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

Thank you, Stephanie, and good morning. And thank you for joining us for our second 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 is also here and he is available for questions if need be. During today's call, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, manufacturing and expenses initiatives, foreign currency movements and other matters, including specific guidance for expectations for the remainder of 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 our CEO, Scott Wine. Scott?

Thanks, Richard. Good morning and thank you for joining us. While the announcement was made last week, I want to start today's call by again acknowledging and celebrating the remarkable 30-year career of our CFO, Mike Malone. When Mike started with the company in 1984, Polaris was a $50 million snowmobile manufacturer. He was part of the team that originally took Polaris public in 1990 -- 87 and he has been our stalwart CFO since 1997. Much like Polaris, Mike has diversified and grown throughout the last three decades, but he remained a paragon of conservative values and impeccable ethical leadership that strengthened both our culture and our company. In sharp contrast with his risk-averse approach to financial, he is an adventurous rider of Polaris vehicle, so I know, he and his wife Colleen will set a high bar for life in retirement. Fortunately, Mike agreed to stay around still the first part of 2016 to guide us through the pending sale of GE’s Inventory Finance business, as well as the contract renewals with our retail service providers. We always seek to better leverage our financial services business and having Mike lead this effort during the CFO transition is a great benefit. Mike Malone established the benchmark for a high horsepower Polaris CFO. So I am thrilled that we were able recruit someone of his caliber to succeed him. Mike Speetzen is one of the many great CFO’s to come out of the GE AlliedSignal finance training ground and has honed his skills across several complex international businesses. His experience leading the spin-off of Xylem from ITT four years ago and successfully serving as their CFO ever since make this evolution easier and we are excited to welcome Mike to the Polaris team. Mike’s first official day as CFO will…

Yeah.

I’ll turn it over to Bennett for insights into our business units.

All right. Thanks, Scott. Good morning, everyone. Polaris North American retail share and retail sales accelerated in the second quarter. 11% increase was driven by excellent motorcycle retail demand and solid ORV contributions in the powersports industry that increased 3%. Our actions to improve dealer inventory are beginning to produce results. Inventory unit levels are down sequentially from the first quarter by 10% and dealer inventory is now up 15% versus 2014. Specifically, ORV inventory moderated some to low-teens percent and should continue to make progress throughout the year. Snowmobiles are up about 40%, but this is related to shipment timing snowfall last season and is manageable. Motorcycles are up mid-single digits in aggregate, including Slingshot, but still far shorter demand in every on-road brand and adjacent market inventory is up mid-single digits. The improvements we have made to ATV RFM including enhanced individual dealer flexibility measures are helping and we are making lead-time improvements in the process to assist dealers and improve both consumer and inventory responsiveness. By year end we continue to expect we will be at mid single-digit dealer inventory growth. Lean enterprise is competitive advantage. Lean initiatives are picking up significant traction at Polaris and will make us much better, product quality is improving, ORV plants are running smoothly and our new Huntsville plant project is progressing right on budget and schedule, and will be ready by the beginning of the second quarter of 2016. Unfortunately, Q2 was challenging for our margins and Spirit Lake. Gross and net income margins declined. Despite improved commodities and solid efforts to reduce product cost and control operating expense, we were unable to fully offset ongoing currency pressures, promotional expense and the elevated production costs due to the Spirit Lake paint system. Factory inventory is up 27%, but we still…

Thanks Bennett and good morning everyone. As you know, this will be my last earnings call for Polaris. After 19 years in the CFO seat, 31 years at Polaris and over 80 of these earnings call, I’ve determined it’s time to start the next chapter of my life and retire from Polaris. I've enjoyed the interaction and relationships developed with our analyst and shareholders over the years. And while this quarter has not been the company’s best executed quarter, I can honestly say that I believe Polaris is in the best financial position that has ever been during my tenure at Polaris. Now, let me turn to the task at hand, our second quarter results. While the Spirit Lake paint capacity issue is significant for both the second quarter and the full year, we believe we can overcome these challenges through improved performance and prudent operating expense control in the second half of the year. As a result, we're maintaining the top end of our sales and earnings guidance range and increasing the lower end of the ranges. We now expect sales to grow 10% to 12% for the full year and earnings per share to be in the range of $7.32 to $7.42 per share. The sales guidance for each of our individual businesses remains unchanged. However, we are adjusting our previously issued guidance for the following three P&L items. Gross margins for the full year are now expected to be about flat with last year’s 29 .4%. Previous guidance was for gross margins to increase up the 20 basis points year-over-year. I’ll give more detail on margins in a moment. Operating expenses for the full year are now expected to decrease in the 20 to 30 basis point range as a percentage of sales through prudent and responsible…

Thanks Mike. Just a few closing thoughts since we want to get to Q&A as quickly as we can. The global economy has been unstable as we enter the second half, especially with the swings in the market out of China recently. But we do see Chinese markets equally balanced between risks and opportunities. We have a strong team there and excited about the acquisition we recently completed in that first quarter. So the path forward identified for Greece and a parent agreement with Iran, we expect an improving economic environment in Europe, the Middle East and Africa. The U.S. economy is likely to disappoint again in the second half, but we should be up marginally from the sluggish first half. The oil and ag markets are likely to continue to be weak and extend for a few more quarters. We need to continue moderation in RANGER growth through the back half of the year. We expect both motorcycles and off-road vehicles to gain share in the second half and do so more profitably as our plans operate more productively. I often refer to this Polaris team as ridiculously competitive and certainly expect better execution across the business as we play to win in the second half. With that, I will turn it over to Stephanie to open the line for questions.

[Operator Instructions] Your first question comes from Robin Farley with UBS. Please go ahead.

Great. Thanks. When you talk about the second half retail looking to be up in the 10% range, should we think about that as motorcycle retail accelerating from Q2 levels and off-road kind of moderating from Q2 levels?

No. Yeah. I think I will add a little more color, Robin. We expect motorcycle retail to continue to remain very, very strong. We will start anniversarying in the second half, some comps again Slingshot and some comps potentially to get Scout, even though it was rather limited. But we see motorcycle momentum remaining strong and frankly ORV, we expect to remain pretty consistent and going forward. So, I don't think you should expect any kind of moderation from second quarter retail from an ORV standpoint.

And as we’ve talked about number of times, the product news that we will reveal next week is probably, is just really right in line with what I think our dealers want and our customers want, which certainly should give us momentum as we go through the second half.

Okay. Great. Thanks. And best wishes, Mike. I will see you next week but we will miss you.

All right. Thank you, Robin.

Next question, Stephanie?

Your next question comes from Greg Badishkanian with Citigroup.

Good. Thank you. Hi, guys. Firstly, Mike, congratulations on a successful career and on your retirement as well. So the first question, in terms of the level of promotion that you think you'll need to put out there in the marketplace on the side-by-sides, ATVs, do you in terms of being aggressive, are you guys going to be pricing at lower level in third quarter as you saw in the second quarter? And also with respect to that, if you can give us some color on what you saw from your Japanese competitors as the quarter progressed into the third quarter, the level of promotions that they were providing?

Yeah. Greg, this is Bennett. I think from a promotion environment, as we said in the remarks, it's been an aggressive environment as we expected. I think competitors are picking their spots as they try to move the products that they’ve made bets on over the last couple of years on the new product. They maybe didn’t see all the share gains that they wanted to see against our armada. And we certainly have seen the Japanese be aggressive, but we’ve seen the North Americans be aggressive as well and it remains elevated. I would tell you our guidance certainly implies and considers that we are in a good position to continue to be what I would call aggressive but balanced as we go into factory authorized clearance and as we roll out our models year ’16s. And frankly with the progress we made on sequential dealer inventory, I think we feel really good about the direction we are heading from where we are with inventory in the field.

Okay. And if you think about your Japanese competitors, how much of their elevated promotions do you think has to do with the yen versus losing share? You did mention your North American competitors are also being very promotional. So how much did currency come into it and they are using as an opportunity to pick up share?

Hey, Greg. It’s Scott. Clearly, as we've historically seen with the yen, when they had the benefit of the yen behind and the Japanese can be really aggressive. But I will tell you that the reason that we are paying so much attention to Japanese right now is not just because of what they're doing with yen, it’s what they are doing with product innovation. And we have said this for years that we would eventually see more and better innovation, especially on the recreational side-by-side and we're starting to see that. So, I think part of the reason of our optimism as we saw those launches come out starting in the second quarter, we were able to hold our own. And we are certainly seeing them play the yen. It’s probably going to continue to be a very competitive environment in that regard, but I would tell you to watch the product innovation as much as you want what they are doing with leveraging their currency. They are good but obviously, we feel very, very comfortable with our product pipeline and what you will see next week.

Great. Thank you very much.

Your next question comes from James Hardiman with Wedbush. Please go ahead.

Hi. Good morning. Obviously, I want to reiterate what a pleasure it was working with Mike and good luck in your further endeavors. Maybe I will start with you, Mike then. You talked about $20 million full year number in terms of some of the Spirit Lake costs. $9 million was in the second quarter, was any of that in the first quarter and how should I think about the timing in 3Q versus 4Q?

Yeah. Thanks James. Yeah, there was some in the first quarter. It was significantly less than the $9 million. So, we didn’t feel compel to bring it up and talk about it. But it did get significantly worse in the second quarter. It will tail off as we go through the second half of the year, but there is still significant costs that are embedded in both Q3 and Q4. So it’s getting better and we are getting our arms around it, but it's still going to be painful in the second half as well.

Great. And then circling back to the promotional environment with respect to ORVs, can you maybe flush out what you are seeing in terms of promotions between ATV, RANGER and RZR and their respective competitors, as well as the share trends that you are seeing there? And then I guess bigger picture longer-term, are you concerned that your conditioning customers to expect those promotions and so as we lap some of this next year that it is going to be harder to get them back to paying full price?

Yeah, James. This is Bennett. You were tricky. There were number of questions in one question. But let me see if I can get this. So, ATVs has been more elevated year-over-year than side-by-sides. But again, frankly the battle lines have been drawn there where I think competitors are trying to beat us on the low and on the value and entry-levels. And so that’s where they've been throwing most of their promotion outright. They think they can win. I expect that to moderate and to put that in perspective, James, I think what we saw back in the day, ‘05, ’06, ’07, ’08, ’09, I mean those levels are moderated. And I think -- I don't think we are going to go back to those days because I think in general, competitors, dealer inventory balances in the field are better and it will be normalized. Side by side, it’s up more modestly than ATVs and that flight tends to be more across the board. Some competitors are picking on value and in the RANGER segments and some guys are promoting on the high end, whether trying to compete against what we would say would be our superior product. And so that’s a little more across the board. And I expect side by side as it gets more crowded will continue to be aggressive. But when you look at that as a percent of sales in relation to say ATVs or something like that, again I don't think these things are crazy levels or out of line. Certainly we’re very, very comfortable with our profitability levels at the promotional levels we run. And I don't think we’re conditioning customers that you got to get a smoking hot deal. It’s been pretty normal par for the course and powersports for many, many years. So I think it’s business as usual.

Got it. Thanks, guys. See you next week.

Okay. Next question.

Your next question comes from Tim Conder with Wells Fargo Securities. Please go ahead.

Thank you. First of all, Mike, it’s been a pleasure over the many years here and you set a standard that anybody in any industry should aspire to. So, congrats. And Mike look forward to meeting you and your new role so next week. A couple follow-ups here. In general, gentlemen, little surprised that the North American channel inventories didn’t come down a little bit more than they did and it still appears your goal is achievable by year end. But given the issues on the motorcycles and you’re desire obviously to get more into the channel but couldn't. It would have seemed like that would have helped a little bit more. So may be a little bit more color there. And then two clarification questions. The cost, Mike, on the paint, is that $20 million for the full year or is it $29 million? And then secondly, the motorcycle market definition, are you still using 1400 or is that now 900 CCs and above? Thank you.

Okay. Let’s move to clarifications first. The $20 million is the full year, okay.

Okay.

Motorcycle industry hasn’t changed from how we defined and now that we have a broader lineup. And so look what we have included there Tim is essentially every product in the industry that we compete against. So it’s midsize and heavyweight cruiser bag touring and three wheel products.

And as for dealer inventory reduction, I think Bennett, if you go back of the slide you presented, it gives you about as much granularity is what in that number is as you could ever want. And with the amount of product news, new dealers that we’re adding, there is only so much progress we can make throughout the quarter. So we were exactly, I mean literally almost exactly on where plan where we expected to be with dealer inventory. Now you asked about motorcycle shipments. Had we shipped more motorcycles we would have retailed more motorcycle, the dealer inventory probably wouldn't have changed very much. But as we communicated, we have a very solid plan throughout the second half of the year to get dealer inventory to that mid-single-digit increase. And again considering the product news, we feel pretty good about that and more importantly, our dealers feel good about that.

Okay. And thanks, Scott. Appreciate the clarification, gentlemen.

Thank you. Stephanie, next question.

Your next question comes from Scott Stember with C.L. King. Please go ahead.

Good morning. And likewise, I just want to say it’s been a pleasure to work with you Mike and just wish you the best of luck and have fun on retirement.

Thanks, Scott.

But just wanted to ask on the motorcycle side again, it looks like we’re going to have another $10 million plus if not more in costs related to some of these bottlenecks in the back half of the year. Can you maybe just talk about what the end result will be once we head into 2016? I know you’re not giving guidance there yet. But maybe just give us a little snapshot as to how you envision the production of motorcycle that have the paint? Will you be more self-sufficient in paint early on in 2016 and just some of the incremental costs that we could just look to go away?

Scott, I will start this and Ken and Bennett can add to it. But we’re not going to have, what we expect out of this paint system and many of you heard me say it. What we thought we’re going to implement was much higher capacity, lower cost and higher quality. That’s what we had envisioned, that was in our budget and that’s what we expected to be able to deliver. Almost completely from our own doing, we outsmarted ourselves, we outsmarted the consultants. We took design element out of the system that we now know make it incapable of delivering what we thought it would. So now what Ken and his team have done, we know more about that darn paint system you would ever want right now. So what we’ve done is develop the plan that we can start to meet demand throughout the second half of this year. Going into '16, we will still be outsourcing some of our products. We’ve got the old system, old paint system back online that was a good bit of cost in the second quarter and we will start to run this thing as optimally as it currently can run. That cost in '16 is going to be dramatically lower than the incremental $20 million we had this year, but it’s not going to be back what we originally thought. So what we're doing now and it’s part of our strategic review with the Board is figuring out what is the right long-term strategy. So we do not expect paint to constrain output next year, it'll just be a slight drag on margins. But over time you can bet with our new knowledge, we will be able to optimize this system and whatever we do next much better going forward.

Okay. And just to follow up on the guidance keeping the high end unchanged and talking about how you expect to make some of the shortfalls up in the back half of the year. Can you maybe just frame that out from a gross margin perspective guys if you're still expecting some elevated costs here for the paint facility, maybe some of the offsetting factors that we could look for that would be embedded in the gross margin line?

Sure. As I said in the call that the gross margins will ramp throughout the second half relative to last year. So all improve upon the second quarter performance, third quarter maybe flattish or so and in fourth quarter, it will be significantly better than last year. If you look at last year’s fourth quarter, we had a pretty tough fourth quarter gross margin impact. Currently was a big part of that in the fourth quarter last year. So as we get later in the year that the comps gets a little bit better for us.

Got it. That’s all I have. And I will see you guys next week.

Thanks, Scott.

Thanks, Scott.

Next question. Next question, Stephanie. Stephanie, are you there?

Sorry, your next question comes from Drew Crum with Stifel. Your line is open.

Okay. Thanks. Good morning, everyone. And best of luck, Mike. So as related to Slingshot guys, where are you in terms of distributions with some of the newly approved states? And like I said, be interested in any early success you have seen out of Texas. And the follow-on just where are you in terms of plans for distribution in Europe? And given some of the production issues you’re dealing with, have you changed the pace or cadence of dealer as for Slingshot? Thanks.

Drew, this is Bennett. We are at about 425 dealers and that’s been increasing frankly as we’ve gotten state licensure resolutions that we made really nice progress in the second quarter. We have two remaining, Hawaii and Maryland, which frankly are -- they are very, very small states from a volume standpoint. We still have a few provinces to resolve in Canada. I think the most notable one obviously that we’re interested is resolving Ontario and we have some progress there. So we'll stay tuned on that front. The early reads, just like it’s been across the country frankly is -- frankly are days to retailer improved in the second quarter as I think we got better at shipping to consumer demand. As we work some of the kinks out of our system, Texas has played up really, really good right out of the gate, has every state and frankly most other dealers across the union even the ones that have been active for six months continue to have demand that’s outstripping our ability to supply, even as we’re pretty darn good in the second quarter from a Slingshot standpoint, because that was one of the items we had outsourced fairly early from a paint system. And Spirit Lake team did really nice job of rolling product out there. So we are going to take another production increase here in August and we will continue to evaluate that as we go forward, but I would say things look good on the Slingshot front.

You asked about Europe.

Europe, sorry, yes. We will get there. We’re going to get there in the third and fourth quarter. We have a launch plan in limited number and the Europeans are excited and we’re building to go to market plans and that will be in market in a limited basis here late in the third quarter and in the fourth quarter.

Okay. So based on those comments, it doesn’t sound like there is any change in terms of the plan to roll out, add more dealers?

There are many dealers hand raising that would like a shot. At Slingshot, we are going to continue to mirror that based on our ability to meet demand and make sure we understand the legs that Slingshot has. So that again we continue to build on a high quality profitable dealer network, which has been our focus. And I think we feel really good about what we’ve done so far.

Okay. Thanks, guys.

Your next question comes from Joe Spak with RBC Capital Markets. Please go ahead.

Thanks. Good morning. And congrats, Mike. The first question is and maybe just some housekeeping. I know in the Q you usually disclose this. But what -- if we think about the different factors in the quarter, can you give us some indication of what volume was contributed for the quarter?

Yes. I will look that up. Ask your next question.

Okay. The next one would be for Ken. I just want to better understand, maybe slide 14. So it looks like if I am reading this correctly, you actually start to maybe satisfy some of the backlog in the third quarter and then you get to more in the fourth quarter. Or I guess was that backlog reduction or how do I interpret that? Are you saying total production would be below capacity in the fourth quarter? Or are you just eating into some of that backlog? And then as a follow-up to that, if we extended that chart into ‘16, when do we think we’re at a right run rate where capacity equal or -- you’re able to satisfy sort of all the demand?

Yeah so...

Just to be clear, we hope we’re never at the point where we can satisfy all demand.

But Joe, to your first question, we will be biting into that backlog in Q4. That’s the first time that our actual build rate is faster than what we believe that would be shipping to orders. So the backlog will be taken down. Next year, we’re going to be modulating between our new paint system, adding capability back into our old paint system and outsourcing. So we’re going to be taking all three of those degrees of freedom so to speak to manage the next year supply and demand and that’s the plan to do that. Over time, our strategy is to in-source as much as we can and rely as little as we can on an outsourcing capability.

Okay. So again, just if I’m reading this chart because it looks like that capacity line in the third quarter even breaks into that backlog a little bit but is the backlog, you think is also increasing the third quarter, that’s why it’s not going down overall? I just want to understand that line versus the bars, I guess?

Honestly, Joe, I mean if you saw how many hours we spend on this doggone chart with map and apologize for the confusion. But essentially, I think what Ken said is accurate. Basically, where we are is demand is still very strong in the third quarter and with the model year ‘16, we expect we’re going to hold the serve. So backlog should be kind of status quo, despite how you see that line and then we'll start to make a sizable impact in the fourth quarter, some of that is frankly seasonality benefit that you get because fourth quarter is a lower demand issue. And I think we'll continue to bite into that even further in the first quarter.

Okay. And then I guess just going back to the first part of the question. I guess where I was really headed at if we look at that 10% to 12% topline guidance for the year and we know currency is a little bit over 3%. And you look in the first quarter, product mix was about 10%. I just want to -- I mean, embedded in that, is it still for the rest of the year, the implication that mix and price are a larger driver than volume shipments?

No, no. So the answer to your question specifically in Q2 of the 11% sales growth, 9% of it was volume and currency was minus 4%.

Right.

So year-to-date that may just 10% on volume on a total 13%.

Okay. So then if -- right, so if year-to-date volume is about 10% and retail is 10% and how do the inventories go down, if you continue to think retail going to -- in the back half is going to equate retail in the first half?

So, Bennett and I actually had this discussion this morning. It’s not that dealer inventories on a sequential basis are going to go down dramatically from where they ended Q2. But on a year-over-year basis, where we ended Q2 is where we should be ending Q4. It’s just last year’s Q4 as we shipped in the model year a year ago ‘15 product, some of it’s in the retail so that's just how we run the railroad for a long time. So that, I think what you read is exactly right. If we hold serve throughout the second half where we ended Q2, you’ll see mid single-digit growth in your inventory.

Okay. Thanks for the clarification.

Your next question comes from Jaime Katz with Morningstar. Please go ahead.

Hi. Good morning and congratulations on your retirement, Mike. I think you guys have mentioned on the call that over time you expect to capture 300 to 500 basis points in gross margin improvement from operating efficiency as which we had modeled into our DCF. But I’m curious where you guys see those as an offsetting factor longer-term whether you’re going to spend more in R&D or marketing expenses to maintain those net income margins that are north of 10%?

Good question, Jamie. I think we’ve been really clear about our net income long-term targets because it’s not -- we’re going to continue to invest in R&D. I mean innovation is going to -- has been the lifeblood of the company and will continue to be. But I think the offset is primarily going to come from getting into new markets with great products and great long-term profitability perspective, but that initially start off at -- as a drag on margins. I mean if we were consolidating Multix. It wouldn’t be great for the first year or maybe two. But overtime when you get significant volume like those kinds of product can yield, we feel really good about it. So I think the 300 to 500 basis points again that over the strategic planning period is going to be real. Don't look for that to go in OpEx. I’ll put my risk if we spend that in OpEx. But and R&D is going to continue to be high, but probably not on a percentage basis. So just think about it as our global growth increases those lower margin initial products will be the drag on things and some of that will be acquisitions and some of that will be organic.

Okay. And then, Mike, on the financing contracts that you’re working on renewing? Can you give us an update on any progress that we might have on that and has there been any thought of bringing any of it in-house at all?

Well, the contracts are up starting this fall, I think, kind of ranges from October to February. So we have quite a bit of time. But we’ve already been in conversation with all of the retail credit providers and there is a lot of enthusiasm for our business. And but we’re having those initial discussions and we're optimistic that we’ll be able to put those in place and solidify those before I move on in February.

Great. Thank you -- go ahead.

Scott, do you want to talk more about this?

Yeah. I mean, I don’t -- we got when much time initially came out. We talked about the EVP of Financial Services role that he was going to step into. I think there was some, oh, my gosh, we’re going to dive head into the deep end. But what we see, as you think about as the growth of our business, a lot of our big competitors in all markets have their own in-house financing. And we saw very, very clear in our mind what happens to some in our industry when they get too aggressive in the downturn hit and didn't end well. So don't think about us trying to replicate what others so in the industry, but think about us trying to be smarter, make more money, serve our customers better and whatever that what will never happen, I shouldn’t say never, but I can pretty much say never. We are not going to bring this in-house on our balance sheet. We are addicted to our high returns on invested capital. We like our balance sheet. We’re going to spend some of that on M&A. But don't expect us to explore opportunities to do better, but don't expect us to do a full wholesale takeover and bring this thing in-house on our balance sheet.

That sounds good to us. Thanks for clarifying. See you next week.

All right. Next question.

Your next question comes from Mark Smith with Feltl and Company. Please go ahead.

Hey. Good morning, guys.

Good morning.

Mike did on what everybody has said. First, can you guys walk us through Victory outside of paint issues, kind of your thoughts on the current business where it is today and opportunities to improve dealer relationships and improve sales long-term in that business?

Mark, this is Bennett. I would tell you, we’ve been very pleased with the progress Victory has made over the last number of quarters. I mean we had seen retail and share growth the last few quarter. It was certainly trending up this new American muscle position that Victory has move to, it’s resonating with customers and dealers and we feel it's a space that we can own and they have some real success in the upcoming years. And I know the numbers seem disappointing in the second quarter. We’re disappointed with them. But Victory dealer inventory is down 31% and it is the decline to this quarter are 100% related to stock-outs and not appropriate levels of inventory of our faster moving, fairly, they’re complex graphics on Victory. So they almost getting ordinarily heard with the paint system challenges because we’re focusing on moving throughput out. So I think this is short-term issue and again, long-term I think you'll see us continue to probably tell you as we go forward a little bit about how we continue to use Indian and Victory as flanking strategies moving forward. But we’re very committed to two-brand strategy and feel really good about where that brand is going.

Okay. And then second quick question. Just can you guys discuss generally how this -- and there is a bunch of them on the acquired businesses, are doing as we look at Kolpin, Klim, Pro Armor, Hammerhead, Timbersled and on and on? Just talk about kind of how you feel about those businesses and also your appetite for continued acquisitions, especially maybe international ones with the strong dollar?

Mark, we feel -- obviously, we’re not betting a thousand on these. I think in aggregate, we feel exceptionally good about the returns, projected returns from our acquired businesses. You mentioned, you can’t really love all them, jump, throw all into the same bucket. And obviously, India has been a homerun, really smart. I think the best acquisition, I’ve said in a long time. Swissauto what -- that team out of Burgdorf does for us in our powertrain business is exceptional. But what Steve Menneto was doing in the Parts, Garments and Accessories business and then it really is a bifurcated strategy now. We’re going to drive the heck out of our organic parts business and what we do in-house and these acquired brands, the Klim is a homerun, Kolpin’s been great, Pro Armor is going to give us customization opportunity, so really we feel excellent about that. Now that we have Matt Homan in the Adjacent Markets’ President Role, really the opportunities for us to continue to use our balance sheet to drive future profitable growth, not just to get bigger is pretty exciting. So, we feel good about what we’ve done and we expect to do more and better in the years ahead.

Okay. Thank you.

Your next question comes from Jimmy Baker with the B. Riley & Company. Please go ahead.

Thank you. Let me add mine congrats and best wishes to Mike on the retirement. Thanks for putting up with my questions over the years and that includes today.

Thanks, Jimmy.

So, year-to-date your income from financial services is up 28%, right. But your guidance call for, to be up only high single-digits for the full year meaning the back half is actually down slightly. Just having a hard time understanding, why financial services income will be down in the back half, given your expectations for retail sales growth and then you simultaneously raised the year end Polaris Acceptance receivable expectations?

Yes. Part of that Jimmy is our expectation of a rising interest rate environment, which dilutes the -- in the short-term anyway it dilutes the financial impact on both businesses as those rates get absorbed. So that’s part of it. There are also, as we go through these negotiation processes, there is certain give and take that will go on as well. So, we are trying to be little careful and conservative. And then the other thing I would tell you is that, particularly with the wholesale credit, Polaris Acceptance, the comparisons in the second half of the last year were very, very steep. So, we are running up against some very difficult comps in a year ago, when we had some accounting changes that we implemented in the second half of last year that we are comping against.

Okay. That’s helpful. And then just lastly, have any other challenges at Spirit Lake affected, let’s say the design or the timing of any future model year introductions?

Yes. They have. It’s been primarily stuff that we’ve really had in the pipe over the last nine months. So, yes, we have, as I said in my remarks, we are metering and we have been metering for the last six to nine months and I think expect us to spread that out here over the next year. But I don’t think long-term it hasn’t slowed us down at all. But if we can’t meet existing demand, we are being very careful of adding new complexities to Spirit Lake and disappointing customers by creating more demand than we can’t fill.

Yeah. And just to give an example of that, one of the issues that contributed to the lack of capacity is the strong consumer demand for two-tone paint. And we’ve got an incredible in-house team, our product design guys. I mean, we’ve got a really strong team in industrial design and they come up with some great ideas that customer will love. But we’re not about to introduce the bunch of wild new paint schemes that are two-tone and required extra time in the paint system when we can’t meet current demand. So we are sorting through this. I will say again, it’s been immensely frustrating. Great lessons learned though in about how we plan, how we execute future paint system. So Ken and his team were getting it fixed. We’re not going to throw additional logs on the fire rather burning and as they get this under control, we will start to meter that those new paint schemes and new bikes in. We have a lot of demand for motorcycles with our current product line. So we really don’t need to view that, but we are in this for the long term. We expect to have an extremely large, extremely profitable motorcycle business. We just missed a gear getting there.

Got it. Well, thanks very much for the color. I’ll see you next week.

Last question, Stephanie.

The next question comes from Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hi, good morning. Mike congratulations. You guys talked about retail picking up in June, what was different in June versus April and May, anything special like weather, promotions, and then how is July working?

I think across the industry you heard people have incrementally better June. The weather was certainly part of it. As we’ve said, we’re going to be, we’re more aggressive with some of the dealer incentive. So what we've seen really is a lot more really for the last 18 months or so within the quarter volatility has been significant. As an example, we started factory authorize clearance last year. So even though we’re not up significantly in July, it’s offer brutally tough compare. So we feel really good about retail getting into the second quarter, but the second quarter started off a little bit weak for us. Perhaps, it was weather what not, but we thought, except -- I mean it was really a good June. And then largely across the board, it was good and we felt like that was important momentum as we entered the second half and we’re leveraging that so far.

Okay. Great. And then in Latin America, what were your growth have been there in local currency and what are you seeing in say Brazil, South America? And also there is anything special in Latin America say swapping distributors for direct distribution in certain markets?

I’ll try to give you a little color while Mike is looking up the constant currency base. Latin America is good, I mean Mexico has been absolute homerun, it's moved to, one of our largest and most profitable subs in a very short time and we continue to see that ORV demand. It continues to grow and we're introducing motorcycles, which should have a bright future. Brazil continues to be a very interesting market. The currencies have been brutal there, but we are making a number of competitive steps that I think will allow us to really grow that market even more significantly than we have over the last few years. And so we're very excited about Brazil. In Argentina, it’s been challenging, mostly because of some of the restrictions and implication that the government has imposed, but overall number that a lot of the other places our distributors. And until they get to a certain size or scale they will probably continue to keep those relationships, things are good.

Got that. Mike.

It looks like the currency impact is about $2 million in Q2, which percentage basis looks to be about a 20% move in currency.

It’s material.

Yes, very material.

Okay. Great. Thank you, guys.

Thanks, Gerrick.

There are no further questions.

That’s the end of the questions we have here. Again, we want to thank everyone for participating in today’s call. And for those of you who are attending our Analyst meeting next week, we look forward to seeing you in Vegas here in few days. Thanks. And good bye.

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