Polaris Inc. (PII) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris First Quarter and Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Mr. Richard Edwards, Director of Investor Relations. You may begin your conference.

Thank you, Susan and good morning and thank you for joining us for our first quarter 2015 earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning's call. The speakers today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer, Ken Pucel, our Executive Vice President of Operations, Engineering, and Lean is also here and is available to answer questions. During today's call, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, foreign currency movements and other matters, including more specific guidance on our expectations 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 CEO, Scott Wine. Scott?

Thanks, Richard. Good morning and thank you for joining us. With a great deal of ups, downs and noise impacting our business in industry. I'm simply going to refer to the start of the year as first quarter as a quarter of excess. We exceeded our sales and earnings targets, although the beat would have been notably better ex-currency. But once again, we did not execute nearly as well as we could or should. Retail sales were below expectations which partially contributed to excess inventory at our dealers and on our balance sheet. We too often fell short of our own high expectations requiring explanations of how we will improve. We will not make excuses, but we will rely on extraordinary talented team to deliver exciting performance, our stakeholders expect. First quarter revenue was up 16% to a record $1.03 billion. A strong global demand for motorcycles and improved availability of off-road vehicles, offset of volume and currency driven sales decline in EMEA. In North America, we saw mixed consumer demand for much of the quarter. With regional weakness and an elevated competitive environment combining to limit overall first quarter retail sales growth to 8%, which is actually our best first quarter retail performance in the past three years. Motorcycle retail was especially strong with Indian and Victory combined up nearly 40% and overall motorcycle retail including Slingshot up over 100%. This dramatic increase in motorcycle retail sales would have been even higher if production issues had not restricted shipments for much of the quarter. Operating profit was up 19% in the first quarter surpassing sales growth, as we exercise control over operating expenses still up 11%. It felt good to reap the rewards of our heavy OpEx investment over the past few years. Although no one should be concerned that we are curtailing our growth focus. We are merely slowing our operating expense growth from a torrid government-like pace. Net income rose 9% yielding record earnings per share of a $1.30. We closed two small strategically important acquisitions earlier this week. The previously announced Hammerhead Off-Road Vehicle business provides us with our first Chinese manufacturing facility an immediate access to the substantial global market for value priced off-road vehicles. Dave Longren sees significant opportunities for his off-road vehicle team to leverage Hammerhead for growth and productivity in 2015 and beyond. We are excited about yesterday's announcement of our acquisition of Timbersled. The industry leader in the emerging fast growing snow bike market. Timbersled grants us access not only to their cool technology that complements our snow business, but also brings the Founder Allen Mangum and his innovative and passionate team into the Polaris family. Together, we believe we can take the sport of snow biking mainstream and create a new platform for growth amongst our industry leading portfolio of mountain sleds. We are raising the bottom end of our full year EPS guidance by $0.05 maintaining a range of up 9% to up 12% which matches our unchanged sales guidance. We are planning for an uphill battle for market share gains across our businesses and no improvement in currencies, but we do expect to continue to win with improved execution and another great year of Polaris innovation. We will accelerate the velocity of inventory through our factories and dealers and expand the global dealer network to support the growth of Indian and Slingshot. While overall international sales are projected to be down for the year. We expect Europe, Middle East and Africa to get moderately better as the year progresses and forecast strong growth in Latin America and moderate growth in Asia Pacific. Achieving the upper end of our full year guidance will put us just over $5 billion in revenue, with net income of $500 million. Well on our way to achieving our 2020 objectives of being a highly profitable $8 billion global enterprise. It is important to note that financial targets are a small part of our strategic objective slide. How we win over the long-term matters and we're committed to winning the right way for all stakeholders. Our leadership team and more than 8,000 employees work hard every day to create our ambitious future and I will highlight three leaders today that offer the potential for significant impact. Starting with customers as any Lean journey must do, I'm thrilled with the progress Tim Larson Customer Excellence Team are driving to enhance the customer experience at every touch point. Tim spearheaded the successful achievement of our goal to add our 150th retailing Indian Dealer in North America by the end of the first quarter and his interactive service and Rider X teams are building a digital competitive advantage that will delight and benefit customers, dealers and riders. He leads the best sales team in powersports and they will guide our way to growth market share gains and customer loyalty all essential to our long-term and short-term success. Matt Homan has only been leading our Adjacent Markets Business for nine months, but has built a stronger work and transportation team with improved execution in almost every respect. His strategic vision and plans for the potential of our business outside of powersports bring our $2 billion adjacent market business goal, clearly into focus. Ken Pucel is off to a great start in the four months, since he became our first Executive Vice President is now is not only accelerating our Lean enterprise progress but is working to streamline our product launches, reduce our inventory and fast track our productivity gains. Improvements have already begun though the truly transformative impact of his leadership will be several quarters or even years in the making. Patience is certainly not a personal strength so I'm anxiously waiting for Ken's team to make us significantly better and innovation quality, delivery and cost. I will now turn it over to our President and Chief Operating Officer. Bennett Morgan, who will provide additional insights into our performance.

Thanks, Scott. Good morning, everyone. Polaris again gained market share in powersports driven by strengthening in retail momentum and scale in Polaris Motorcycle brands as well as RZR. First quarter Polaris retail sales in North America increased 8% with some regional weakness Canada and Texas were weaker with the balance of US markets generally stronger. The overall North American powersports industry remains healthy and grew at a 4% rate. North American dealer inventory is up 17% versus 2014, with ORV inventory up mid-teens percent. Factors that contributed this increase were our new ORV models especially the A segment, our Q1 retail started slow and was a bit softer than we had projected, increased dealer stocking due to new ATV RFM dealer profile requirements. Level loading of our production and shipment schedule ahead of key seasonality due to limited ORV capacity upside until Huntsville becomes operational, and reduced order to ship lead times in conjunction with RFM. In summary, our ORV dealer inventory is just too high. We've already taken steps in recent leaks to improve RFM order flexibility to better meet the needs of our individual dealers and we have further measures in development. The objective is to lower the year-over-year physical until box count growth in ORV dealer network even with our continued product expansion by increasing dealer turn velocity. Snowmobile inventories are up mid 20% due to lower snowfall in key Snow Belt regions but remain at acceptable levels in the majority of dealers. Motorcycles are up about 20% driven by Indian and Slingshot dealer and product expansion, but overall motorcycle inventory remains too low. Lean enterprise is competitive advantage, product quality is measured by our customer continues to improve we're number one in net promoter scores in motorcycles, ATV's and side-by-sides and number two in snowmobiles. Factory inventory is up 30% year-over-year driven by PG&A, raw materials, mix and acquisitions. But we expect to see reductions on the year-over-year percent increases as we move throughout 2015. Our ORV operational performance improved in the first quarter. Our logistics team effectively managed the West Coast port strike with minimal impact to supplier or other than some elevated expedited freight expense over 93% of our ATV orders were shipped on time and order variation was further reduced through RFM and Spirit Lake continue to improve stability of our new paint system throughout Q1. The build and supply were constrained on all motorcycle brands. Paint efficiency and throughput has increased significantly and will continue to improve in Q2. Order to ship lead times are beginning to come down now and now that we've begun shipping Scouts, all lines are operating and improving. Our Huntsville project is progressing on schedule and on budget, our general contractor is been selected. Earthwork has begun and we expect to be operational in less than a year. Finally, Ken Pucel and his team have developed a solid list of Value Improvement Process projects. We call them VIP's and link cost down initiatives that we expect will help offset the margin pressures we are currently seeing. Moving to business unit performance, off-road vehicles. Polaris, first quarter ORV revenues increased 11% driven by primarily by strong North American demand fuelled by the strength of the industry's leading side-by-side brands, RZR and Ranger. Somewhat offset by weaker international sales associated with the strong US Dollar. Polaris first quarter North American ORV retail sales increased mid-single digits. Our side-by-side retail was up almost 10% thanks to strong performance from RZR XP 1000's and a new RZR XP 900 trail models. ACE a new Ranger models also contributed to ORV retail growth which was slightly offset by a low single digit decline in our ATV's. The North American ORV industry also grew mid-single digits with ATV industry up low single digits and side-by-sides increasing an estimated upper single digits. For the quarter Polaris ORV market share was flat with modest gains in side-by-sides offset by a modest loss in ATV's. The Q1, ORV promotional environment escalated as Japanese and North American competitors attempt to move the competitive battle away from Polaris product superiority and innovation. We have added to our plan promotional spending in the latest forecast, so we can act decisively, if necessary to compliment our armada of industry leading products, which should continue to get even stronger with our model year 2016 new product introductions later this summer. To kick off the new model year 2016, we recently announced another industry first. Bringing fuel injection reliability to the youth market with our new Sportsmen and Outlaw 110cc EFI models. Motorcycles, Polaris first quarter motorcycle revenue surged 74% despite continued order backlogs in all motorcycle product lines. Despite the improving production rates, we expect backlogs to continue on some models into Q3. We had an excellent first quarter and 1400cc heavyweight motorcycles and picked up a significant amount of market share in this North American industry that rose low single digits. Victory retail sales slightly outperformed in the market. Even with increase promotional and finance and activity with competitors and both orders and retail has been excellent on our boldest bagger yet, the new Magnum X1. Indian 1400cc heavyweight momentum continues to accelerate with retail well over 60%. Dealers retail in North America increased to 150 by the end of the first quarter and dealer sign rose to 200 and we introduced the new Indian Chief Dark Horse, which targets a younger rider and an affordable $16,999 MSRP. Indian is a premium brand and our pricing and promotion strategy has remained constant since our inception. Indian Scout retail was modest for the quarter as all dealers were essentially sold out through most of the first quarter due to the production delays. Both shipments and retails have increased notably in April and we expect this to accelerate going forward. Slingshot, Slingshot remains hot. North American retail sales significantly exceeded our expectations and accelerated throughout the quarter. Demand remains excellent with consumer presold orders increasing throughout the first quarter and we will remain short of demand at least throughout model year 2015. As a result in April, we executed a production line rate increase to improve our full year shipments. Consumer net promoters scores indicate high early consumer satisfaction rates, active retail dealers increased to over 370 with more waiting and we are making tangible progress on the remaining state and provincial licensure front. In fact, just last week North Dakota announced approval for Slingshot and we are confident a few more states will soon follow soon. In March, we introduced our first limited addition Slingshot and Nuclear Sunset Orange we sold out to dealers immediately. Slingshot is proving to be a strong growth catalyst and for calendar year 2015 has already forecasted to be an excess of 20% of our motorcycle sales guidance. So to say the least, we're encouraged about each of our three unique differentiated brands that constitute our growing motorcycle business. Snowmobiles. First quarter snowmobile revenue decreased 7%. Lower snowfall in key markets in the first quarter caused a mid-single digit industry decline. However, for the just completed 2014, 2015 season the industry increased mid-single digits growing for the third consecutive season recording the strongest industry sales level in over six years. Polaris retail sales outperformed and increased high single digits for the seasons. Despite being down to low double digits in the first quarter and we grew share in every key segment led by our new AXYS chassis. Our 800 Switchback PRO-S and the AXYS Chassis was recently awarded the prestigious SnowTrax TV, Real World Sled Of The Year for 2015 after a full season of on snow evaluation versus the competition. For model year 2016, Polaris has the biggest news in the industry led by seven all new AXYS RMK models. At 408 pounds, the all new RMK PRO is by far the lightest sled in the industry. These new models have been a enthusiastically received and snowcheck sales for RMK are up significantly year-over-year. Global dealer orders are still being finalized, but based on another strong preseason of consumer snowcheck deposits, North American order should be up slightly, but will be offset by weaker international orders primarily due to Russia. Global adjacent markets; global adjacent markets first quarter revenue grew 7%. North American Work and Transportation revenue was up over 30% led by strong partnership shipments on the air and supply vehicle, continued national account growth and GEM over 40% retail increase. BRUTUS retail was up low double digits, but revenue was down due to distribution erosion and additional promotional planning. EMEA work in transportation markets decline modestly due to currency Goupil and mega shipments increased and future orders are up over 20% while Aixam gained a moderate amount of share in an industry that was flat, strengthening in our number one position in Europe. Defense continues to grow with revenue up double digits, DAGOR shipments to special operation forces accelerated in earnest in the first quarter with the vehicle now in the field and receiving very positive customer reports. International sales expanded with M RZR's and our family of ultra-light combat vehicles now deployed in 25 countries with new customer orders coming online. Parts, garments and accessories. PG&A generated record Q1 revenues again in Q1 up 12% with strength in the US offsetting weakness in Europe and Canada. Accessory sales grew 23% driven by motorcycle and side-by-side performance in all brands and we had nice contributions from our growing aftermarket portfolio of KLIM, Kolpin and Pro Armor. Apparel grew 8%, while part sales rose just 1% due to lower demand for snow related parts associated with poor global snow conditions. Investments in our online shopping experience are paying dividend. E commerce revenue was up 100% and traffic was up 44%. International, Polaris International revenue declined 7% in Q1 due primarily to currency pressures across the globe and weakness in Europe and Russia. EMEA region revenue declined 15% and European Powersports industries and Polaris performances were mixed. The ORV industry grew mid-single digits but with smaller value products and discounting driving the growth. Polaris was down mid-single digits. Motorcycle industry retail was down upper single digits with Polaris down more due entirely to lack of product availability. Scandinavian Snow Industry has improved to flat now season to-date with Polaris now up low double digits and gaining a nice amount of share. Our Opole Plant is on track and shipping ORV products to our EMEA customer base. Asia Pacific sales increased 6% led by solid double digit growth from China, and India, and New Zealand. Australian sales were flattish despite continued market share gains due to a very weak currency. The Eicher - Polaris JV is in the final stretch before we commercialize our new personal utility vehicle. The plant is completed, the supply chain is being post and dealers are in place with shipments beginning in Q3. Latin American sales were very strong up 75% led by our New Mexico subsidiary and growth in Brazil. Our momentum in these regions is increasing and we continue to invest in future business in product development in these emerging markets and with that, I'll turn it over to Mike Malone, our Chief Financial Officer.

Thanks, Bennett and good morning, everyone. As Scott and Bennett noted, our first quarter results while another record, were not without challenges. However, we are making the necessary adjustments and are comfortable in maintaining our sales guidance, so up 9% to 12% for the full year and increasing the lower end of our earnings per share guidance and now expect it to be in the $7.27 to $7.42 per share range. While we are maintaining our total company sales guidance, we are making a couple of adjustments to the individual business, sales expectations as follows. Snowmobiles are now expected to be down low-single digits percent slightly better than prior guidance reflecting the impact of the recent Timbersled acquisitions. Motorcycles are now expected to grow 55% to 70% up from prior guidance driven by the strong sales for Indian and the new Slingshot and we're revising down slightly both globally adjacent markets and our international sales guidance given the weak European markets and the currency impact of the strengthening US Dollar. Global adjacent market sales are now expected to grow 5% to 10% and total international sales are now expected to decline low single digits percent. Our previously issued sales guidance for the other businesses remains unchanged. PG&A sales are expected to be up high teens percent for the full year 2015 and ORV's are expected to increase mid-single digits percent after growing 11% in the first quarter benefiting from a 7% increase in the average sales per ORV unit. We are adjusting our previously issued guidance for the two following items. Income from financial services is now expected to grow mid-single digits percent for 2015, a slight increase from previous guidance. The improved income guidance is due to the strong performance in the first quarter both our retail and wholesale credit businesses. And the income tax provision rate for the full year is now expected to be in the range of 34.75% to 35.25% of pre-tax income, somewhat higher than our previous guidance due to the lower expected pre-tax income from our international operations largely currency related. For 2015, we are again expecting the R&D credit to eventually be extended by the US Congress, but not until later in the year. Our guidance for the remaining P&L items remain unchanged. The gross profit margin percentage decreased by 66 basis points in the first quarter to 28.4%. While our first quarter gross margins benefited from product cost reductions and higher pricing. The speed and magnitude of the negative currency changes more than offset these positive benefits. In addition, product mix was unfavourable in the first quarter as motorcycles grew significantly faster and PG&A grew less than the overall company. For the second quarter 2015, we expect the gross profit margin percent will again be lower than the prior year. Similar to what we experienced in Q1. For the full year 2015, gross margin guidance is unchanged. We continue to expect the gross profit percentage to be in the range of flat to up 20 basis points. We expect gross margins to continue to benefit from higher selling prices and product cost reductions along with the improved productivity in the factories after a challenging past few quarters. Start-up cost for the Poland plant are winding down as we ramp up production and we are moving quickly with the planning and construction of the new Alabama plant which will add start-up cost for the balance of 2015 and 2016. With the continued low oil prices, diesel fuel cost are expected to be beneficial to gross margins in 2015. We have about half of our diesel fuel exposure hedged for the remainder of the year and we expect to see the benefits of other commodity prices moderate later this year. Although, we did not recognize that in Q1. Foreign exchange headwinds have intensified significantly in the last 90 days. Currencies in the 2015 first quarter had a $32 million negative impact on our total company sales versus Q1 of last year and a $16 million negative impact on pre-tax income. On a constant currency basis, for the first quarter our sales and net income would have each increased about 20% over the first quarter last year. Assuming currency rates remain in about the same range as quarter end, we expect that the appreciation of the US Dollar will reduce full year 2015 total reports sales versus last year, by about $140 million to $160 million. Negatively impact gross margins by about $65 million to $75 million improved operating expenses by about $15 million to $17 million impact other expenses by about $15 million to $17 million, thereby reducing pre-tax income by about $65 million to $75 million. Keeping mind these currency impacts are factored into our guidance ranges I reported on earlier. We now have about 75% of our remaining full year 2015 Canadian Dollar cash flow exposures hedged as well as the 30% of the Australian Dollar and 70% for each of the Japanese Yen and Mexico Peso and have also started to hedge the Canadian Dollar and the Peso for the first half of 2016. Most of our hedging activities gains and losses are reported below the operating line in other expense. Along with currency gains and losses related to foreign cash transfers and certain intercompany transactions. In the 2015 first quarter, this resulted in a $7.4 million of expense compared to other income of $2.1 million reported in the first quarter of last year. Given our current hedges in place and assuming the exchange rates day in a similar range, we expect that this other expense will continue for each of the next three quarters of 2015. I'll just add a few comments on our balance sheet and liquidity. We expect cash flow provided by operating activities for the full year to increase over last year at a higher percentage rate than net income as we're working hard to moderate factory inventory levels. We continue to expect capital expenditures for the full year to be over $250 million which includes the portion of the cost of our Alabama plant as well as an increase in tooling investments for the new products under development. Polaris acceptance receivables from dealers in the US, were over $1.2 billion at the end of the March, an increase of 28% from a year ago. The year-over-year increase reflects the elevated level of dealer inventory and the mix change of higher value, side-by-sides and motorcycles. GE announced that it will be selling large part of its GE Capital portfolio over the next 24 months including the entity that is our joint venture partner in Polaris acceptance. In the near term, we do not expect any change in the business or the relationship. The retail credit environment remain stable with approval rates of 56% for the first quarter and the penetration rate at 32% each of which is slightly improved from a year ago. With that I'll turn it back over to Scott for some final thoughts.

Thanks, Mike. After starting my comments today, talking about the quarter of ex's. I will finish with a few A words that are pertinent to the ongoing success of Polaris. I will start with anticipation. Which always a key part of leadership success, but it is especially vital in today's dynamic globally competitive powersports industry. Across Polaris we are committed to anticipating more and reacting less in order to stay ahead of the competition. Agility can be associated with most of our vehicles and is now I guess to one of my favourite speed wins. It is also a critical tool for Polaris corporate where agility can overcome imperfect anticipation which is also by definition to reality. And aid us in beating bureaucracy, so we can accelerate profitable growth. Alignment contributes better agility and anticipation, but also enables us to better focus on and serve customers. Strong leadership which is essential to effective alignment is a core strength at Polaris. Our recent leadership transitioning provides proof of this concept. When Mike Jonikas a 15-year Polaris veteran, who runs our oldest and newest businesses Snow and Slingshot announced his intention to retire, it could have created a strain on our business and organization. Due to Mike's leadership and the processes infrastructure and positive momentum he had built, we were able to quickly identify strong executive backfills that enabled us to become even better aligned around our Snow and Slingshot customers. Chris Wolf, is the natural leader to step up as the next VP of Snow. He started with Polaris is 2002 and successfully rose to the ranks in sales, service and product management before being promoted to Director of Snowmobiles in 2011 and is subsequently advancing to General Manager, Snowmobiles in 2014. Chris is respected and highly regarded in Polaris and throughout the snow industry and we are excited for his continued leadership of our legacy snowmobile business and Timbersled. Craig Scanlon is the perfect candidate to backfill Mike's role as VP of Slingshot. Craig has been with Polaris since 2004 driving aggressive growth and growing as an aggressive driver. He's acclaimed RZR racer. In various leadership roles within our $3 billion offered vehicle business. Some want to compare Slingshot to RZR in terms of growth potential and Craig is our best bet to make that happen. I want to thank Mike Jonikas for making Polaris a better, bigger and stronger company during his 15-year. He professionalized Polaris sales, created our dealer council, ran almost every business in Polaris at some point and was simply good for powersports industry and great for Polaris. His legacy will move on with the growth and success of Snow and Slingshot, which he has aligned well. Accountability is my final A word, but it's also the most important. For me Bennett and Ken to the new leaders on our team we are all accountable for the success of Polaris, that entails winning most of the short-term battles, but also doing the big and hard work to ensure we deliver and win for customers, dealers, employees, shareholders and all stakeholders over the long-term. I feel good about our ability to do that, throughout the rest of 2015 and beyond. With that, I'll turn it over to Susan to open the line for questions.

[Operator Instructions] your first question comes from the line of Tim Conder. Your line is open.

Thank you. So let me ask one clarification gentlemen. Bennett on your Slingshot comment, you're saying that, that's going to count for over 20% of the motorcycle segment increase for this year, is this correct?

No, that's not correct. It's 20% of our implied motorcycle guidance for the year. Just trying to give you some idea, so that you don't chase Richard, Mike around all quarter trying to get some ideas. So total revenue.

So total revenue, okay. Okay, perfect, perfect. Thank you. Okay, my real two questions here, so first and foremost on sales. On RFM and ATV inventories clearly you guys aren't happy with what's going on, at the company level or in the channel that's very clear. And so if RFM is been kicking in for ATV's and understanding it's a ramp, why do you have to, just I think I've got a little bit of that understanding, but why do you have to build the inventory so much there in the channel as that's kicking in. Secondly, it relates to the competitive pricing promotional environment. We've seen in the past that, the Japanese generally have March fiscal year-ins and we've seen this in the past, where they do some promotions on that and sort of clean things up to make the books look good at year end. How much of it, what we're seeing for in ORV's and in motorcycles is that versus the end, and clearly there is, I would think both going on. Those are my two questions, gentlemen.

I'll jump in with one and maybe the other guys will telling at. Let's start with your most recent one which was the competitive formal question. We would agree with you, I mean again we're not inside the walls of our competitors. Certainly, we've seen that trend in the past that there is some year-end stuff that often is taken by the Japanese, but with the Yen where it's at, again as I made at my comments. I mean, we did a really remarkable job with the increased new product introductions from competitors over the last couple of years, with our armada of innovation. I think we've pretty effectively beat those people back and a lot of those folks have had to solve some of their volume issues, I think through increased promotion and so, we are planning on environment potentially remain more aggressive when we built the flexibility in our plan going forward to make sure that we can do that. So again it's not a shock to us, but again we want to remain nimble, so that we can continue to protect our industry in leading market share positions and then in regard to RFM. I think it really in terms of by-product of a number of things, ATV RFM is really a model that is been design to try to improve shipping predictability get the right product at the right place, at the right time to dealers. We also saw an opportunity frankly, as we continue to get bigger and more diversified and make sure that we have appropriate segment stocking across all of our retailers and I think what we are acknowledging there is, we implemented that initially as I think perhaps we were a little bit more rigid and it wasn't working to the individual needs of each of our dealers as well as it needed to and we've just got to be a little bit more cognizant of box count even as we get much a larger, broader portfolio. So I think those are the adjustments that you hear us signal. Anything, to add on that Scott.

Thanks, Tim. Next question.

Your next question comes from the line of Greg Badishkanian of Citi. Your line is open.

Two questions, I'm just going to follow-up from some of Tim's question. So if you look at second quarter ORV sell-in versus sell through? What are kind of puts and takes, how much will that impact the second quarter and by the time we get through the spring selling season, will inventory levels be at your target level, that's question number one and then the second question is, maybe just comparing and contrasting. You know we heard from Harley that the motorcycle segment increasing the competition in the first quarter seeing that accelerated competition. So maybe comparing motorcycle heavyweight segment versus ATV's and side-by-side in terms of the competitiveness that we're seeing from the Japanese.

Let's take the second one first Greg. From a motorcycle standpoint. I mean certainly we have seen Japanese be a little bit more aggressive that's a smaller business for us and frankly as you could see from our numbers, our numbers were good and we're seeing a lot of momentum and I would say the impact at least on the Polaris side, to the Indian and Victory brands was frankly very, very modest. So we are feeling pretty good about that as we head into seasonality. Again, competitors are going to do, what competitors are going to do, but we didn't really see an impact. On the ORV side, again it's aggressive it's out, and we saw a lot of competitors attacking really on the value side in the low end of the market that's frankly where we saw most of the investments and the other thing we saw, as we saw a fair amount of wholesale discounting in by number of our competitors, which also has an impact and often isn't even measured in that promotion impact. So I think there was kind of one two punch and I don't expect the wholesale discounting to continue for an extended period of time. I think that was more of a short-term phenomenon. So I do think there is a little bit of difference going on between those two markets.

The inventory?

Yes Q2, again what I'll tell you're going to see, I think you'll see sequential and directional improvements on our year-over-year increases throughout the year and it will be, you'll see improvements in Q2 and I think you'll see more significant improvement as you go to Q3 in particularly the Q4, as we make those adjustments and again remember, we've got some capacity issues that we have to kind of level lower in with the Q3 coming up. There is some timing that has a little bit of impact on how quickly we manage that along with model year 2016 new product introductions.

Okay, great. So what you're saying is that the increase in retail inventory that year-over-year increase will moderate and then I think, it might get better.

Expected to moderate some in Q2 and then and to much more aggressively accelerate the year-over-year decreases so to speak, as we go throughout Q3 and Q4.

Perfect. Thank you again.

Thanks, Greg. Next question.

Your next question comes from the line of Craig Kennison of Baird. Your line is open.

I want to wish all the best to Mike Jonikas, he's been great to deal with on our part. My question is on retail. Your North American retail metric improved 8% against a 7% comp that was an improved result, but you do face low double digit comps for the remainder of the year. Do you think you have the product plan to drive I think low double digit in North American retail growth against these tough comps in order to meet your shipment goals?

I mean, Craig I think, you've got to look at it not just on what we've got from a product plan coming in 2016, but recognize that many of our high demand model year 2015 products are still and that includes Slingshot, it includes Scout, Magnum. I mean there is a lot of stuff on the motorcycle side, that we still have a tremendous backlog for it and is going to help retail, but don't ever underestimate Dave Longren and his team and what they're going to bring for off-road vehicle innovation. It probably won't be an epic year, but it will be damn close and I think across the board. But it's not just Bennett commented, we're going to be appropriately aggressively with our promotions as we need to be, we're going to - to what Tim Larson and the team are driving from sales tactics is going to be high. We absolutely expect to win the retail battle for the remainder of the three quarters.

Are you concerned at all Scott about just more challenging comparison in the back half of the year?

If you look back, Craig. We've been facing that for five years. And like I said in my prepared remarks, I was surprised to look back the 8% increase in this year's Q1 was higher than we've had in the last three years. So we lapped the very difficult snow comparison to retail in the first quarter, yet we're still able to drive 8%. So it is a difficult competitive battle, but I think it would be incorrect to assume that our team is not prepared for that challenge.

Thank you.

Next question.

Your next question comes from the line of David Kelley of BB&T Capital Markets. Your line is open.

And first one, just on the side-by-side segment. I have a question on the performance of Ranger versus RZR and if you're seeing any underperformance on the utility side of the market to the West Coast throughout Europe, what might be driving some delta between the two segments?

Yes, Dave this is Bennett. Yes, I would tell you there is a couple of things. I mean, RZR is notably stronger right now than Ranger. But Ranger grew nicely, Ranger is coming up against much tougher comps whereas the RZR comps frankly because we didn't have the new product in the trail segment I would say as easier comps. You know there is some modest impact in a few regions Canada is little weak and Texas is little weak, but overall utility segment is probably a little weaker than the Rec side, but again I think that has to do really with the new product.

Okay, great thank you and then kind of along those lines and a quick follow-up as well. I think you noted in the late start to the first quarter selling season and some regional weakness. Are you seeing anything on the East Coast that was maybe delaying that start of weather or was it colder winter weather, what are you hearing from the ground troops from the dealers as far as the recreational market and utility as well?

Well David remember, we had a blowout snow retail in on the East Coast in the first quarter that's been, that was really good. As that transition, we've got some of our best motorcycle dealers in that region and we expect that the North East to be a good spring selling season for us across the board.

It actually really cornered, the east was fine on the ORV side. So I think we're feeling pretty good about that. I think that as you're reading, I think that's even potentially more positive.

All right, great thank you. I appreciate you taking my question.

Thank you, next question.

Your next question comes from the line of Robin Farley. Your line is open.

Two questions. First is, with the supply constraints you have in the motorcycle segment, would you say that today or in April that you're shipping at the rate where you want to be shipping for all three motorcycle brands at this point?

No. That's an emphatic no, if you didn't hear.

What do you really mean by that? The paint system though, it sounded like the paint system issue been work through. I mean in another words, how much is it just that year, not being able to keep up with demand versus seems like the paint system that regardless of demand, where issue is on the supply side.

Yes, so this is Ken Pucel. I'm our new EVP. We built a lot of capacity, good capacity in Spirit Lake, the weak link right now is our paint system. We've made considerable improvements from Q1 to Q2, we're focused on all of the right root cause, elements of things like downtime, rework, first pass yields and those types of things and at the same time, our model year 2016 paint products and moving our Victory product line from our old paint system into the new paint system, just it culminates and our paint system being a bottleneck. We roughly doubled the output quarter-to-quarter and we got plans to continue that and it won't be long until that is off critical path and then we're going to rapidly close the gap to the open orders and through the rest of the year catch up and so that's the plan.

Okay, great and then, you guys talked about discounting the promotional environment off-road and I think it sounded like you were saying kind of mid cc [ph] the values segment. Was that, ATV specifically or are you seeing the same or similar levels in the side-by-side business in terms of the promotional activity?

Robin, we're seeing a little more pronounced in the ATV side, but we're also seeing it in the side-by-side segment. The promotions are up and again, where we were seeing more aggressive attacks, I would say generally is in that entry value segment.

Okay, all right. Great, thank you.

Next question.

Your next question comes from the line of James Hardiman of Wedbush Securities. Your line is open.

So my first question, maybe to help us sort of distil, how much of the inventory increase in ORV's was planned versus unplanned? So you talked about a mid-teen increase in ORV inventory, what should that have looked like, what did you plan for that number to be heading into the first quarter and ultimately help us understand how much you're going to then have to work down going forward?

Yes, James I'm not going to probably give you - completely our plan. What I would tell you is, if the plan we went into the year because of some of the kind of level loading we had to do and getting ready to key seasonality, we expect Q1 to be up, we're probably up a couple percentage points more at most than what our plan was at most and then the plant was to bring that migrate that down as we went through the year and I think what you're hearing in our remarks is we're going to be a little bit, well we're going to be more aggressive and try to be a little bit more assertive on the rate and the cadence we do that with, right now.

That's really helpful, that's about what we thought and then I guess staying with you Bennett, obviously again you're not inside the walls of your competition, but as you read the [indiscernible] how do you think about this promotional environment going forward and I guess pretty clear the currency plays a role, but it also seems like elevated inventory levels, among your competitors also plays a role and while we don't know how quickly or ever if the currency is going to fix itself? In theory your competitors would be sitting with better inventories once they clear some of this stuff out so, maybe talk through some of those issues. We know on the Arctic Cat side it's not currency, its inventory, but how do we just think about timing going forward.

I think you know again, one man's opinion for what it's worth. This isn't the great recession, this isn't the periods when some of our competitors literally had a year's worth of supply and we were looking at extensive crazy level the wholesale and discount we had to compete again. I think most of these guys are not way out of lack on their, on where they're from their inventory levels to their builds. And I think people are trying to get their fair share in their minds and they can't necessarily per se win on the product innovation front. So they're just going to be a little more aggressive on the promotion front and I think that's the environment, we're dealing with. I think, there is a very good chance it will moderate as we go throughout the year, but again to what we made in our comments. We're not going to take that chance and we're going to make sure, we built the flexibility so we can act decisively, if necessary.

And James it's important to note, obviously it's little inconvenient sometimes, but we firmly believe that competition makes us better and what Tim Larson and Dave Longren and the team went out in the field to understand what's going on, we have better plans going into the second quarter. We have better product plans coming forward. We are better company because the capitalism works, so it might seems like a complete negative sometimes when you look at it, but we actually recognized the value that we're getting from this increase competition and we expect to deal with it.

Great. Thanks Scott and thanks Bennett.

Next question.

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

My two questions are first, your Slide 10 where you got your ORV inventory up 4% and then your new ORV model plus 3, how much is that as ATV and how much of that is side-by-side? Is ATV driving that up number? Or maybe the axis of what you're thinking of for the quarter.

No I think it's reasonably balance Joe. I mean, we're, we did drive up ATV inventory slightly because some of the as we talked about this segment stocking profile adherence. We executed with RFM that we're now building some more flexibility in. Side-by-side because of the demand and being fairly tight, we elevated those levels little bit for the key strings that season.

Okay and then, you talked a lot about promos and the higher promotional environment, but if you look at your Slide 20 and you've talked about guidance. Promos are actually a benefit to gross margins in Q1 and you've got it as a push for the full year 2015. Can you just put those two kind of with the commentary that we've got around promos expenses?

You know I'll let the guys jump in, but two factors. I think one again, as much as we complain about currency particularly in Canada, there is a benefit to us in the promo line on currency that we realize in the promo line and then secondarily again, we're using the strength of the Polaris armada you know again strategically, if as we develop more innovative and better product solutions and what's out there. Our intent is to try to reduce promo and that was kind of the plan that we're running in Q1 and the way we're thinking about it, as competition does different thing, we adjust appropriate.

And I would say, Joe for the full year. Our guidance didn't change. We got it under control [ph], and I think that, you followed us long enough to know, that we prepare for pressures and when we built the plan and built the guidance. We had an expectation that competitive promotional environment might get tricky, it might get tough and we're seeing that but we're prepared for that. That's not.

Right, that's what I was, I guess that's what I was getting at because your guidance hasn't changed on that line item and so it would appear although we've got higher promotional levels right now. It's really not in excess of maybe what you were thinking could have occurred, is that a fair way to say, is that what you're communicating?

That's fair.

Okay. Great.

And matter of fact, we get offset by the benefit of the currency helping us a bit here too.

Okay, great. Thanks for my two questions.

Joe, it should be I'll just add that, obviously the competitive environment in motorcycles is difficult, but we have not changed our outlook there in much at all in fact, if anything we're seeing opportunities on a promotion line to shift it from motorcycle to other parts of the business, just we're in backlogging. It's a competitive segment, but we're doing just fine there.

Next question.

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

Yes, great. Thanks. Just to kind of expand on some of the regional variations that you're seeing, you called out Texas. Can you give us a little bit more color, what some of those underlying trends are, maybe by hire and lower and work play, just to help us understand what you're seeing early on?

Again, Texas is not a train wreck, it's just, it's down versus most of the other US markets being up. I'm seeing that really across ATV's and side-by-side's in all segment. Even in the value segment, which just tells me there is a little pressure in that market because usually if there is a little pressure sometimes, they'll pop in another area and Texas is just kind of down in general across all of our segments.

You know and the Bakken, we read the news there is been significant layoffs on the oil rigs up there. It actually helps us recruiting labor for our Rozo [ph] plant, but it takes away a few of our customers in parts of the upper northeast mid central.

Okay and then just on the international snow market, can you kind of help us understand what's going on with inventory there. It sounds like orders are down, is it mostly currency? Is underlying demand not good and how should we think about that as a percentage of your snow business?

Well the international snow business versus North America. It's a smaller piece of the pie, so I don't think you should be too alarmed on that and frankly Scandinavia looks good and I think, we'll be just fine there. I mean, what we're dealing with is primarily Russia. Russia is not good, as you guys have heard and with the devaluation of the Rouble and they have another poor snow year. Virtually there is very few units going to go in their market in this year because they've got a tonne of carryovers ours and everybody else's they've got to work through, so that really is the big adjustment you're seeing on the international snow.

And it should be noted, that's one of the areas where currency hurts us the worst because one of our competitors actually has a plant and it builds in Europe. So they get a significant discount that they're more than willing to pass on.

And we took a tonnage, a tonne, we took a lot of share in Scandinavia. So we feel good about that, so we're just fine on the competitive front. It's really our issue.

Thanks, next question.

Your next question comes from the line of Gerrick Johnson of BMO Capital Markets. Your line is open.

Mike, can you talk about the other income line and why it was a such big negative? Wouldn't gains from Canada and Euro hedging offset losses and Peso and Yen. So you can just talk to about that for a second?

Sure, we actually had there's a couple of things going on, Gerrick. When you see gains from Canada. We all get gains from Canada because it's, we're hedging, but we're hedging out of a significantly lower rate than we experienced a year ago. So hedging makes it, it makes you feel better a little bit because you've got some predictability, but the reality is, currency is off 10% or 15% and whether you're locked or at spot, right now doesn't feel good. And the other piece of this is, the extent that we didn't have hedged because if you remember 90 days ago, we were only about 10% hedge in the Canadian Dollar. Now we're 75%. So we've taken a lot of hedges lately at pretty unattractive rates historically. So again that kind of makes us feel good, but we're at under $0.80 at an all-in rate on our hedges. In first quarter, we actually didn't have a whole lot of hedges and so we're removing all of our cash at the spot rates, which have been horrible. So when you actually transfer the cash out of the international markets into US Dollar that gets hit down in other income as well. So that's what's going on, on the big pieces the $7.4 million expense.

Okay, that's really helpful and maybe either Bennett or Scott. You just talked about the agricultural market. You mentioned the energy market its impact and what about lower corn prices and soybean prices.

We've been dealing with that for 18 months, 20 months now and certainly it's not helpful, but really that's, it's what we see with the farmers is our product is typically at a discretionary level, but that really doesn't get into their capital investment bank, so we know because some of our dealers also sell farm equipment that they're having a much harder time with the big farm equipment than they're product. We think, we're dealing with that just fine. I mean it's obviously it will be helpful when that turns around and I'm a big believer that the farm economy is, got great tailwinds long-term, but short-term it's not helpful, but not terribly hurtful either.

Great, thank you very much.

Thanks, Gerrick. We've got a few. We're kind of crossed, but we've a few more questions. So we're going to keep going a little bit longer here. So the next question.

Certainly. Your next question comes from the line of Michael Swartz with SunTrust. Your line is open.

This is actually Mitch, sitting in for Mike. Just first, did you quantify the increase in overall ORV either inventory related to the RFM?

I think we pretty much answered that.

Okay and then jut with regard to the EMEA region, can you speak to your confidence level that it will improve over the balance of the year?

I did say at my prepared remarks and obviously the quantitative easing going on in Europe is been a boost to the market optimism. We're not seeing it is as much in our product categories, but really we had such a low baseline in the first quarter, that your optimism is really about our ability to ship more motorcycles over, which there is a tremendous demand for and really across, we've got some new distributors in Saudi Arabia. So we feel pretty good about the ability to get better, but don't pencil in tremendous growth over there. It's just coming off, a bad baseline in the first quarter.

Okay, thanks guys.

All right, thanks. Next question.

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

Hi guys, real quick. It's been a while since we've asked, what's your outlook or thoughts on more of an entrance in to the motorcycle business in dirt, adventure bike or any other thing especially with Timbersled getting here in little closer?

Mark, it's well enough we don't talk about future product plans. I'll leave at that.

All right, that's fair. Thanks.

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

Two questions, one I was just wondering. I know these things are small, but is there can you give us any indication as to whether Timbersled and Hammerhead combined added all to this year?

Yes, they'll both be accretive, but very slightly accretive for the full year.

I wouldn't adjust your estimates on it.

Right. They're - it's embedded into our guidance on both top and bottom line. They're both small companies right now that are kind of niche players that we think can really benefit us going forward, with attracting different customer sets and different products. But the impact is pretty small and in fact, early on in Q2 as we get through the transition and the integration and all that, as you know there is always there is transaction cost that will kind of hurt us in the near term, but we're excited about both of them.

Okay and then, we've also been talking to dealers pick up a little bit of tension as it relates to RFM. So I was wondering if you guys could maybe even critique yourself as to sort of that rollout, like do the dealers really and truly understand the benefits of potentially quicker reorder or are they just, it seems like they're more focused on and maybe even pushing back on stocking some inventory that they feel, they don't need. So is this really education process, how does it improve or does it just take time and maybe they need a couple seasons to really trust the new system?

Joe, I think we've been pretty clear on our remarks. I think we're critiquing ourselves and I think what we're stating unequivocally is we think, we can and should have done better on that. We want to provide more flexibility, there is certainly an education process that will take time for them and they have been asking for very much so, more quicker lead times and more predictable ship lead times that's the two biggest complaints that they used to have with us. This is addressing those issues, but I also understand that they want to flexibility to run their business and we need to be able to do all of those things and that frankly is what we are undertaking to execute here in the upcoming weeks.

I mean, our dealer. We have a incredibly strong dealer network and when the system works best is when there is strong profitability in all parts of it and one of the ways that our dealers are more profitable is they carry less inventory and to the extent that we can reduce lead times, give them the right inventory at the right time to meet their customer demand everybody wins. The reality is, as Bennett just describe as we move towards RFM and ultimately, long-term towards more of a pull system, which Huntsville will be very key in helping us get to, we didn't execute it perfectly and as we set up our RFM stocking profile, there was just some units and some box counts that weren't right for some dealers and we were too slow to adjust to that.

Okay, thanks a lot guys.

Your next question comes from the line of Jimmy Baker from B. Riley Company. Your line is open.

Just at a product planning level, I guess given the consumer reaction to some competitive promotional activity. The industry in the ATV industry specifically. Does this change your thoughts at all about how price sensitive that ATV customer has become hiatus perhaps because some of the more products buyers have made a shift to side-by-side?

Jimmy, this is Bennett. I would say absolutely not. I mean, we know that in critical important segments of the ATV and the side-by-side marketplace pricing value is a really important constituent. Again as Scott says, how the competition makes us better. We've been actively expanding and developing our value lines over the last two years. It was one of our big winners during the recession, was how hard we were able to play value and I think this is just one more reminder as we continue to go forward to make sure that ideally you want to win with product versus promotion and that's really been the Polaris strategy for years and I think as you go forward in the outlined product plans over the next couple of years, I think you'll see Polaris continue to be focused on this segment. It is an opportunity for us.

And recognizing, that's part of what drove the strategy acquisition of Hammerhead. It's going to allow us to leverage that capability to play bigger in the lower end of the market. Obviously it doesn't help in the third quarter, but overtime that's going to be a nice part of the answer to how we compete better.

Very good, thanks guys. Thanks, Bennett.

We're just going to take the next two questions from Jaime and Trey.

Okay. So your next question comes from the line of Jaime Katz from Morningstar. Your line is open.

So I'm curious about this Hammerhead acquisition, can you give us your early thoughts on maybe how you're thinking about building the brand in the Chinese market with them and bringing them the Polaris brand more widespread over there and what are your thoughts are of that market potential?

The Chinese market potential for off-road vehicle is a really long-term play. What we've seen to-date, we've got great new leadership over there. We're optimistic about it. But what we saw mostly is the high end RZR's, the high-end motorcycles and that is an opportunity for us to build a profitable and good size business there. The opportunity to leverage Hammerhead for sales into China is probably somewhat limited. We can use it probably overtime to assemble some of our products and reduce the cost of selling ORV there, but really the opportunity is for us to leverage their brand and leverage really strong engineering and manufacturing capability to sell products, not only in the US through our distribution but really globally and to some of these markets, where they just can't buy a $5,000 ATV or a $5,000 side-by-side. We're going to have the ability to hit a much lower price point, with a very good quality product.

Okay and then just real quick on BRUTUS. It sounds like it's not improving as quickly as maybe you guys would have thought, so are there can you maybe talk about just the evolution that's going onto to better adapt to what consumers are looking for there. Thanks.

Yes, all right. As I - BRUTUS story it's not as good as we want to be as I think the bottom line. We have this in our adjacent markets group under Matt. They're making a number of its adjustments, where we're selling in this into, into work and transportation portfolio. Retail is increasing, but we're seeing some distribution erosion, which I think is a little bit inconvenient in the short run but you know long-term we need to have the right dealers, that are capable and interest in retailing that. And that's kind of that transition Matt and team are working through that, we're going to out direct and selling this part of our portfolio the Bobcat guys are doing fine and again I think the reality on this one is, we probably oversold this one a little bit about, how big it was going to be and how quickly the products. The product is fine. I mean and particularly at the high end with the PTO. The high end work in, we're doing quite well. It's really the base models, that we're more struggling with and so we're making some course corrections and I think, it's going to be smaller than you guys thought it was going to be and we thought it was going to be for a while, but we still are pretty committed to BRUTUS being a key part of our work and transportation strategy going forward.

Great. Thank you.

Next two questions. Trey and Robin, go ahead Kelley.

Your next question comes from the line of Trey Grooms from Stephens

One question is all I have here and really it has to do with the value end of the spectrum that you guys and the model year 2015 it looks like you guys had a pretty strong rollout of new models in that kind of value end of the market. Can you talk about how your market share has trended on that side of the ORV segment, the more value side given that pretty extensive rollout, but also in the environment of more promotional activity I think you noted on that side of the ORV business?

Hi, Trey, this is Bennett. I think it's an interesting phenomenon. Frankly, we came with a number of ETX models and frankly we've been constrained. We were constrained on supply for most of this for several months since rollout. Demand is been pretty good, but I think competitors have responded aggressively in the value segment and frankly our share at least in ATV's was down in value because again people have just change the price value relationship really significantly between formal and discounting on that end and again it's been most of our competitors in that segment. So we chose not to go down completely and get that dirty and fight because again we've got some great product with ETX and I think again those will normalize overtime and I expect we'll continue to see share gains you know over the long-term with that product. But in the short-term right now, we're not seeing that.

And you mentioned ATV specifically, is have you see similar behaviour on the side-by-side part of that business on that value? ETX type product?

Yes, but I mean and not quite as, you mean again it's a little bit more strategic based on what products have, what product entry. Whereas an ATV is almost everybody's in that segment and it's kind of a little bit of a free fall right now. So it's a little more strategic I would say, so and our each axis powered through that, I think better on the Ranger side.

Great. Thanks a lot for answering my questions.

Last question, Kelley.

Your last question comes from the line of Robin Farley. Your line is open.

Thank you for squeezing in the follow-up question. I just wanted to just check the math, because it looks like, when you exclude the impact of FX that you've actually raised your guidance for sales on a full year basis, but I feel like I haven't heard sort of say that explicitly, but when I do the math on your currency impact, you're saying 3% to 4% on the full year a quarter ago, you said it was 2%, if your sales guidance is unchanged at up 9% t o12%. You've actually raised your sales guidance, right by a couple by about 2% for the full year basis despite there is, you're talking about. I mean is that, I just want I feel like you haven't said that explicitly. Is that math fair?

Yes, Robin you're really good with your math on a quick basis because we haven't really looked at it that way. We don't talk in a constant currency basis. We recognize that our customers and dealers and shareholders and everybody else has to deal with the currency swings. So we don't really look at it that way, but the fact is you're right.

And you'll see that all the way down the P&L. We 're battling through some pretty significant headwinds, but some of which we had built into the budget and some of which we did not and so we're challenged, but we're powering through and making adjustments in sales and margins and all throughout the operations to offset these pressures.

Great and I just wanted to confirm that, so thanks.

Oka, that's all the time we have thanks for everyone participating. We look forward to talking to you next quarter. Thanks again and good bye.

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