and people of different products and customers and new challenging competitors in the future, but as we look to next decade, I’m excited about our potential to execute our strategy and do big things. Our executive leadership team will provide additional perspective on our businesses, plans and strategies on Monday, July 28 here in the Twin Cities at our Analyst Investor Meeting, which I hope many of you will attend. With that, I will turn it over to our President and Chief Operating Officer, Bennett Morgan, to provide insights into our operations and business unit performance.

Thanks, Scott, good morning, everyone. Polaris North American market share and retail sales accelerated considerably in the second quarter. The 15% increase in retail was driven by excellent ORV and motorcycle retail demand in our powersports industry that was up mid-single digits. Dealer inventory decreased from the first quarter and is up 13% versus the second quarter of 2013. ORV inventory introduced low-teens percent, Motorcyles about 20% and snow and small vehicles, low single digits percent. Our working inventory composition remains very good. Year-over-year increases are primarily in support of incremental ORV customer segments, Indian expansion and new dealer distribution points. We are in a very healthy position, as we transition into the Model Year’15 products. Moving on to business unit performance, Off-Road Vehicles. Polaris, second quarter ORV revenue increased 13% driven by strong RZR, ATV and ACE demand. Year-to-date, ORV revenues is up 12%. For the 29th consecutive quarter, we gained share in ORVs in North America gaining in both ATVs and side by sides and building upon our clear number one positions. Polaris ORV retail sales improved to up low double digits in an industry that increased upper single digits. Polaris ATV retail sales increased mid-single digits in an industry that grew low-single digits, while Polaris side by side retail sales grew robust low-teens percent exceeding our industry estimates by roughly 3% to 4%. Sales increased across our entire side by side portfolio with Rangers and RZR both up double-digits and all our customer segments growing in each brand. ACE continues to sell briskly and provide excellent instrumentality. We've already began the Model Year’15 product launches with a bang with last month’s announcement of the Model Year ’15 Ranger XP900 that received 13% more power and Red Hot RZR XP1000 that is now up to a 110 horsepower. We are less than a week away from our 60th Anniversary Dealer Meeting where we will launch the balance of our 2015 model lineup and we again have tremendous product and business news across our ORV portfolio. Motorcycles, Motorcycle revenues more than doubled in Q2 up a 107% primarily due to Indian retail sales and dealer expansion. Year-to-date motorcycle revenue was up 79%. Polaris motorcycles continue to expand -- significantly expand North American market share. Polaris second quarter retail sales grew at about a 50% rate in a heavy weight industry that was about flat. Victory Retail was down mid-single digits and lost a small bit of share likely due to an execution of a product we called back in May. Nevertheless, we remain encouraged by the resilience of the Victory brand and distribution channel. We recently promoted [Rob] (ph) to General Manager of Victory to lead the brand team and dealer network to new levels of performance. Indian sales momentum remains very positive with Vintage [sheet] (ph) sales leading the way by our quality satisfaction is extremely high and sales per dealer is very strong. We now have over 95 North American dealers actively retailing India. The timing from dealer sign up to dealers being ready to retail continues to be more variable and take longer than we initially anticipated. As a result, we now expect to have about 125 retailing dealers at year end. Our long term outlook of approximately 300 North American Indian dealers remains unchanged. We are eagerly anticipating the full unveiling of our compelling Model Year’15 motorcycle product launches. They began earlier this month, with the announcement of hotly demanded two-tone paint versions on all current Model Year’15 Indian models and we will introduce further news for Indian and Victory at our 60th Anniversary Dealer Meeting next week and in [Sturgis] (ph) in early August as Polaris continues to rapidly expand our American Motorcycle business. Slingshot, the worst kept secret in powersports is about to be unveiled as the official public reveal of our exhilarating new Slingshot will occur on July 27th during our 60th Anniversary Sales Meeting in Minneapolis. There we will launch two distinct trim levels, a base trim level model called Slingshot and a premium priced model with additional features called Slingshot SL. Social media is buzzing in anticipation of this exciting new on-road driving experience. Further details will be announced at the meeting, so stay tuned for more. Snowmobiles; second quarter is a seasonally slow quarters for snowmobile shipments and retail sales. Q2 revenues were $6.1 million down versus 2013’s $8.5 million. Model year 2015 orders are complete and in total slightly exceeded our expectations. Strong North American dealer and consumer snow check orders were offset by weaker Scandinavian and Russian orders due to poor snowfall. With a positive response to our Model Year '15 product lineup led by our new access platform, we are excited for the start of the upcoming fall snow shows and riding season. Parts, Garments and Accessories; PG&A momentum remains very healthy with both second quarter and year-to-date revenue up 20% led by strength in both ORV and Motorcycle related products. All product segments grew led by accessories, which were up 26% and apparel up 57%. KLIM had another excellent quarter and year-to-date sales have grown 36%. Kolpin has gotten off to a fast start and as a quality outcome market brand to our portfolio, providing access to new distribution channels and customers. Our Wilmington, Ohio PG&A distribution center has improved service levels to our Eastern U.S. customers over the past year and in July, we extended its support to our Eastern Canadian dealer network. And innovation reminds it's alive as ever in PG&A. Next week we will launch over 350 new accessories to support the largest new product launch in our history. These new products highlight our commitment to seamless integration with the vehicle, user installation and improved quality. We couldn’t be more pleased with our performance and consistency in our highest margin business and we remain bullish on building on this momentum in upcoming quarters. Commercial; as expected, second quarter Polaris commercial revenues declined mid-teens percents since we face much tougher year-over-year initial channel fill comparables for Brutus. Brutus retail sales in the second quarter improved but remained below projections and clearly it will take longer to gain scale with the business to business customer than we had initially forecasted. Bobcat retail improved strong double digits and our national account business continues to post nice quarterly increases. Defense; defense sales improved by about 50% in the second quarter and the entire business is gaining momentum. International sales were up about a 100%. Customer code activity is increasing. Our order backlog is up notably and our MRZR and Dagger vehicles are receiving outstanding customer acceptance. Our defense outlook has never been so encouraging. Small vehicles; small vehicle revenue increased 29% in the second quarter led by Aixam. GEM and Goupil also contributed to Q2 small vehicles growth. Aixam had another strong quarter considerable expanding its market share leadership position with retail upper mid single digits in a European quarter cycle market that remained down low single digits in Q2. The Aixam business is operating at a high level one year after the acquisition and we are finding additional synergies to drive further profitability and efficiencies. Our GEM and Goupil businesses continue to improve. Goupil’s Q2 revenue and profits grew despite sluggishness in its domestic French market. GEM retail increased double digits. Orders were up. Business to business penetration is trending upward and we are seeing increased backend cost improvements. International; international revenue was up 26% in the second quarter, driven by strong RAZR, Indian Motorcycle and small vehicle demand and excellent sales momentum in all regions. Year-to-date international sales are up 34%. Europe, Middle East and Africa had another very solid quarter with revenue increasing 22%. We continue to outperform the industry and gain significant market share in both ORVs and Motorcycles. ORV retail sales are up low-teens percent year-to-date and Motorcycle sales on the strength of Indian are up over 80%. European markets are also improving with year-to-date ORV industry sales increasing low single digits and Motorcycle industry sales up high single digits. The European Snowmobile industry ended a disappointing season with retail down low single digits and Polaris down a bit more seeding some share for the season. Our Opole, Poland plant is substantially complete and will begin initial limited ORV production early in the fourth quarter. Shipments to customers will not commence until January 2015. Asia Pacific second quarter revenue increased 40% led by strength in Australia, New Zealand and China. In Australia, our largest subsidiary market share is up significantly in both ORVs and Motorcycles. Q2 sales in Latin America surged up 36%. The launch of our New Mexico subsidiary has gone even better than expected and Brazil remains strong. Our overall international business is performing at a higher level across the globe in 2014 as our teams and brands continue to strengthen. LEAN enterprises competitive advantage; LEAN initiatives continue to drive results at Polaris. Gross margins improved 20 basis points despite pressure from Canadian currency and product mix. Consumer quality and warranty improved. Retail floor management or RFM is driving results in Motorcycles with 14-day order to ship lead times. Q2 productivity improved 5% helped by Kaizen teams attacking key opportunities such as reduced assembly and change over times and lead time and inventory reductions in our various businesses. Factory inventory is up 31% versus a year ago driven by product mix, acquisitions, new products and timing to assist with second half production capacity. We are bringing in number of planned investments online in our third quarter. New ace in ranger lines in Milford, a liquid paint system and new Slingshot and Motorcycle lines in Spirit Lake, additional mono-rate capacity increases and of course Opole, but these will take a better time to ramp up. As a result, with all of our demand growth we are essentially at full production capacity especially in ORVs for most of the second half. And with that, I'll turn it over to Mike Malone, our CFO.

Thanks Bennett and good morning to everyone. It is gratifying to report that our 2014 second quarter results represent another record quarter for sales and earnings for the company. As Scott mentioned earlier, we are again raising our full year sales and earnings guidance as follows. Total company sales are now expected to increase 16% to 18% driven by increases in our ORV and international businesses as follows. ORVs are now expected to grow 11% to 13%, up from prior guidance of 9% to 11% and international sales are now expected to increase low-teens percent. Our previously issued sales guidance for the other businesses remain unchanged. Snowmobiles are expected to grow mid single digits percent. Motorcycles are expected to increase 65% to 75%. Small vehicles are expected to increase 25% to 30% and PG&A sales are projected to be up about 20% including the sales from the Kolpin acquisition. Moving down to P &L, given our performance at the gross margin level for the first half of the year, we now expect gross margins to decline in the 30 to 50 basis point range, slightly better than our previous guidance. I will provide more detail on my next slide. Operating expenses as a percentage of sales are expected to decline about 60 to 80 basis points in 2014, a modest change from our previously issued guidance of down about a 100 basis points. The variation is primarily driven by our desire to make additional investments in sales, marketing, product development and distribution in some of the new brands namely Indian and Slingshot and to make various other global investments in future growth opportunities. In addition, in the second quarter, we’ve made an additional provision for product liability cost related to a settlement of a significant case. We will continue to expect positive benefits to operating expenses from our planned reduction in our incentive compensation expenses related to changes made to the long term incentive plan as we have previously discussed. The income generated from our financial services business is now expected to grow about 20% for the full year and improvement from prior guidance due to the improved profitability of the Polaris acceptance dealer financing portfolio. The net result of these guidance moves does not change our expectation for operating profit margin expansion. We continue to expect the 2014 operating profit margin to grow in a percentage range similar to what we actually grew in 2013. The expected income tax provision rate for the full year remains unchanged at 34.25% to 34.5% of pretax income compared to 33.7% last year. Although the U.S. Congress has not yet extended the research and development tax credit for calendar 2014, which has caused our second quarter tax rate to be higher than last year, our guidance assumes the legislation will be passed retroactive for the full year in the fourth quarter of 2014. Earnings per share from continuing operations for the full year is now expected to be in a range of $6.48 to $6.58, up 20% to 22% while net income from continuing operations is projected to increase 16% to 18%. For the full year 2014, the number of diluted shares outstanding is expected to decrease between 2% and 3% compared to last year due to the Fuji share repurchase late in the year. Compared to last year, the 2014 second quarter gross profit margin percentage increased by 20 basis points to 30.1% and year-to-date it is up 10 basis points. Given the better than expected performance in our gross profit margin percentage year-to-date, we are adjusting our 2014 full year guidance and now expect gross profit margins to decline only 30-50 basis points for the full year. We project that we will continue to benefit from higher selling prices and product cost reduction efforts as we have the past three years. However, as we have previously discussed, we expect a negative impact from currencies this year, especially the Canadian dollar, which has a much greater impact in the second half of the year when we shipped the majority of our Snowmobiles to Canada. The second quarter currency impacts were negative versus last year, but not quite as much as expected given the modest sequential improvement of the Canadian dollar exchange rate during the quarter. Currently, we have about two thirds of our remaining 2014 Canadian dollar exposure hedged at a rate of about $0.92, which puts us in a more predictable position than earlier in the year. The impact of the remaining items listed on the gross margin slide for the full year 2014 has not changed from previously issued guidance. Moving now to the balance sheet and liquidity profile, net cash provided by operating activities was $131 million for the first half of the year up 26% from the first half of last year. We now expect cash flow provided by operating activities for the full year 2014 to increase at a slightly higher percentage rate than net income growth. At the end of the second quarter, our cash balance was $119 million while our total debt balance of $368 million is higher than a year ago primarily due to the repurchase of about $500 million of Polaris stock from Fuji in the fourth quarter of last year. For the first half of 2014, our investments in capital expenditures and new product development tooling totaled $102 million up slightly from last year. For the full year 2014, we continue to anticipate capital expenditures will be lower than last year, but still exceed $200 million. Polaris acceptance receivables from dealers in the U.S. were $880 million at the end of June 2014, an increase of 23% from a year ago but down 8% sequentially from the first quarter of 2014. The year-over-year increase of 23% in dollars reflects the mixed change of higher value side-by-side vehicles and Motorcycles and the increased PG&A sales or as the units in the portfolio grew at a 15% pace. The retail credit environment remained stable with approval rates of 54% for the first half of the year and penetration rate of 32% each slightly lower than a year ago. In summary, these solid first half results provide a springboard for what is expected to be another record year for Polaris. I will turn it back to Scott for some closing comments.

Thanks Mike. July is the busiest month of the year at Polaris and between today’s results and next week’s new model introductions I believe it may also be the best month of 2014. Coming on the heels of an overall solid and sequentially improving first half, we started the back half of 2014 with high expectations and even at a higher sense of urgency. We gained market share in side-by-sides and ATVs in the first two quarters, though with Tim Larson’s customer excellence efforts providing better sales pools to complement a magnificent array of new vehicles, we expect to accelerate share gains and retail sales growth over the strong first half performance. Indian Motorcycles had a good first year delighting thousands of new customers and contributing to the growth of not just Polaris but the entire Motorcycle industry. I love my new Chief and I am pleased with how Steve Menneto and his team have positioned the business for the future. But we did not deliver our A-game in year one. As we get better and our lineup gets bigger, I am more confident than ever about the future of our Motorcycle business and this includes a bright outlook for victory, which continues to supply bold styling and outstanding quality to discriminating riders who want our edge. Motorcycles, ATVs, Snowmobiles and every vehicle in our stable are better by our Polaris engineer parts, accessories and apparels. Steve Eastman and his team are building capability to enhance customer value and continue the aggressive growth trend thereon. With new plants nearing completion in Poland and India, excellent performance from our Axiam mega business and heightened global interest in Indian RAZR, sportsman and ACE and other products, we expect to maintain above-market growth in our international businesses. We are diligently building capability enhancing the offerings of our small vehicle military and commercial vehicle businesses. These are attractive markets and a priority for future investments. I remain much more confident in this Polaris team and business than I am in the U.S. economy and global stability, which is again that what we frequently refer to at Polaris as a very bad baseline. In turbulent times, leadership matters, and I have tremendous confidence in the leaders at every level of Polaris. We have many interesting opportunities and no shortage of challenges in the months and years ahead. Expect a lot from this team. I certainly do. With that, I'll turn it over to Simon to open the line for questions.

[Operator Instructions] Your first question comes from the line of James Hardiman with Longbow Research. Your line is open. James Hardiman – Longbow Research: Hi, good morning. Thanks for taking my call and congrats on a great quarter. Couple questions on gross margin, obviously you saw some real nice acceleration in the second quarter. Gross margins ended up being certainly better than I think most of us thought. I guess how does that gross margin number compare to how you guys were thinking about things in the second quarter and in particular given the fact that even though you tweaked the number, second half still looks like it's going to need to be down meaningfully. So maybe talk a little bit about mix within 2Q for gross margins, which products were outperforming, which maybe not as much so and then the back half of the year, how should we think about mix and then the other piece just being the promotional environment. You guys are talking more about that in recent quarters. I didn’t hear as much of that on this call, maybe talk a little bit about competitive environment with respect to promotions. Thanks.

Okay James, this is Mike. I will try to answer all of those questions succinctly. I think the way -- we expected the second quarter gross margins to be down left than the full year expectation. So when we gave our guidance we -- we knew that the second half of the year was going to be tougher for us on our gross margins than the first half of the year and that’s how it played out. I will tell you that the 20 basis points is probably a little bit better than what we had thought going in. The pieces of that are the Canadian Dollar improved a little bit during the quarter and as we said at the end of the last quarter we weren’t hedged very much on the Canadian Dollar. So as it improved, the penalty if you will is probably less impactful and the negative impact in the second quarter than what we had planned. So as a result of that we were able to get some more hedges. So as I said, we were about two-thirds hedged now on the Canadian dollar for the balance of the year at about $0.92. So the good news is that that gives us a little bit more predictability and less volatility as we are go into the second half but it does kind of lock in if you will the year-over-year negativity of the Canadian Dollar in the second half, which we have about two-thirds of our Canadian sales are in the second half of the year versus the first half of the year. As far as the mix is concerned the mix is generally about the same quarter-to-quarter. We will have accelerated ACE shipments in the second half of the year as we were just kind of ramping up in the first half and will have full Model Year'15 ACE line in the second half. So the ACE mix impact is little bit tougher in the second half. Hopefully that gives you some context to the markets. James Hardiman – Longbow Research: It does. And just a couple of comments on the promotional environment it seems like may be bless of a pinch or less of a worry may be going forward than you felt in the last couple of quarters, can you comment on that a little bit.

Yes James, this is Ben. And I think the other thing I would add to Mike’s comment was that our plans have been performed at a pretty high level year to day, I think that was a little bit helpful to our margin performances as well. On the promo environment, it's pretty much what we have seen. It remains elevated and side by sides and I would say ATV is essentially stable. And what we're seeing is pretty much consistent with how we model the year going in and we expect it to remain aggressive and side by sides particularly may be in the RZR recreational space and stable in ATV. So as we do new products and other guys do new products it changes the mix, but again I would say it's kind of breaking down pretty much as we saw it as we came into the year. So I would say that we feel good about that. James Hardiman – Longbow Research: Great. Thanks guys. See you next week.

Yes, next question. Operator Your next question comes from the line of Scott Stember with Sidoti & Company. Your line is open. Scott Stember - Sidoti & Company: Could you may be touch space on comments that you made about capacity. If I heard correctly you talked about how in the back half of the year and particularly side by side that ORV you are going to be adding capacity, could you talk about how you will work your way through that in the back half, particularly with the new models coming out next week and maybe just talk about some of these expansion projects that you’ve talked about outside of Europe?

Yes, Scott, this is Bennett. I don't think this is any reason for concern. Frankly with all the growth we've had over the last five years, as we've gotten into the second half of the last three years this has been a fairly normal situation for us. We're pretty tight in the second half of the year. So a little bit tighter than it's been. So we thought we would call it out. We are making as you guys have heard a number of investments to improve our capacity and a lot of those are coming online and frankly there are all on track. So Milford is frankly right on schedule and for the last the additional new volume ACE and Ranger line that looks good. Spirit Lake is really becoming a motorcycle and a road plant with paint system and again they are tracking beautifully well. And [indiscernible] are amidst expansion projects as well so as well as Osceola. So capacity is coming along really, really nicely and again Poland is right on track as well and that will start early in the fourth quarter. So all the capacity stuff is going right as we planned. The team is executing well and we are excited to bring that additional capacity online. Scott Stember - Sidoti & Company: Okay. And a follow-up question just on the European facility, beyond the obvious benefits of building product cheaper that you can sell into Europe, can you talk about some of the other inherent benefits such as being able to build purposely build models for the Euroepan marketplace and how you would expect that to manifest itself in 2015 and beyond?

Yes, again I think it's a -- we don't believe it's going to be significant long term competitive advantage to have a plant in Poland right in the region will be really on fewer only guys building purpose build European region products in the market. We should save only with just with our speed to market will become much quicker and then frankly over a period of time, we will be able to do a lot on the product development side and really rather than what I call North American -- really sign was right there in Poland for that market place and I think long term that's a big competitive advantage for us. Scott Stember - Sidoti & Company: Okay and last question on Brutus. You talked about the tough year-to-year comparisons as we doing in the initial role out last year around this time. And you also talked about the still more work that needs to be done to bring that product up to stock. Is there is anything else to be read into that or we just talking this last quarter just tough comparisons.

Well, I think clearly we are one year into it we are coming up against comparable issues, but obviously we've been pretty clear, we're not thrilled with our initial starting penetration with that customer base. I think we were clearly too optimistic, but we also know that we need to do much better and we are going to need take different strategies and tactics and I think you will be hearing more from us in upcoming quarter on how we are going to get that going because we remain very committed to this segment of the market. It is a big long term opportunity for us. Scott Stember - Sidoti & Company: Great. That’s all I have. Thanks guys.

Thank you. Next question please.

Next question comes from the line of Robin Farley with UBS. Your line is open.

Great thanks. Two question. One is just back on the envelop I am calculating Indian market share as a percentage and the U.S. heavyweight is being about 3% market share, I just wonder if you could confirm that ballpark. And then my other question is looking at your total revenue guidance and then the category that went up with also vehicles is relative to your previous guidance. But that actually doesn’t explain all of the increase. So I assume you moved up within the existing range in some of your other segments. I wonder if you could just highlight which other segment as we saw your expectations move up even though the range didn’t change.

Hi Robin, it's Scott. You are not too far out of the ballpark going on the Indian market share. Obviously it's early and you are just ramping up and lots of opportunities, but we're in that low single-digit range and we will expect to ramp that up quite significantly over time. From our guidance that you could tell we still feel really good about where we are today with Indian and after the next couple of weeks when Steve and his team unveil the products to compete for the remainder of the year, I think we will feel even better. So that's certainly positive outlook for what Steve and his team are doing with that business. Mike do you want to take the revenue.

I think the revenue guidance changes. My guess it's in the rounding with ORBs being two-thirds of our sales and that guidance going up. That's the bulk of the increase. We also did increase our international sales guidance a bit not a lot, but a little bit. So we've been very happy and surprised with the strength of our sales outside of North America. So those are the two that went up and the balance is rounding. Robin Farley – UBS: Okay. Great. Then just lastly, you talk about production capacity in the second half also pretty full at that level of the second half. Will that be the case heading into Q1 next year or at that point will you have increased production capacity completed the other facilities you’ve talked about. Will that be only a second half issue and not a 2015 issue?

Yes Robin. It's really just a second half issue. The way our market places exist we have more demand in the second half so we feel that pinch a little bit more normally in the second half. The first half generally is not a pressure point for us and as we bring a lot of this capacity we are obviously clearing up some additional capacity. I would tell you as we continue to grow rapidly, I think capacity investments may become a way of life for us. They certainly have over the last few years and I again based on our growth outlook I don’t see that changing in the forcible future. I think we'll have to continue to invest in capacity. Robin Farley – UBS: Thank you.

Thanks Robin. Next question.

Your next question comes from the line of Scott Hamann with KeyBanc Capital Markets. Your line is open. Scott Hamann – KeyBanc Capital Markets: Hey. Thanks. Good morning everyone. Just a couple of questions, number one on the motorcycle guidance overall I guess it has not changed, but can you maybe speak to the three main components of that. And may be if Victory was a little bit lighter if that is moving up and where do we stand with Slingshot. Interestingly just on the Polaris facility we keep a sense of what the expense cost were and see if that in 2014 and what the anticipated benefit would be for 2015 thanks.

Hey Scott. Not surprisingly. We are not going to give a whole lot more color on the mix. Not dramatically different for motor cycles than it was at the beginning of the year. Obviously India is doing a little bit better and Victory with the recall had a slight blip there in May, but overall they are still in the game and we haven’t even shift the Slingshot yet. So, that’s not a huge contributor, but it's still a part of the mix. But overall years playing up as we step by holding our guidance, pretty much like we expected in the motorcycles segment. Mike you want to cover that.

So, the primary plan start up cost impediment to our gross margins this year is Poland investment. As we have said we were ramping up throughout the year on our investments in Poland. We haven’t been real specific with exactly how much impact that has on the gross margins this year. But as we get the plan finished and we start production next year that impact on the gross margins next year will still be probably a negative, but it will be less dilutive than it is in 2014. And then at mutuality when we get the plan up and running fully and we got fully capacity utilization, we expect $20 million of annualized saving from the Poland facility. So that will not happen at once, but it will ramp up as we move to capacity utilization. Scott Hamann – KeyBanc Capital Markets: Okay. Is it safe to say that in terms of dollars though that it may be the hit to 2014 was similar to Monterey in terms of the start-up cost.

It's probably a little less than that. Scott Hamann – KeyBanc Capital Markets: Okay. Alright thanks.

Next question. Operator Your next question comes from the line of Gerrick Johnson – BMO Capital Market. Your line is open. Gerrick Johnson – BMO Capital Market: Thanks. Good morning. I wanted to ask you a couple of questions on ACE. Did it achieve the goal that you were looking forward to attract new riders, younger riders women? Put in another way where are the sales coming from new riders or share gains or perhaps cannibalization and then related to that you mentioned ATV retail up mid-single digits excluding ACE. Why exclude ACE. What would have looked like with ACE and then did you gain share in ATV. You gained share in ATV, did you gain it with ACE or without ACE. Thank you.

Gerrick. That’s kind of lot of questions. Alright. Let me.

Actually we tried to make it more clear.

Alright let me talk first about ACE and then I’ll go into some of the ATV comments. ACE is I think doing everything we expected. It's frankly a little bit better than expected. I think the most I don’t want to say pleasant surprise so far as we at least by our studies it had a very little cannibalization impact. It's almost been 100% incremental so far. We are reaching the customer base that you mentioned again the other real positive sign of this is reaching new or underutilized customers that probably would not have gotten on our types of products and it also was appealing to a broader sense within the existing categories. So we are feeling really good about the customer base that ACE is drawing from and it's a new product and a new category and we just launched it and it’s a new concept with a new engine and we continue to built this category out as we thought we would do over a couple of year period and I think as you stay tuned for the upcoming analyst meeting we will continue to talk more about ACE and where that's going. But we were encouraged by the start. We don’t put ACE in our ATV numbers because we believe it's in all new category. It does not fit in definition of an ATV and so it's inappropriate to report it as such. We gained share in our core ATVs without ACE and we gained a lot more share with ACE is how I would tell you if you want to put it in there. We gained a lot more share if you would put ACE in the ATV industry in our numbers. I think that was all your questions. Gerrick Johnson – BMO Capital Market: Yes. You got it. Thank you.

Next question.

Your next question comes from the line of Michael Swartz with SunTrust. Your line is open. Michael Swartz – SunTrust: Hi. Good morning everyone. Just may be hoping on Gerrick’s question about ACE. How much of the in guidance to the ORV businesses is from things like ACE or products that are already in the market doing maybe better than expected versus I guess your expectations for some of the new Model Year’15 product are going to be introduced next week.

Yeah, I think ACE is contributing to that as is I would say our second quarter performance as well as what we are going to unveil here next week. But to be clear, I think most of our raise is based on our current productivity [ph] and now we have -- we are not smart enough to change the projections of the products we haven’t launched yet, so we had a really as we said a sequentially improving first half that gave us optimism about second half. Michael Swartz – SunTrust: Okay. Great; and then, just on some of the capacity discussion that we have had on the second half of the year. I think, as I recall last year you moved around some -- some Snowmobile production in order to fit in, yes, it was ORVs side-by-side and is something similar to be expected this year?

We have made a number of moves proactively Michael -- one of the things I mentioned is you saw a little bit of some of our model year 2015 news coming a little bit earlier. That was partly to help me arrange that so we were really on the gas in June much more so than last year in the plants, so usually that’s a time for a model year transition and we kind of effectively managed that aggressively and then obviously all the capacity that we’re bringing online was a proactive thought around what we are going to need in the second half. So again I this is -- lots of questions on this. We have dealt with this the last three years. It’s a little tighter than it’s been the last few years but we are used to this and we have, I would say very robust second half expectations for what we are going to ship and I – I don’t see this being as significant issue for Polaris. Michael Swartz – SunTrust: Great. Thanks a lot.

Thanks, next question.

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

Thank you, a couple of questions here. One, just a clarification on the Indian share side earlier. That’s only the 1400 and above segment. It is up only what I understood.

That’s all we ship today, yep.

Just wanted to reaffirm that. Thanks. A ship at this point I guess was key -- key part. Victory, you decided the recall in the -- in the commentary. Any weather or you have seen that turnaround here now that the recall is sort of behind these years as we will be through July at this point.

Well, Tim this is Bennett. I mean -- again the only thing you saw in our press -- in our press release that the reason why we commented on the recall was just -- we were able to gain share in April, we had gained share in June. We normally don’t comment on that month on month, so we think that was kind of the anomaly on the Victory interruption, which affected it for the quarter. Weather’s not been great but -- we are not going to use whether as an excuse and as we said collectively our Motorcycle sales are up about 50% so we are feeling just fine about the Motorcycle industry.

Okay, and then Mike, if I may on the Canadian dollar that you called out that it’s better than you thought versus 90 days ago and that helped a little bit in the second quarter and then you put in some hedging. How much of that change in the currency given you still got two thirds of Canadian business ahead of the year, that given that you hedged and how much of that have you factored in now to the higher guidance.

Yeah, I -- what I tell you Tim, is that we have hedged that -- like -- like I have said. Our average hedge rated about $0.92 and so that’s kind of how we forecast in and how we do our guidance basically at the hedged rate. So we are assuming 92ish for the balance of year and today it’s a little bit better than that, but if you are hedged, you -- you kind of lock. So, yeah.

Okay. Okay and then last, not much was commented on about the iShares joint venture. How are things turning there with the plans and cost and -- and the -- the launch timetable.

Yeah, Tim this is Bennett. We are going to talk about that a little more next week at the analyst meeting, so I think that’s why we saved the remarks since we are not in production, I mean that team continues to make tremendous progress. Anytime you’re – you are dealing with an all new plant and new team and new product there is a scheduled pressure of that we are feeling right now, so we may lose a few months before we actually get into full launch, but we will talk about that a little bit more but I would say all in we remain very excited about that we have got a compelling offering for the Indian market as we move in the future.

And just add to that we feel really good about our partner, I mean iShares is a wonderful partner. There core business is doing extremely well and obviously there has been some positive movements in the Indian economy that we think we will launching at the right time. So obviously there were more -- more later but pretty good early signs for that what could be a really good growth business long term for us.

Great, thanks gentleman.

Thanks Tim, next question.

Your next question comes from the line of Joe Hovorka with Raymond James. Your line is open.

Thanks guys. Just a couple of quick questions. One, could you give the ORV, ASP increased or decreased for the quarter.

Mike, why don’t just add that to Joe’s?

I am going to ask it, right?

You are -- okay, again look that up. Go on to your next question.

So you’re -- you -- it is better that I take you said that ACE was pretty much 100% incremental. You have also put up consumer profiles stats. I take it your slides aren’t running through websites yet 6% first time buyers of ACE. How do I flick those two numbers? How do you [indiscernible] 50% first time buyers with your [ph] incremental to -- to ACE?

Yeah Joe. I -- I apologize, I am not sure I am familiar with the -- with the chart you’re referring to tonight [ph]. James going to talk about that next week in the analyst -- I am sure he will spend some more color on ACE, but these guys have done a bunch of triangulation on the customer base and when we are looking at the profiles of where these customers are coming from in the segments that we are in and it’s just not cannibalizing the ATVs at all and that was obviously one of the not only to say fears, but that was obviously what we were very interested to see how it interactive but as we survey these people they were not necessarily in the market for an ATV or a side-by-side so that’s where we are getting instrumentality numbers I am quoting.

Okay, and then just on -- on Victory in the recall, just to clarify the recall as a lack of availability of product and the dealers, right? It wasn’t the people are not buying the product because of the recall but you did chip it in.

Yeah as you do with mix and the regulators as you go through an issue like that until you have stand out and all of them make that stop sale on it and so really by law, we may not be able to ship and dealers can’t sell and so we are just -- in the middle of the hike of the selling season. It becomes a one or two week interruption that seriously kind of has an impact on your short term sales and we believe we immediately recover and there were no long term implications but it -- there is no question you feel it in the month that it happens.

Yeah, you -- I think you said while the recall is simply like 800 to 900 bikes and it sounds like your retail is down probably a couple of 100 bikes year-over-year. So it would.

Yeah, yeah and again I mean we -- we felt that really just in about a two to three week period there in May, one that was just in the height a bit until you’re moving the parts and the fixes are going on, but it creates some uncertainty and slowdown there.

And then the last question. I think you have mentioned paint was all in track. Is it up and running yet? I thought it was not your change or it was about time it was supposed to go online.

Yeah, obviously the paint, it’s a $28 million dollar investment. It’s highly complex and that’s going to be coming up online here over the next month and then we will be ramping it up really over about a 90-day period throughout third quarter and into early fourth quarter. So it is not necessarily online yet, but will be coming on very shortly and then we will ramp it up here over the next 90 days probably through October.

And that increase throughput down there too, right? It that’s part of the bottleneck.

Yeah, absolutely. It is capacity quality technology improvement. It will be a significant and cost.

I tell you Joe, the ASP change for ORVs is 2%.

Okay, right. Thanks guys.

Thanks Joe.

Okay. Next question.

Your next question comes from the line of Joseph Spak with RBC Capital Markets. Your line is open.

Thanks for taking my question and congrats on the quarter. It sounds like the larger part of the gross margin guidance change was obviously the second quarter performance, but then also a little bit more visibility on currency. I guess I am a little bit curious as to why the volume factor hasn’t really changed versus your prior guidance given that the top line is better. Is that some conservatives or am I missing something in the back half of the year?

Well I think what I tell you there Joe is it’s we have talked about a lot. Its capacity, the capacity discussion we are having. We’re stretched and making adjustments and moving things around and getting stuff done, working over time, those kinds of things to handle the end of the volumes.

Okay. So even with some stuff around obviously, but clearly the -- just production volume is a little bit better. So isn’t there more of a benefit than versus what you’re thinking prior.

Again, we're stretched enough but that's not contributing.

Okay.

As you normally would expect it to when you’re operating at less than capacity levels. I think we built a plan pretty much at or near full levels before some more such stuff was modeled in as we came in to the year.

Okay. And then just quickly on Victory. I know you said the recall has been impacted, but just that you not only have a little bit of history with India, I was wondering if you could comment -- I don’t know whether you’re seeing any competition between the two brands or -- or I know you’re trying to reposition Victory a little bit just update on how that transition is going. Mike Malone – VP-Finance and CFO: Joe, I think the net, net is we are seeing a positive impact on Victory because of our Indian ownership and what we are doing with that brand. You have mentioned that it gives us a chance to put in a little bit more distinctive brand positioning on its own but the dealerships that have both -- there's are buyers that want the Indian brand and they are buyers that want the great styling and performance that comes with a Victory. So we’re happy with the price points. We think that both brands performed very well. The Gunner has done exceptionally well in the initial launch for us and by and large, not cannibalization. We thought it was going to be 3% or 4% cannibalization and I think that’s probably about the right number if that.

Thanks a lot for the color.

Okay. Next question.

Your next question comes from the line of Jaime Katz with Morningstar. Your line is open. Jaime Katz – Morningstar: Good morning, guys. Nice quarter. I have one question on small vehicles and it looks like in the second half that obviously drops off because we are lapping really difficult year-over-year comps, but I am curious if you guys still see the market for that business growing. I think it was 8% to 10% you guys had mentioned in the past and that you guys might grow slightly faster than that, is your outlook for that business the same or has it changed.

Yeah, our long term outlook for that business is still very bullish. Aixam really relapsed that in early April. So wasn’t much of an incremental benefit in the second quarter. We’ve got the Aixam -- the Aixam mega business is performing exceptionally well with Philip and his team continue to do and that -- that essential duopoly in Europe is encouraging. We’ve seen our GEM business, the retail growth has just been fantastic over the last couple of years and we are starting to make some more investments. Obviously as a new business for us there was a limited number of significant investments we could make in that category and we are starting to do that over the next couple of years. So the long term trends for that are still pretty darn good, demographically not only in the U.S. but globally and that small vehicle that what we classified as small vehicle segment and we expect to do better in the years ahead. Matt Homen and his team will be at the Analyst Meeting. I think you will get additional color from them next week. Jaime Katz – Morningstar: Great. Thank you.

Okay. Next question.

Your next question comes from the line of Jimmy Baker with B. Riley & Company. Your line is open. Jimmy Baker - B. Riley & Company: Hi, good morning. Thanks for taking my questions. Bennett, you mentioned that your defense outlook is -- I think the quote was, never been so encouraging, is a pretty strong statement, so can you maybe just give us a little bit more color to what’s driving out optimism. Maybe just speak to the back wall. Again also remind us what level of visibility you historically have in that business.

Yeah. Jimmy, obviously over the last couple of years as we’ve gone through kind of constrained defense spending that business, which has been growing rapidly has kind of been bumping along and we’ve working behind the scenes, obviously on a number of what we would call transformational type of projects and frankly I think the primary cause for optimism right now is really around the MRAZR, continues to build out acceptance both here state side as well as internationally with the customer base. It's just the right product for those customer’s needs and so it’s getting much broader use and appeal and orders and then this Dagger, which is a new product is it’s a much larger footprint than anything we've done before, a much higher selling price type of product, a much more capable vehicle that really moves us into a space we’ve never been and again the potential for that product, we don’t want to get to far in front of ourselves could really transform our business if we do it right and we got plenty of landmines. We got to work our way through with competitors and so forth. It’s early, but we’re very encouraged by that and I think that's the sense of optimism. The team is frankly executing at a much higher level as we continue to build our brand with the customer base throughout the world. Jimmy Baker - B. Riley & Company: Understood. That’s helpful and then just on Slingshot looking forward to that unveiling next week. Can you maybe offer any preliminary insight into the distribution strategy for that product?

Jimmy, I really would like to hold that until we get to the median. I will tell you that it’s -- it's if you are trying to make analogies to Indian or something, we are expecting more from our partners on that, but it’s a secular base, so to set up our existing Powersports and Motorcycle dealer base so again I don’t -- I don’t think that the magnitude of build-outs and variability that we saw with Indian will be anything nearly as complex is what we dealt with on Slingshot, if that was the genesis of your question. Jimmy Baker - B. Riley & Company: Okay, got it. Thanks a lot.

All right, next, we have two more questions that we're going to take. Next question, Simon.

Your next question comes from the line of Mark Smith with Feltl and Company. Your line is open. Mark Smith – Feltl and Company: Hi guys. Real quick, just with Slingshot I know it's too thin levels, talk it all about your expectations for attachment rate on accessories.

No, I am going to again let -- again just try and give you a little taste of what’s coming and we will talk more about that obviously in the analyst thing. We are going to hold that for the unveil and just again there will be a decent accessory business with that, but again we will talk more color on that when we launch the vehicle. Mark Smith – Feltl and Company: Sounds good. See you later this week.

All right. Thanks Mark.

Last question Simon.

Your last question comes from the line of Trey Grooms with Stephens. Your line is open. Trey Grooms – Stephens: Thanks guys. Just real quick. Kind of housekeeping I guess so on the quarter, were there any Kolpin acquisition costs.

Yeah, there were some acquisition related transaction costs and inventory evaluation, things like that on the purchase accountings that impeded the gross margins slightly. Trey Grooms – Stephens: Any way to quantify that or is it not that material.

It's not that material. Trey Grooms – Stephens: Okay. Thanks. See you next week.

Okay guys. That’s all the time we have. We certainly appreciate joining us this morning for the call and those of you that are coming to our Analyst Investor Meeting this coming Sunday and Monday, we look forward to seeing you then. Thank you again and we will talk to you next quarter.

Ladies and gentleman, this concludes today’s conference call. You may now disconnect.