Polaris Inc. (PII) Q3 2014 Earnings Report, Transcript and Summary

Richard Edwards - Director of Investor Relations Scott W. Wine - Chairman, Chief Executive Officer and Member of Technology Committee Bennett J. Morgan - President and Chief Operating Officer Michael W. Malone - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division Scott L. Stember - Sidoti & Company, LLC Gregory R. Badishkanian - Citigroup Inc, Research Division Joseph Spak - RBC Capital Markets, LLC, Research Division Jaime M. Katz - Morningstar Inc., Research Division Timothy A. Conder - Wells Fargo Securities, LLC, Research Division Robin M. Farley - UBS Investment Bank, Research Division Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division James Hardiman - Longbow Research LLC Mark E. Smith - Feltl and Company, Inc., Research Division Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division Jimmy Baker - B. Riley Caris, Research Division Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris Third Quarter Earnings Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Richard Edwards, Director, Investor Relations. You may begin your conference.

Thank you, Melissa, and good morning, everyone, and thank you for joining us for our third quarter 2014 earnings conference call. As always, a slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning's call. The speakers today are: Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. During the call today, our discussions will include various topics, including our updated guidance expectations for 2014 and some preliminary comments about our outlook for 2015, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. Now I'll turn it over to Scott Wine, our CEO. Scott?

Thanks, Richard, and good morning, everyone. Thank you for joining us. At Polaris, the third quarter always tests our mettle, from the challenge of pulling together increasingly large and complex dealer shows and delivering on the high expectations of our model year news to building a strategic plan that charts our course for the years ahead. Add a global crisis or 2, major moves in currencies and the inevitable internal and external issues that arise, and the quarter provides the perfect showcase for the tremendous leadership, agility and teamwork that has fueled Polaris' growth for the past 60 years. Across our global business, innovation and execution won the battle against volatility in the third quarter, yielding an 18% increase in Polaris third quarter sales to just over $1.3 billion. North American retail sales remain high, posting an impressive 12% rise, and that's without a single Scout or Slingshot sale. Motorcycle revenue still led the company, with a 20% increase over the prior year period, with PG&A and ORV recording respectively strong 24% and 17% increases. Our International business was mixed, with robust 40% growth in Asia Pacific and Latin America, offsetting an essentially flat Europe, Middle East and Africa business for an overall quarterly increase of 9% for our International businesses. Earnings outpaced revenue again in the third quarter, with net income increasing 20% to $140.8 million, yielding record earnings per share of $2.06, up 26% over the prior year period. The resiliency of the Polaris earnings machine was clearly evident in the quarter, as we balanced aggressive top line growth, pricing and operating expense leverage to offset the predicted negative foreign exchange impact of the Canadian dollar and most European currencies. Net income margins increased modestly to 10.8%. Our year-to-date growth has not come easy, as we have worked to overcome persistently high competitive threats in Off-Road Vehicles and motorcycles, weakening demand in Europe and Canada and the negative impact of a stronger dollar. Some or all of these trends will endure in the fourth quarter and beyond with the potential interest rate hikes and no slack in the stifling regulatory and tax environment, we are starkly aware that we must execute extremely well to maintain our growth trajectory. Fortunately, we remain confident in our ability to leverage innovation and improving operational and commercial performance to drive our success. We expect moderate strength in the overall powersports industry in the final 3 months of 2014, with share gains continuing to drive growth. With positive momentum and 3 solid quarters under our belt, full year sales for Polaris are now estimated to be up 17% to 18% over 2013, which will put us in the realm of $4.5 billion for the year. We are raising our full year earnings per share projections to $6.55 to $6.65, a 21% to 23% increase. Strong financial performance, which we define as a sustainable profitable growth is but 1 of our 5 core strategic objectives. It is typically listed last as we recognize that it's essentially the result of successful execution of our 3 major growth plans combined with the competitive advantage of our Lean enterprise. Any financial objective can be counterproductive if focused on simply or narrowly, but we find that a laser focus on sustainable profitability serves us well in our relentless pursuit of growth. From guiding our allocation of capitals to supporting our ranking of acquisition targets, we never lose sight of our long-term commitments to strong financial performance for the sake of all stakeholders. With our expansive line of industry-leading RANGERs and RZRs and our first foray into 3-wheeled and mid-sized bikes, we strive to design, manufacture and launch products that delight customers and enable Polaris and our worldwide dealer network to grow profitably. Our strategy is straightforward and transparent, which means we can only win by consistently out-executing our competition. Three executive moves in the third quarter illustrate how we leverage our talent, leadership and best people, best team philosophy to win the competitive battle and deliver on our strategic objectives. We recently announced that Ken Pucel will join Polaris in the fourth quarter to become our first Executive Vice President of Operations, Engineering and Lean. We aspire to be great in each of these areas to create a Lean enterprise that will give us a competitive advantage in quality, delivery and cost, worthy of our world-class innovation machine. Ken has spent the past 25 years building such an enterprise at Boston Scientific, and with his operations, research and development and Lean expertise and lifelong passion for Polaris vehicles, we anticipate that he will add another cylinder to our profitable growth engine. Earlier in the quarter, we announced the promotion of Matt Homan to President, Adjacent Markets, assigning one of our most experienced and successful leaders to deliver on our stated objectives to create a $2-plus billion non-powersports portfolio. Matt brings a unique skill set to this task, having created a broader platform for Polaris in Europe, led the early dramatic growth of our Off-Road Vehicle business and spent several years now growing and improving our small vehicle businesses. He is rapidly building his team and creating a strategic framework that will give us ample opportunities to expand both organically and through acquisition. Our adjacent market strategy has not changed, but under Matt's leadership, we expect that the growth trajectory will quite quickly. Matt's promotion created an opening in our Swiss headquarters, and we were fortunate to have Suresh Krishna to fill that role, starting his tenure as Vice President, Europe, Middle East and Africa, just in time to host the grand opening for our new plant in Opole, Poland. We have a great facility and team there, and I know Suresh will leverage this asset he was instrumental in building to serve our EMEA customers and global stakeholders. He will not lack for challenges. With the prospects of a slowing Eurozone barely overshadowing major risks in Russia, the Middle East and Africa, I trust Suresh to get things done. And even with extremely difficult circumstances, we expect that he and the team will continue to find a way to grow in the Europe, Middle East and Africa region. We continue to improve our strategy and our team in the third quarter. Neither of these tasks will ever be complete, and almost by definition require change and adjustments over time. We believe that corporate agility is a strength, as is our competitive culture. Expect Polaris to move quickly and aggressively to build on our progress towards becoming a highly profitable $8 billion global enterprise. With that, I'll turn it over to our President and Chief Operating Officer, Bennett Morgan, who will provide insights into our operations and business unit performance.

Thanks, Scott, and good morning, everyone. As Scott just mentioned, Polaris North American retail sales increased 12% in the third quarter. This retail growth, along with market share gains in each of our businesses, extended our market leadership in powersports. The third quarter North American powersports industry remained positive, posting mid-single-digit growth. Year-to-date, Polaris retail sales are up 11%. Dealer inventory remains in good shape, up 15% versus 2013, primarily to support model year '15 new model introductions and segments. We continue to introduce an unprecedented level of innovation and news to our customers, with 18 new ORV models, 5 new motorcycles, including the Slingshot, and over 300 new PG&A items. Let's move on to business unit performance. Off-Road Vehicles. Polaris ORV business registered a record third quarter, as revenue rose 17%. Year-to-date revenue was up 14%. For the 30th consecutive quarter, we gained share in ORVs in North America, gaining in both ATVs and side-by-sides and building upon our clear #1 positions. Polaris ORV retail sales were up high single digits in an industry that increased mid-single digits, despite some softness in Canada. Polaris core ATV retail sales were down slightly but outperformed an industry, which declined low single digits, while Polaris side-by-side retail grew double digits in an industry, we estimate, grew about 10%. RZR retail was particularly robust, led by the RZR XP 1000 2- and 4-seat editions and later in the third quarter by the fantastic new RZR 900 trails. The ACE lineup is growing both in models and retail sales and continues to be very incremental as well as attract new customers. The balance of our 18 model year '15 ORV models began to arrive in dealers late in the third quarter, and early sales trends are brisk. We are investing in and building on our leading ORV brands and customer experience. Just last month, we had our first-ever Camp RZR for the Eastern U.S. customer base in Brimstone, Tennessee, and it was a rousing success: over 12,000 attendees, hundreds of demo rides and almost 2 million positive social media impressions. We expect an even better response to Camp RZR at Glamis in Southern California over the Halloween weekend, as we build loyalty and lifestyle in this fast-growing sport. Motorcycles. Polaris' third quarter motorcycle revenue were up 28%, led by Indian's accelerating retail and market share positions and dealer additions across the globe. Year-to-date, motorcycle revenue was up 62%. Polaris again expanded North American market share in the third quarter. Q3 retail sales jumped nearly 30% in a heavyweight motorcycle industry that increased low single digits. Victory retail sales declined mid-teens percent, primarily due to a combination of extremely strong third quarter 2013 retail comparables and delayed model year '15 shipments, particularly of our hotly demanded new Magnum bagger. Indian had a very good quarter. Market share is increasing. We now have 109 retailing dealers, and our new model year '15 2-toned paint schemes and Roadmaster touring models are in high demand. Paint capacity in Spirit Lake constrained third quarter shipments of both Indian and Victory and will remain a constraint until our new liquid paint expansion comes online in the fourth quarter, providing the additional paint capacity we need. Our first mid-sized bike, the 1133cc Indian Scout has received great early response, with dealer orders and consumer deposits easily exceeding our expectations. We expect to begin Scout shipments in the next 30 days. International motorcycle sales percentage growth rates continue to surpass North America, with third quarter sales up over 80% and year-to-date well over 100%. Slingshot. Our revolutionary all-new 3-wheel motorcycle was launched with 2 model offerings in late July: the base Slingshot retailing for $19,999 and the premium SL model for $23,999. Dealer response has been amazing, with over 360 dealers signed and ready to retail and many more waiting in the funnel. Orders have been excellent, with dealers reporting better-than-expected consumer interest and deposit activity. Press and consumer interest has also exceeded expectations, with over 1 billion impressions in just the first 4 weeks. The new Slingshot assembly line in Spirit Lake is already in production, and we expect to begin shipping to dealers in the next month. Snowmobiles. Polaris' third quarter snowmobile revenue increased 13% and year-to-date revenue was up 11% as we accelerated model year '15 shipment timing to better serve the dealer network. Polaris' North American season-to-date retail sales are off to a very good start, up well over 50% and significantly outperforming a healthy industry, which rose over 30%. Remember, only about 10% of the season's retail has occurred so far. So as always, the next 120 days will be important for both Polaris and the industry. Our product lineup is strong across all segments. Our compelling all-new AXYS platform is selling very well, and our 800 SWITCHBACK AXYS PRO-S was recently named Snowmobile of the Year by Snow Goer magazine. Early-season consumer snowmobile shows have been very well attended. And coming off a good riding season last year, we are excited for the riding season to begin in earnest. Parts, Garments and Accessories. Our PG&A business growth continues to outpace overall Polaris revenue growth. Third quarter sales exceeded all previous records, up 24% and increasing year-to-date revenue to up 22%. ORV and motorcycle PG&A sales were particularly robust, and every PG&A category contributed to our increase. KLIM and Kolpin have expanded our customer and distribution reach in PG&A, and both are performing well. We are expanding our dealer rollout of SMART, which we expect will transform our PG&A sales to a more efficient Lean retail pull model, allowing more frequent dealer ordering, tailored stocking profiles and retail execution focus and improved customer satisfaction through better forecast accuracy and order shipment service levels. We expect to transition fully to SMART in North America by late 2015. Commercial. As expected, third quarter revenue decreased as we faced tough year-over-year channel fill comparables for Brutus. Brutus retail sales continue to grow sequentially and year-over-year for both Polaris and Bobcat, but remain lower than our initial expectations. Nonetheless, we are encouraged about the future of our commercial business under Matt's leadership. National account and fleet sales increased about 50% with a strong order bank. Bobcat's dealer retail improved double digits. And in the fourth quarter, they will transition to a new improved chassis for model year '15. Also, our supply partnership with Ariens progressed, with the dealer launch of the new Gravely Atlas, which was very well received, and initial shipments will begin in the fourth quarter. Defense. Q3 Polaris Defense sales were about flat but year-to-date revenue was up by over 25%, as this business continues to gain traction in the marketplace. Our revolutionary 9-passenger DAGOR vehicle, which has the optimum combination of transportability, payload, off-road mobility and value, was officially launched at AUSA earlier this month and was named the star of the show by the press. We have already received orders from customers, and production has already begun. International sales are expanding rapidly with our MRZR now sold into 21 countries, and our order backlog is well positioned as we head into the fourth quarter. Small vehicles. Small vehicle revenue rose 8% in the third quarter due to the strength in GEM and Aixam. Year-to-date revenue was up 52%. Aixam had another good quarter, with revenue up low double digits, despite continuing weakening in the European quadricycle industry, which is now down mid-single digits year-to-date. Aixam is outperforming, with share up notably for the third quarter. And year-to-date, Aixam retail is up low single digits. Goupil revenue decreased due to the softening French and European economies, but we are starting to see signs of improvements. Orders grew in the third quarter, and we will introduce 2 new models in the fourth quarter. GEM had a good quarter with revenue up over 30% and retail sales to customers up about 20%. Business-to-business and GSA sales penetration is on the rise and our customer lead generation and closing efforts are beginning to drive real results. International. Polaris International revenue increased 9% in the third quarter, driven in particular by strong Indian, RZR and RANGER sales. All regions contributed year-over-year growth. However, we are seeing a softening trend in European markets. Year-to-date, Polaris International revenue is up 25%. EMEA third quarter revenue increased just 1%. Weak snowmobile shipments due to a poor snow season last year, Russian geopolitical uncertainty and softening ORV and motorcycle industries in the third quarter were offset by solid Polaris market share gains from Aixam, motorcycles and ORVs. Year-to-date, European ORV industry sales are now flat, with Polaris retail increasing low double digits. Polaris motorcycle market share performance is even better. Industry sales are up mid-single digits year-to-date, while Polaris retail has increased by over 60%. Our Opole, Poland manufacturing plant celebrated its grand opening last month and has now begun producing ORV products to support our EMEA customers. We are the first OEM to have a plant dedicated to produce ORVs on continent in Europe, and shipments to customers will begin early in the first quarter of 2015. Asia Pacific sales increased significantly, up 37% in the third quarter, driven by outstanding market share performance in our largest subsidiary, Australia and New Zealand. We are now #1 in ORVs in Australia, thanks in part to models designed specifically for that market. Motorcycle sales of both Indian and Victory are excellent, and we continue to make progress in China and India, with our Eicher EPPL vehicle expected to begin shipping in the second quarter of 2015. We expect a bigger and better future out of this important region going forward. Latin America revenue surged, increasing 48% in the third quarter, driven by strong sales performances in both the Mexico and Brazilian subsidiaries. We launched Indian into the Mexican market in the third quarter, and see this as a nice long-term opportunity. Lean and operational excellence. As I mentioned earlier, third quarter was a challenging quarter in operations with capacity issues, several capital investment projects ongoing and a substantial wave of new model year '15 products beginning production. Between capacity projects in Monterrey and Milford, Iowa, a new liquid paint system in Spirit Lake and Opole coming online, we are starting to relieve our constraints, but we will remain tight through the fourth quarter, particularly in Spirit Lake liquid paint. Third quarter manufacturing productivity improved but declined sequentially year-to-date to just under 5%. The Lean retail flow management implementation for ATVs is in process, with the assembly line, dealer profiles, order slotting and initial orders all complete. Gross margins declined 55 basis points in the third quarter due to significant currency headwinds, primarily in Canada, depreciation associated with ongoing tooling and costs related to the capacity investments. We were able to offset some of the pressures through product cost reductions, pricing improvements and lower promotion rates, so that net income margin actually expanded. Factory inventory by units was flat, but in terms of dollars, rose 26% due to PG&A, raw materials, product mix and acquisitions. And with that, I'll turn it over to Mike Malone, our CFO.

Thanks, Bennett, and good morning to everyone. We are narrowing our total company sales guidance and now expect sales to increase 17% to 18%, driven by year-over-year sales gains in each of our businesses. Based on the strength of year-to-date retail sales, ORVs are now expected to grow 13% to 14%, up from prior guidance of 11% to 13%. All previously issued sales guidance for our other businesses remains unchanged. Snowmobiles are expected to grow mid-single-digits percent. Motorcycles are expected to increase 65% to 75%. Small vehicles are expected to increase 25% to 30%. PG&A sales are expected to be up about 20%, and sales to international customers outside of North America are expected to grow low-teens percent. With better-than-expected year-to-date gross margins performance, we now expect our gross margins to decline in the 20 to 30 basis point range, slightly improved from our previous guidance. Operating expenses as a percentage of sales are now expected to decline about 50 to 70 basis points in 2014, a modest change from our previous guidance of down about 60 to 80 basis points. The difference is primarily driven by our ongoing investments in sales, marketing, product development and distribution, particularly for our newest brands, Indian and Slingshot, and various other global investments and hires for future growth opportunities. We have realized positive benefits to operating expenses from the reduction in our incentive compensation expenses related to changes made to the company's long-term incentive compensation plan as we have previously discussed. The income generated from our Financial Services business is now expected to grow about 25% in 2014, an upgrade from prior guidance due to the improved profitability of the Polaris Acceptance dealer financing portfolio and increased income from our retail credit providers. The net result of these guidance moves does not change our expectations for operating profit margin expansion. We continue to expect 2014 operating profit margin to grow in a percentage range similar to what we grew in 2013. Moving on to income taxes. There's a high level of uncertainty regarding the United States Congress extending the research and development tax credit for calendar 2014 as we approach the end of the year. As a result of this uncertainty, we are increasing the upper end of our income tax provision rate guidance for the full year to account for the possibility that the R&D credit may not be extended by year-end. If the tax credit is not extended, our expectations are that the income tax provision rate will be nearer the upper end of our revised tax provision guidance range of 34.5% to 35.5% of pretax profit. If the R&D credit is extended, by the end of the year, we would expect the full year income tax provision rate to be nearer the lower end of the range. We are raising our guidance for earnings per share from continuing operations to be in the range of $6.55 to $6.65, up 21% to 23%, while net income from continuing operations has also improved and now projected to increase 17% to 19%. This is a rather wide range of earnings expectations for just one quarter remaining in the year, due largely to the uncertainty of the R&D tax credit extension and its impact on earnings. For the full year 2014, the number of diluted shares outstanding is expected to decrease approximately 3% compared to the full year last year, due to the Fuji share repurchase in the fourth quarter of a year ago. Compared to last year, the 2014 third quarter gross profit margin percentage decreased by 55 basis points to 29.8%, and for the year-to-date period is down 15 basis points. We now expect gross profit margins for the full year 2014 to decline 20 to 30 basis points from the full year last year, slightly better than our previously issued guidance. As previously discussed, we realized a significantly negative impact from currencies in the third quarter, given the weakness of the Canadian dollar and our exposed intercompany balance sheet positions, primarily in European currencies. If not for the impact of currencies, our gross profit percentage would have increased in the third quarter 2014 from a year ago. We expect the negative impact from currencies to continue in the fourth quarter and into calendar year 2015 as well. We do have approximately 90% of our remaining 2014 Canadian dollar exposure hedged exchange rate of about $0.92. Although the hedged rate is unfavorable year-over-year, it does remove much of the uncertainty for the remainder of the year for the Canadian dollar. Helping to offset some of the currencies' pressure, we project that we will continue to benefit from higher selling prices and product cost-reduction efforts as we have throughout the year. Additionally, product mix no longer appears to be the headwind we initially expected, as sales of higher-priced, higher-margin ORVs are exceeding our original projections. For instance, the average per unit sales price for ORVs increased 6% in the third quarter of 2014 from last year. The impacts of the remaining items listed on the gross margin slide have not changed materially from the previously issued guidance. Moving on to our balance sheet and liquidity profile. Net cash provided by operating activities was $380 million for the year-to-date 2014 period, about flat with the first 9 months of last year. Higher net income for the year-to-date period was offset by an increase in factory inventory as well as the timing of estimated income tax payments. We continue to expect cash flow provided by operating activities for the full year to increase at a slightly higher percentage rate than net income growth. At the end of the third quarter, our cash balance was $169 million, while our total debt balance of $228 million is higher than a year ago, primarily due to the repurchase of the Fuji shares last quarter. Sequentially from the second quarter, our total debt balance is down $140 million as we completely paid down our revolving line of credit at the end of the third quarter. For the year-to-date 2014 period, our investments in total -- I'm sorry, in capital expenditures and new product development tooling totaled $146 million, down from last year. For the full year 2014, we continue to anticipate capital expenditures will be somewhat lower than last year but still exceed $200 million. Polaris Acceptance receivables from dealers in the U.S. eclipsed the $1 billion mark for the first time ever, with a balance of $1,072,000,000 at the end of September, an increase of 26% from a year ago. The year-over-year growth reflects the mix change of higher-value side-by-sides and motorcycles, increased shipments of snowmobiles in anticipation of the upcoming selling season and higher PG&A sales. The retail credit environment remains stable, with approval rates of 57% for the year-to-date period and a penetration of 32%, each slightly lower than a year ago. I will now turn the call back to Scott for some closing comments.

Thanks, Mike. From unfavorable movements in currencies to the potential lack of movement in the Long Beach ports, we see no lack of challenges as we work through the final months of 2014. But with a great team and an exciting lineup of new products and commercial campaigns, we expect to finish strong and position Polaris well for 2015. The past few years have been marked by a combination of a persistent policy and regulatory uncertainty and a consistent pattern of the U.S. economy growing below expectations. I would like to think that the U.S. electorate will speak loudly in a few weeks and demand action on taxes, energy, immigration and the other areas that have the potential to unleash our economic engine, but we do not rely on wishful thinking at Polaris. As such, we will plan for a moderate domestic GDP increase again next year, with the Eurozone possibly not growing at all, which will leave Asia Pacific and parts of Latin America as the most likely markets to offer tailwinds. Once again, we will rely on innovation and share gains to lead us to double-digit growth. As the U.S. dollar strengthens, we anticipate adverse currency movements again in 2015. But in concert with our robust balance sheet, the stronger dollar will also assist us in our M&A pursuits, which could enable us to drive faster growth in our International businesses. We will remain capable of managing expectations for Ken Pucel but, nonetheless, expect him and his team to carefully balance our need for capacity with their mandate for margin expansion. Lean is our answer, and 2015 will mark a major inflection point for Polaris' Lean transformation. From an investment in people at all levels of the company and in all parts of the world to a plant in Poland, Indian Motorcycles, Slingshot, our DAGOR military vehicle and our Eicher joint venture in India, we have made significant calculated bets on our future. Cumulatively, these represent hundreds of millions of dollars of invested capital, which we have not yet seen a return on. We anticipate that 2015 will be a year where several of these become contributors to, rather than detractors from, our market-leading returns on invested capital. Very few investments match the returns generated by our Off-Road Vehicle business, and Dave Longren continues to invest heavily in dollars and process improvements to ensure we build on our #1 market share position in 2015. Steve Menneto will have more models and a broader dealer network to expand our Victory and Indian businesses, and Mike Jonikas has a new AXYS sled to go with the Slingshot business to grow our snow business. With Off-Road Vehicles, snow and motorcycles growing rapidly, we foresee another big year for Steve Eastman's Parts, Garments and Accessories business. As we position ourselves to close the year with positive momentum with expectations to do more and be better in 2015, I believe this team's ability to drive sustainable, profitable growth surpasses anyone else in our industry. With that, we will turn it over to Melissa to open the line for questions.

[Operator Instructions] Your first question comes from the line of Mike Swartz with SunTrust.

Just on FX, if we can dig into that a little bit. I know that, that's been a significant drag this year on gross margin. Just really 2 points and, I guess, based on Mike's commentary, it looks like gross -- or the drag to gross margin was at least 60 basis points in the quarter. I mean, you said, gross margin would have been positive. How would we look at that for maybe fourth quarter?

Well, this is Mike. We would expect gross margins -- we increased our guidance for the full year on gross margins a bit. It’ll still be down for the year. Currencies will continue to have headwind impact in Q4 as well. At the current rates, we don't see things as getting materially better anytime soon.

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

Well, we have some hedges for 2015 at this point in other currencies: the peso and the yen and the Australian dollar. We currently do not have any Canadian dollar hedges for 2015 as of yet. We haven't been able to execute on any of those yet.

Okay. And then maybe, just flipping over -- switching over to Scott, I mean, you made some commentary on just, I think, international M&A. I mean, based on what you said, a read that something has changed or something is more likely today than it was maybe several months ago?

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

Your next question comes from the line of Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Just getting back to the currency topic. Can you talk about how the new facility in Poland, now that you'll be having your costs also being impacted by the euro, how that could act as a potential hedge next year to help you out on the currency front?

Obviously, it creates just more of a natural hedge for us. The reality of the volume of the shipments, it's not going to provide too much incremental coverage. But certainly, that's one of the reasons. Obviously, the biggest reason we did the Opole plant was to serve the European market better and reduce our logistics cost. But obviously, the currency benefit will be helpful, but I wouldn't change your model completely on it. Scott L. Stember - Sidoti & Company, LLC: Got you. And what are your plans, as far as -- let's say, by the end of 2015, how much of the European ORV supply will be provided by the plant in Poland?

Scott, this is Bennett. As we get to the end of '15, we'll be ramping production rate up really, fairly aggressively through the year. And by the time we get to the end of '15, we should be doing the majority of at least European region product out of Opole. There'll be a few models where it doesn't make sense and some homologations where we're still doing that engineering work that will probably increase the percentage as we get to '16 and '17, but think about it as a significant portion by the end of the year.

That's just of Off-Road Vehicles, not motorcycles.

Yes. Thank you for clarifying. Scott L. Stember - Sidoti & Company, LLC: Got you. And just moving over to Slingshot. Can you maybe just talk about, give a little more granularity about the positive reception. I know that some states, in order to get a motorcycle license, you have to actually ride a 2-wheeler, so that could present some headwinds going into a dealership to test ride a Slingshot. Can you maybe talk about how all those logistics are taking place and if there's anything that you guys are doing to help smooth that out?

Yes. I mean, clearly, by definition it's a motorcycle, and you need a motorcycle endorsement to do that. And in -- I would say in a number of states -- majority of states, it's difficult to take that on a 3-wheel product based on the test. So our team, just like Ken Am [ph] has done with the Spyder, continues to work on trying to develop, I'd say, a more 3-wheel specific type of test and evaluation process, but that would be a process that will happen over a period of months and, frankly, probably years as you work with the individual states. But again, from the early innings here, we couldn't be more pleased with the response, really, from all stakeholders, from dealers to consumers to the response by the press. It's frankly been the most -- it's been the highest response impressions product we've had, frankly, in the history of Polaris, really, over the first couple of months. And I think that really ties to its sexiness and its uniqueness. And customer deposits, while we're not going to comment on the specific amounts, it certainly far exceeded ours and dealers' expectations. So we're pretty encouraged early. Scott L. Stember - Sidoti & Company, LLC: Okay. Just one last question on the Financial Services income. Can you maybe just talk about -- I mean, you had a near 50% increase year-over-year. Was there anything onetime in nature? And is that $16 million, $17 million run rate per quarter something that we should model going out?

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

Your next question comes from the line of Greg Badishkanian with Citigroup.

First question is with respect to Indian. So Scott, I think you mentioned, it was -- I think it was a few quarters ago that your 3-year target would be to achieve high single-digit, low double-digit share for Indian. So just wondering how you feel about that target. And do you think that, that maybe ended up a little bit too conservative of an estimate?

It's hard to say. I think when I said that, we hadn't really launched much and were just building the business. Clearly, the first year has gone extremely well. The excitement has been, I mentioned, around Scout, has been literally through the roof. So we still feel very good about it. As we know, the motorcycle industry is quite competitive, so we're not going to project too much success, but we certainly do feel better than we did a year or 2 ago about the potential for the Indian brand business.

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

Yes. Greg, this is Bennett. Promotional environments, I would say, generally, really relatively stable and within our expectations. ATVs, I would characterize as a pretty stable environment over the last 12 months, and I don't think there's been any surprises there. And side-by-side has remained -- because it's a much more competitive industry with lots of additional product introductions by different competitors, has been more elevated, as we've launched products and customer -- I mean, and competitors have responded to those products. I mean, I think it's been particularly aggressive on the recreational side, but it's also been aggressive on the utility side in RANGER. But everything is, again, within our expectations. And as you can see, it's not really been a headwind to the P&L, and we continue to gain share. So we feel okay about it. But it's going to remain aggressive. I wouldn't expect it to get easier.

Your next question comes from the line of Joe Spak with RBC Capital Markets.

Just on -- sticking on Indian for a little bit. Is it -- it seems like the pace of the dealer has slowed a little bit. So maybe you could update us if there's anything specific going on there or that's really just timing. And then the other thing is if it's possible to separate some of the growth you've seen in the Indian from true retail demand versus dealer expansion and if you are seeing any impact on Victory from the Indian growth.

All right, that's 4 questions. No. The pace for the Indian dealer adds -- I mean, we came out of the gates this year saying it was taking us longer to retrofit the dealer locations and find the quality of dealers we were looking for. So really, it hasn't slowed. And in fact, if anything, the pace and quality of the dealers that we're adding to the list is going quite well. It's just ultimately getting these dealers to the point where the doors are open, and their retailing is taking -- it just takes a while. And I will tell you that the quality of the dealerships we're getting is fantastic. And because of that, the retail of those dealers, that 109 right now, that are selling bikes has surpassed our expectations. So absolutely, it's not at all coming from dealer adds as we'd like to catch up, and we certainly will. We see good progress there. But the retail and quality of the dealers that we've got is fantastic.

Yes. And then maybe to address your question, Joe, on the Victory angle. I mean, Victory was down, as I said mid-teens. And I think there really were a couple of factor. And remember, we were coming off a pretty amazing third quarter last year with the Red Tag. It was our best Victory quarter ever. We're up 32%, all-time high share gains. So it was a pretty tough comp. And as I kind of indicated in my remarks of really around liquid paint in Spirit Lake, we were constrained on shipments, Victory dealer inventory was actually down 10% year-to-date. And you certainly saw that in our new product availability of Magnums, which certainly hurt retail end. So that's more of what's going on in Victory. When we look at all of our cannibalization numbers from Indian to Victory, frankly, it's about 10%. So I would tell you, I would probably say we're fairly thrilled with that. Indian is getting its source of volume from exactly the competitors we thought it was going to get it from. And frankly, Victory is just like every other heavyweight motorcycle manufacturer has to compete with the offerings out there, whether that's from Indian or Harley-Davidson or from the Japanese. We haven't been able to get that brand quite as much news in the short term, and that will change certainly over time. And so we still remain very bullish on our future in Victory and are not daunted at all because it seems a little soft right now.

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

No, it's just timing, timing related, this year versus last year.

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

I have a couple of questions. First, I think you guys had put a chart up on capacity utilization at the meeting earlier this summer. With Poland opened, I'm curious how you feel about the extra capacity you'll have online domestically. And maybe if growth continues as it has, how you feel about that maybe for the next year or 2 and what that means for expanding your footprint? And then second, for inventories, I know you guys said something about product mix is part of the reason they had gone up. Can you maybe dive a little bit deeper into that?

Bennett and I will answer this one together. The Poland play was really about making more profitability and adding the ability to serve the European customers. We obviously get a nice little capacity benefit from that as it ramps up production throughout next year. But certainly, as we've continued to grow quite fast, specifically on our Off-Road Vehicle business, and as we've shifted Spirit Lake to be more of a motorcycle facility, we do find ourselves looking at how to expand our capacity in the most effective manner. So we're in the process of looking at that right now, and we'll ultimately make -- I mean, we are very committed to maintaining our returns on invested capital. So trust that if we do something, it's going to be in line with that. Bennett, you want to talk a little bit about the inventory position?

Yes. I guess, Jamie, were you talking -- reference factory inventory or dealer inventory?

Factory.

Okay. Yes. On factory, I think a couple of factors. I mean, I think you know we've been not necessarily thrilled with our performance in factory inventory over the last several quarters. We remain to believe that, that is an opportunity for us. We continue to get our Lean initiatives off and rolling. We expect better performance from ourselves and the team as we go forward. Specifically, on the number this quarter, the differences really were driven by really tremendous growth in PG&A and a couple of acquisitions that add to that inventory. As we add these new factories and plants and capacity, we are dealing with more raw materials as we go forward structurally. And then just look at our product mix of more expensive motorcycles and bigger and higher performance ORVs. That product mix of more expensive products is adding to the dollars level because the units, frankly, again, are flat, which we view as a positive, frankly.

Yes. And it would have been -- and obviously it will be helpful in the fourth quarter as we begin to ship Scout and Slingshot, which were both poised for shipment in the third quarter.

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

A couple of things gentlemen. One on motorcycles. Scott, a little while ago, you talked about potentially getting to breakeven by the end of '15. Number one, is that with or without parts and accessories? And then it sounds like you've got the paint issues going on with Slingshot and a little bit on Victory. So has that maybe slowed that up just a little bit? That's question number one. Number two is, Bennett, if you could give any color -- you said that Canada sales, and everything going on with currency and so forth there, hurt your ORV in North America. If you just sort of exclude that, can you give any comment on U.S. ORV and side-by-sides year-over-year?

All right, Tim. On motorcycles, we do see a path to profitability in the end of '15. And there's a lot of investment continuing to go on. But as we've referred to several times, what we're seeing with Indian and the prospects we have for Victory and ultimately Slingshot adding to that mix, we certainly feel like we've got the potential to have a very profitable business exiting as we get into next year and certainly as we finish. As far as the...

Yes. And again, I would just -- again, it's a complex new liquid paint system and it's going to be a way better future for us. We'll get through that here over the next couple of months. And then it is, I don't want to say going to be smooth-sailing, but we'll have a ton of capacity in our On-Road stuff going forward in Spirit Lake. So we're really poised for a better future. On the Canada question, I don't want to overdramatize that. It's -- what we would call it is it's notably softer. And I think that really is attributable to what's going on in the Canadian economy right now. If you look at our wholesale performance, United States is up really strong double digits, over 20% in the third quarter; and Canada was down about 5%. The market differences on the retail aren't quite that pronounced, but it is softer. And Canada is an important market for us for both ORVs and sleds. So it hasn't been an impact on sleds yet, but we're watching it carefully and just wanted to make sure people were aware of it. It's about 10% of our sales. It's an important market, so we watch that very, very carefully.

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

No.

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

Your next question comes from the line of Robin Farley with UBS Securities.

Great. First on ATVs. I wonder if you could comment on the market, it's down for the first quarter, and 6, 7, 8 quarters, at least, they've had increases. And is that related to the ACE? Or is the ACE cannibalizing? Or is the ACE in your ATV numbers? So just kind of how to think about that. And then also on Indian dealers, when you look at the total number of new signings, is there any change in the existing signed dealers? In other words, is there any churn? And so is it just the incremental dealers that signed? Or did you lose some of the signed and kind of gained others? And just how should we think about how to expect the dealer rollout and new signings over the next year?

All right. I'll try to take the Indian one first. I mean, we're not -- we really haven't had any dealer turnover in Indian since we started as our -- going retail [ph] because some of these are pretty extensive build-outs. In some cases, they need zoning. We've had a few guys that have dropped, as they've gone through that process and not been able to get the land or the building. Those processes have dragged out, and then we've kind of jointly decided to go a different direction. But that's -- I would say that's not even a handful. It's very small numbers. So it's basically going as planned. It's just -- as Scott mentioned, it's a very involved process and it takes time, longer than we certainly initially estimated.

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

In regard to your question on ATVs, again, we've been pleased with how the -- what we would call that core ATV industry has performed year-to-date. And yes, we're a little disappointed that it was down low single digits. But what I would say, if you look at it over a little bit longer period of time, the ATV industry is doing what we expect it to do. ACE is not in our number on that. And I would say ACE is still early enough as a new category in this. And from everything that we're reading in our numbers, it's not cannibalizing our ATV sales at all. And obviously, if you threw ACE into an ATV industry, if you want to do that, the numbers look better. But we're not worried we're seeing significant cannibalization at all. Right now, the metrics we're looking at, it says that ACE still is largely almost 100% incremental on the sales side from us at the retail standpoint, so we're thrilled with that.

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

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

Your next question comes from the line of Scott Hamann with KeyBanc Capital Markets.

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

Yes. Obviously, the ag market has been weak now for almost a year. And if you look at our performance over that prior year period versus those larger companies, I don't have to name them for you, that are very focused on heavier ag equipment, you'll see that it hasn't hurt us much at all and that's kind of what we expect to see going forward. We didn't get a huge benefit on the run-up with ag, and we're not seeing much of an impact at all on the way down. That being said, a lot of our customers are farmers and ranchers. What we find, though, is that the -- and this is -- our products are a rounding error to what they're betting on. So obviously, it’s a little bit of impact, but it's something with well -- as we've proven over the last 9 months, well within something that we can deal with.

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

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

Jim, this is Bennett. I don't like to deal in would have, could have, should haves. But yes, I think it would have been modestly higher, certainly motorcycles because we were slow with -- that was just -- I mean, the demand on these new model year '15s on both Victory and Indian 2-tones and Roadmasters, and we were constrained. So no question that impacted our motorcycle retail. And I prefer for you to say modestly, but no question. And again, we were swamped in our ORV plants as well. And so we were a little slower on those, even though we were able to get the shipments out. So I think it did have a modest retail impact on the ORVs as well.

Got it. And then second question, I think Mike mentioned ORV ASP is up 6% in the third quarter. That's a great number. Maybe talk through how we should think about that going forward. It doesn't seem like a whole bunch of the special edition, really high price point XP 1000s hit in the third quarter. That should help. But you're also going up against a real tough ASP comp, ORV specifically, I'm speaking to here. So anyway, that could -- that seems like that could be a really big swing factor in the fourth quarter. How should we think about that going forward?

You know you're encroaching on Hovorka’s [ph] question there.

Yes. So it was 6% in the third quarter. It's 4% on a year-to-date basis. I don't know that we can project too much going forward at this point on what that might be. I think you're right. There are opportunities for higher priced ORVs. We also introduced a fair number of value models, and EXTs and those types of things, which -- 570s that are in the mid to lower end of the scale as well. So -- and then ACE, the ACE ramps up, ACE is lower. So I don't think I would get too carried away with that.

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

Can you just walk us quickly through the Eicher timeline. Bennett, I think you said second quarter '15 expected shipments?

Yes. As we built out the JV going into a new market with a great partner, I mean, again, I would tell you, everything is moving along probably as we expected. But just as we expected there, when you're doing an all-new kind of new-to-the-earth kind of a product category and concept, you have a new partner, you're building a new team, you're preparing a distribution channel, you're building a plant, there's always a little bit of complexities that you -- that even though you try to plan for them, slow you down a little bit as you go through regulatory. And so we're about 3 months behind where we expected to be about a year ago. And so right now, we're in the process of kind of signing up distribution. The teams are -- is preparing the final kind of go-to-market launch and marketing plan. The plant is essentially ready, and we expect to begin shipping in the second quarter is really the plan. And we expect as does Eicher, that we'll be successful in this -- in the venture. But again, any time you're going to an Indian market, I want to make sure you're clear, it's a big, vast, wonderful market. But you're dealing with traditionally lower margins, and it'll take time for us to build that to everything that it can be over the next 3 to 4 years.

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

Yes. Well, Scout is going to help. We're going to ramp up Roadmaster. And don't forget, Slingshot is going to be in there as well, so...

Yes.

We've got a lot of good stuff coming into fourth quarter.

Your next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: I'll keep it to one question. Scott, a lot of investors perceive you to be the leanest company in powersports already. So maybe the question is what can you do further to, I guess, press that advantage? Maybe frame, if you would, what's still on the table for Polaris to get more Lean to drive better margin? It just seems like you've done a lot already.

No, I mean I -- we've talked about a bad baseline sometimes. So when we talk about the improvements we've made, it's really not -- it's more of the powersports industry-wise versus where we could be. And I think if you just look at the automotive industry and some of the metrics they have and what they've done in their Lean transformation over the years gives you a good example of what we can do. I mean, the main areas where we expect to get better, this lead time reduction effort, getting products to our dealers and our consumers. We started to do that with our motorcycle business, and we're going to continue to get better with motorcycles and expand that across our ATVs. So lead times are going to improve. Our quality, which includes Net Promoter Scores, our warranty costs and ultimately the rework that we do will improve over time. The labor productivity, which is not a huge number for us, but it's going to get better. And it's been alluded to, we're not on top of our game with factory inventory right now. And we believe we've got a great opportunity to free up cash by better managing inventory in the future. So those are just a couple of areas. And I think the potential as we -- it's not just a single person. Obviously, Ken's bringing a lot of great experience to help us accelerate that growth. But I think it's a requirement for all of us on the team to really embrace this opportunity to be a great Lean enterprise.

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

Just had a couple of follow-ups here. First on capacity. Can you just talk a little bit about the flexibility of capacity at Spirit Lake? Is that at all interchangeable? I guess, for example, could you take advantage of some potential weakness on one line to meet demand in, say, Indian or Slingshot? And then secondly on the income from Financial Services, can you just kind of talk a little bit more about what's differing there from your prior expectations? I think, as you mentioned, penetration rate remains flat, flat sequentially, still down a couple of points year-over-year. So is the guidance raise there just really a function of higher-than-expected dealer inventory?

All right. Let me take the kind of Spirit Lake flexibility and capacity. I think that remains kind of a hallmark strength of Polaris versus any of our traditional competitors. I mean, generally speaking, our lines with a minimum of rework and investment in time can produce other products in our portfolio, particularly in a motorcycle thing, with really not a tremendous amount of lead time. So I would say, absolutely, Jimmy, that's true in our expectation. What we would probably do, unless we saw something major here over the next several months, is what we would use is kind of use our labor forces to kind of swap that around to go faster or slower, based on what's going on because we have some dedicated lines set up for each of the key categories, whether it's Victory, heavyweight, Indian or essentially mid-sized Scouts right now and then Slingshot. So we're feeling pretty good about our flexibility, particularly now that the big paint system is about to go live here over the next week or 2, and we'll have that behind us.

Okay. On Financial Services, as I said before, it's really coming from both our wholesale and retail. In the wholesale area, our portfolio balance is now over $1 billion. And in a stable interest rate environment and a stable cost environment for that business with the inventory -- the finance inventory being up 26%, it's just generating a lot more profit opportunity for the joint venture that we share with GE. On the retail side, the penetration rates are holding stable, but our volumes continue to increase as our retail sales increase. And the profitability with our relationships, the metrics that are driving the payments that we get are improving. And that's generating significantly higher profit for our Financial Services business.

Your last question comes from the line of Joe Hovorka with Raymond James. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Just 2 quick questions. The first on Victory. Bennett, you talked a little bit about the Indian not cannibalizing Victory any more than you thought it would be. But we now have 3 quarters of down retail sales, and I can understand what's going on here in the third quarter, how do you foot that with 3 consecutive down quarters and cannibalization not being any worse than you thought? Because I think we were kind of talking about Indian potentially growing alongside with Victory growing.

Yes. I think that's a fair question, Joe. I mean, I think when we really are honest and that we assess the situation, I mean, the heavyweight motorcycles industry is an extremely competitive space. And as we've entered with Indian, with really, really compelling products in all of those key segments, it's only gotten more so. Harley has responded with some very good products of their own and a lot of our Japanese competitors are responding, if not with new product, with really aggressive promotional efforts. And so I would tell you it's a product more so than anything of a very competitive industry. And again, in the short term, we have not had as much product news as our dealers or our customers are used to, and we expect to rectify that in the near future. And then I think secondarily, clearly, in the third quarter, it was worse because we didn't help ourselves with our capacity constraints. And gain our key new products and the appropriate model year '15 is out to the marketplace. That would have helped us. That's how I would tell you the answer. I mean, we're certainly not panicked and we know what we got to do to make that better as we go forward. It's straightforward.

And I mean, we still -- I mean, we make great motorcycles with Victory. And I think all the reports say that. We've got some exciting new members on our team, so I expect the commercial execution of that as well as the operational execution to get better. So certainly, not the growth -- or the lack of growth, which is not what we wanted this year, but we feel very good about the long-term ability for Victory to be a growing and viable part of Polaris. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Okay. And then the second question is on your gross margin guidance. You've got -- production volume has actually pushed in the third quarter for the full year, but we've got volumes up. How is that not gross margin accretive? What am I missing there?

Well, I think the real thing there, Joe, is -- we've been talking about it for much of the call, in capacity. We're bursting at the seams on capacity. And to get the product out, we're not always as efficient as we'd like to be. We're expediting stuff. We're working overtimes. We're moving stuff around from factory to factory. We're not as efficient as we like to be.

Plus new line ramp-ups.

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

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

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