Polaris Industries, Inc. - Shareholder/Analyst Call

| About: Polaris Industries (PII)

Polaris Industries Inc. (NYSE:PII)

July 30, 2013 8:00 am ET


Richard Edwards - Director of Investor Relations

Scott W. Wine - Chairman, Chief Executive Officer and Member of Technology Committee

Bennett J. Morgan - President and Chief Operating Officer

Steve Menneto - Former Vice President of Motorcycles

Stephen L. Eastman - Vice President of Parts, Garments & Accessories

Michael P. Jonikas - Vice President of Snowmobile Business, Sales & Corporate Marketing

David C. Longren - Vice President of Off-Road Vehicles and Off-Road Vehicles Engineering

Matthew J. Homan - Vice President of Europe, Middle East Africa and Small Vehicles

Michael D. Dougherty - Vice President of Asia Pacific and Latin America

Steve Kemp - Chief Technology officer of Engineering

Suresh Krishna - Vice President of Global Operations and Integration

Michael W. Malone - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance


Gerrick L. Johnson - BMO Capital Markets U.S.

Robin M. Farley - UBS Investment Bank, Research Division

James Hardiman - Longbow Research LLC

Gregory R. Badishkanian - Citigroup Inc, Research Division

Jimmy Baker - B. Riley Caris, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Scott L. Stember - Sidoti & Company, LLC

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Richard Edwards

Okay. I think we're going to get started here. We've got a full agenda. First of all, I just want to thank everyone for coming this morning. We certainly appreciate taking your time -- your valuable time out of your week here. I know it's kind of towards the tail end of earnings season, so I know many of you probably have notes to go back to your rooms and write today and tomorrow. But we certainly appreciate you coming out time and spending some time with Polaris here and hearing the story we have to tell.

I think most of you were at the reveal last night, so I hope you guys have pretty kind of a sense of what were the new products that we're introducing and going to be shipping here in the back half of the year. So you'll hear a little bit more about those this morning, but I think hopefully you kind of got a feel of kind of the excitement that many of our dealers are showing for the new products.

We have a pretty full lineup. So you see the agenda. I won't go through the whole agenda. But we've got a full day, so we've got to keep it kind of tight on the time. So what we would ask, I'm going to ask you that you kind of hold your questions until the end of each presentation, so let each presenter go through their presentation. And then, we'll -- at the end of their -- each presentation, we'll have a little bit of time for Q&A. And I think that would probably be the most efficient, or else we'll get behind here pretty quick. Unless there's some real urgent question you need to ask, you can hold up your hand, we'll take it. But if you can hold your question until the end, that would be good.

On the cellphones, we would ask if you could turn them off while you're in the room. You can certainly use them out in the hall. But this meeting is being webcasted, so anything you say will be webcasted, just so you know that. But sometimes, there's some feedback on the cellphone, so if you would maybe turn those off while you're in the room, that would be helpful.

The restrooms are just to the right and down the hall and at the end of kind of the main hall, if you need to go there.

And we'll go to -- once we get to the presentations this morning around noon or so, we'll go down and we'll go down to lunch with the dealers, 1 floor down, so we'll -- or actually, it's on this floor, so we'll do that at the 12:00 time. And then we'll have -- at 1:00 o'clock, we'll go down to the display room and have the ORV walk around. So you get an opportunity to get a little more detailed information about the new RZR and one of the ATVs, the 570 ATV. So that goes from 1 p.m. to 2 p.m., and it will kind of -- that will be the end of the -- of this event.

So again, I want to thank you for coming. And if you have any questions, look for the guys in the blue shirts, they'll be able to help you out.

And with that, I will -- one thing, Safe Harbor. Just remember, the things we'll say this morning are forward-looking and there may be some things that could happen that would change that. So just refer to our 2012 10-K for a list of those risk and uncertainties.

With that, I'll turn it over to Scott Wine.

Scott W. Wine

Good morning, and thank you, all, for joining us. Just to kind of set the stage for how this works, if we can go back to the agenda. Notice that Richard stressed how we're going to stay on schedule, then he doesn't put himself on the schedule for the introduction. But I'm going to make sure we finish in my 10 minutes so we don't get behind.

Really today, is not about Richard or Mike or Bennett or myself. The beauty of the last -- yesterday and this morning is that you really get to see the people that are running the company, building the products and bringing them to market. And I think as you see the management team come up this morning, you'll have a great opportunity to see why we're so bullish on the future.

You all know the numbers, the first half was solid, certainly not great. We don't want to make any excuses, but really a lot of anticipation about -- last night about the upcoming Indian reveal, and we are optimistic about the future. But certainly, we cannot complain about the numbers we're delivering on margin expansion. We're delivering on double-digit revenue growth and continue to focus on cash flow as we spend upward of $200 million -- I mean, CapEx to invest in our future, as Bennett talked about last night.

We spend a lot of time on metrics. We measure just about everything in the company. But we also try to make sure that as we're driving the numbers that these guiding principles and performance priorities are never out of sight. Because we realized that if it's all about the numbers, it can have a pretty short ending that's not good.

And so it's best people, best teams. I encourage you to talk, not only to the people that are in the room presenting today, but to our employees throughout the business. You will see we do have the best team in powersports. We've added a couple of thousand people to our roster, and it's making our business, our teams and our culture stronger.

Safety and ethics always. Suresh will probably talk about it. We are operating the first half of the year at world-class safety levels. We've had more than a 50% reduction in our [indiscernible] recordable incidents and continuing to drive more safe products and a more safe workforce.

You saw last night about how customer loyalty is driving Victory, going to drive Indian, and certainly, razor's creating a new category of its own in that class.

And the performance priorities, we are a growth company. Obviously, we're a Midwest manufacturer, but we're trying to make sure our investments, our innovation, our position is to be a growth company.

Product and quality leadership. We cannot get one without the other. It can't be great products with mediocre quality. It can't be great quality and not strong brand and strong product. We have to pull it all together.

And ultimately, operational excellence is the way that we deliver that, not only in the factories, but across the business.

We talk about margin expansion a lot. I strongly believe the correlation between our ability to drive growth with margin expansion is going to be the key to continuing to deliver strong in the stock price. We do not believe, write it down, that we're going to grow to the moon. We are going to have bad days ahead. For those of you that were shareholders in '08, you know that we have the ability to get through those bad times when they come. We haven't lost that. Be a little bit more difficult as we've grown, but certainly, we know how to deliver it, and we will continue to focus on margin expansion and growth.

Obviously, we just like to put it in there because it's a pretty chart, and you know the numbers. What I will add to this chart, though, is I am constantly reminded that those of you that bought our shares yesterday don't care what we've done the last 5 years. The people that joined Polaris this year don't care about the success we've had over the last 4 or 5 years. It really is about driving the future, and that's what we're focused on.

We had our board meeting last week, took the Board of Directors up to Roseau, Minnesota, where the company was founded. We got to see where the products were made. We got to go ride the products. But we also spent some time looking at our strategy for the next 5 years. And as part of that, we realized that our strategic objectives are the right strategy for the future of this company. We have a great future in powersports. Stanley [ph] talked about doubling the RZR business, you see our commitment to continuing to grow ATVs. And what Bennett talked about, introducing the teaser on Slingshot. We're going to find new categories in powersports, not to mention our very, very strong Off-Road Vehicle business.

But adjacency growth is very, very important to us. We love powersports. But we also realized the cyclical nature of it is great for the business many times, but also times where we want to be in other markets, whether it's small vehicles or commercial vehicles or our Military business or increasingly our aftermarket apparel businesses. We see an opportunity to grow in other areas. We'll continue to make those investments.

Obviously, our strong North America growth has made it difficult to have our percentage of growth outside of North America. But we are still very committed, and I expect that growth in both percentage and dollars terms to increase.

We've made a little change on the next bullet. It's not about just operational excellence is the competitive advantage. We are committed to building a LEAN enterprise. And I think as you get chances in the future to visit our factories and visit our businesses and see the way that we're bringing products to market, we are increasingly going to become a LEAN enterprise. And ultimately, that means strong financial performance.

You'll notice that as part of our strategic review, we looked at what our long-term goals are. We realized that it's likely we're going to hit our $5 billion, 10% net number before 2018. So rather than just revise the 2018 number, we thought we get to an even decade and go out to 2020. And we really believe that -- and you'll see why as you hear the guys come up and talk this morning, that over the next 7 years, we have the potential to create an $8 billion highly profitable enterprise. So we'll get little bit less margin expansion on the bottom line than we've had because as we grow in some of these new markets, we're going to buy businesses or start businesses that are a little bit lower in margin and have to build them up.

But we are very bullish about the future. We realized the competition is tough. We realized the economies won't always be our friend or ever be our friend, as the case seems like right now.

But we appreciate you making time to come in this morning. I'll turn it over to Bennett. How long do you get, Bennett? 15 minutes, okay. I'll hold him to that. Have a good day.

Bennett J. Morgan

Well, good morning, everyone. What I'd do real quickly is just -- Scott's kind of told you the kind of the bigger, broader agenda that we have strategically. I'm going to just kind of try to frame up the day a little bit and talk a little bit about kind of our overall strategy and what we're pushing for, really, over the next 18 months. And I'll talk a little bit about, again, for those of you that are kind of new to the story, what I think is our special sauce that makes us so successful?

Again, very similar, very pretty chart, we like to put it up. Really, over the last 5 years, we've transformed the powersports industry, and now we're the clear industry leader. But again, if you were there last night, I hope you see that there are plenty of legs for us to continue to grow on. Frankly, multiple legs. And we expect to continue to build that lead and momentum in powersports.

This is just a quick snapshot of what we went through last week. Really, outlook of all and each of our business. All of our businesses are growing. I don't think there's any real surprises. I think at the midway point of the year, we're feeling pretty good about where we are in each and every one of those businesses, and we're looking forward to a very strong second half.

Just a little bit on Financial Services. We don't always talk about this business too much, but this is a great roll business for Polaris. It's split really between our wholesale portfolio, with our GE partnership with Polaris Acceptance, and then we have a nice retail finance arm. There's really no risk to Polaris at all, and this generates very nice returns. You can see a 32% ROI over the last 3 years. We've got a great set of partners between Capital One, GE and Sheffield. And you'll look at the approval rates and the penetration rates, very stable. And it's a very big enabler for our business and our dealers to grow, and we make some money on it as we continue to grow in scale and size. So it's just a beautiful little business.

I wanted to touch base real quickly on, again, what makes Polaris who we are and how we're able to -- we say -- I like to say we slay giants on a daily basis, and we do. And it really comes back to, I think, what makes us great and what we call our sustainable competitive advantages, and really, there's 4 of them that work together.

The first one is that we're very innovative. Lots of companies like to come up here and say we're innovative, and usually they say they're innovative when there's trouble on the horizon. Those of you that have been following our story for a long time know that we're very innovative. It's not one thing that makes us innovative. It's 50 things. We start with the selection of our people, we empower them. They come because they want to make a difference in the world, and see what they do. We enable them. We do a lot of Monster Garage stuff. And the amount of our discreet employee has been able to drive our product plan would shock you. And it's just a real passion to innovate. And again, I think you saw a great taste of that last night.

We're also extremely good at applications engineering. And again, that's the stuff from a standpoint of we got maybe the best engineering team in powersports. But they're not the guys who develop the technologies in the lab. I mean, these are real world people that take and adapt technology solutions from related industries, from our supply base, and then apply them to real-life problems that our customers are having. And when we do that, we can do that very quickly, and we can leverage that very effectively. And I think that's a very transferable skill in or outside of powersports as we move forward.

And then we're very good at flexible manufacturing. Again, you look at the people we compete against, it's easier for Scott and I and Mike to be pretty bold because we can make decisions to go into new spaces or into a new category, frankly, in a much quicker timeframe and a much lower discretionary cost than the people we compete against. And that really goes back to our flexible manufacturing strategy, where we use a global supply base. We're not highly vertically leveraged. And with our speed, we can get to those spaces. Spirit Lake, for example, has built every one of our products in our portfolio at some point in the last decade. It doesn't take us years and tens of millions of dollars to decide to go into a space or get there. We can get there very quickly at a lower cost. And when you can do that, you can be bolder, more aggressive, more innovative.

And then last but not the least, for us, it's always about speed, not just speed in our products like you saw with the RZR XP 1000, but speed in our product development time, speed in our decision-making. And we've got a whole business and operating system around speed to get there. Because we've got to be able to zig when the big guys zag. And we've proven that. We've honed that over the years. And we happen to think we're very, very good at that.

And we put all 4 of those things together, that's really what makes us unique and I think what really gives us some confidence that not only can we be the best in powersports and extend that lead as we go forward, but we can move into new spaces as we go forward and take these same kind of ingredients and be successful.

I'm going to cover real quickly just kind of what you're going to see today from the team. And this is really kind of the objectives we're running the organization on really for '13, and I'm just going to hit through some of the highlights. Again, it starts, as Scott said, with being the best in powersports. That's our core business. We're very good at that. And each and every one of our businesses, we expect this year to drive growth, expand their margins and then basically sweep and win share, not just in their business, but in every region they compete in. And at the midway point, I think we're on track to do that.

It really starts with ORV. That's our largest business. They really kind of feed the families. And they've had, as you've seen, outstanding performance. And they're on track for another excellent year. And again, the way that we really measure that is they feeding us double-digit retail growth. When they are giving us double-digit retail growth, things are very, very good at Polaris.

Victory continuing to gain share and build momentum, even as we bring on our new shiny toy of Indian. And we're about 5 days, not that we're counting, until launch day on that. And we're very, very excited about that. And we need to be flawless on that. And I would tell you, at this point, we're feeling pretty good. We got a very good chance of being flawless. So we'll see.

Our snow business is our legacy business. A lot of pride, a lot of passion there. And again, we want to not just be growing share, but we want to be the industry leader in quality. And we're on our way to doing that.

And PG&A business is kind of the -- it's a little bit of the quiet company at Polaris. It's our second-largest business. It's our most profitable business at the margin level. And generally speaking, when you look at Polaris performance, we're doing the things we want to do with margin expansion, getting the growth, this is the swing business for us. And they're having an outstanding year right now. I mean, you'll see that from Steve. And as you look at the strategy that he'll start to frame up for you, we've got more legs, I think, for growth in PG&A than we've seen in a long, long time.

And then, obviously, we're working very hard to make sure that our dealer inventory is working for our dealers, and we've been working on that velocity. And what we've done really over the last 7 years is we've taken dealer inventory that's been in big pockets in dealers or big pockets in segments, and we basically, with our MVP and RFM, we spread it like peanut butter, so it is really working inventory. And so it's out from the backroom, into the showroom, as we built out these segments. And again, our working inventory, I would say, is better than it's ever been, and I'm certain it's the best in the industry right now.

So again, we're looking for double-digit profitable growth out of our core business.

On the adjacencies, that's really about us expanding into new playgrounds. We're picking up some really nice momentum. Our GEM and Goupil businesses in the small vehicles are having really good starts to the year. We acquired Aixam in April, and that adds another stable of really leading brands in the European quadricycle market. That's a nice, nice profitable company, and it's adding some scale and some capabilities. So you can really see our small vehicle strategy starting to take shape. If you're a little sketchy on it maybe 18 months ago, I think you can see that we're grinding away, we've got dedicated teams on each of those brands and we're building some momentum.

Our Defense business is obviously fighting through a pretty tough defense environment. But again, behind the scenes, we are really building a lot of capability with new categories. And we'll get profitable growth out of that business this year. And it, frankly, fits in very nicely to the brand and our core business. And in the long run, that will be a nice diversification play for us.

And then obviously, we just got into Brutus here, and we're really in the early innings. But we've got a separate Polaris channel. We also use a similar product into the Bobcat channel. And the commercial play is one we're in for the long run. I don't expect big, massive home runs out of that in the first quarter or 2, but I think you fast forward 3 years from now, we expect that to be a very successful diversification strategy for us.

On the global side, we expected it to be a little tougher globally this year, and, in fact, that's been true. It's been a little bit surprising. Our European team has actually, I would say, over-delivered, and they're doing that really by outperforming a pretty tough market. It's been a little bit tougher, frankly, in the Asia-Pacific region than we anticipated, really due a little bit to our largest subsidiary, Australia, having some tough market conditions. But we continue to really invest aggressively in infrastructure. We have plant projects going between our Eicher Polaris JV in Asia. We just broke ground in Opole, Poland about building really a European plant. And we are very, very bullish still about the ability to win, to diversify ourselves and really drive profitable growth.

Moving to operations as a competitive advantage. Scott talks a little bit about how we're going to transform that really to LEAN. But the idea really here on the strategy is just, this is about making sure that you're driving profitable growth. I mean, growth for growth's sake, if you're not finding a way to do it more profitably isn't as interesting to you or to us. And as a manufacturer, we're proud of being a manufacturer, and we want to use that operations capability really to drive bottom line productivity. And so, it's really all about LEAN. It's about taking that LEAN concept and moving it all the way forward to the customer. That's where you see those things like retail flow management and 14-day delivery to customers, which is, frankly, unheard of in powersports or durable categories.

We're pouring investment in, in all of our North American plants to feed this $8 billion vision you kind of heard about today because, again, we got to be in front of that, otherwise we run out of leg room. And we've done a good job of staying in front of that.

And we want to continue to use just like we use our dealer inventory productively. We want to do the same thing with our factory inventory as we continue to make investments across the globe. And again, our costs are in very good shape here as we hit the midpoint.

And again, those 4 really lead to strong financial performance. I'd say strong financial performance is almost less a strategy than it's an outcome. And if we do those first 4 things really, really well, good things happen.

And again, the numbers look good. You saw the guidance. We're going to be up 18% to 20% on the bottom line, 13% to 15% on the top line. And again, as you saw last night, we think we have plenty of weapons to drive that growth.

So with that, I will open it up to any questions, or I'll be around all day, so you can catch me at any point.

Richard Edwards

Any questions for Bennett? Brilliant.

All right, next up is Steve Menneto, our Vice President of Motorcycles. And so he'll give you a little more information on what you saw last night.

Steve Menneto

Good morning. So we'll talk about the industry 1400cc and above in North America. We're about flat right now, seeing a little bit down 2%, so we're coming out of that choppy weather that we had early on Q1. We're getting back on our feet, having a good July right now. Baggers continue to be the biggest part of the heavyweight motorcycle segment, followed by Touring and Cruisers. And we're seeing the same flattening in the Cruisers that we like to see. So it's getting a little stronger for us.

Market share-wise, HD continues to grow a little bit of share. We're going okay with share, but not to our plan, as I said last night, so we're trying to countermeasure that, get back on track.

Our strategy in Victory is pretty simple. We want to strengthen our brand, make sure that we keep -- continue with the frequent product news; LEAN operations with RFM, get the waste out of the system; continue to support international and grow that; and then also work on our distribution as we go forward.

So as we go for our brand, we want to make sure that we're getting the right partners that fits Victory's brands. Victory is that bold, aggressive, modern brand. We're going after partners that really play up to that and really hit home with the consumers. We're in the midst of working the challenge zones, which we introduced last year. And we're into our dealerships, and we're really working that. So we got it in. Now we got to get them up, get them right, get them squared away and merchandised. And with our new apparel and accessory lines, it's been going really well. Our dealers are happy about our products there. They're making money with them. And that's an area that we're going to continue to support.

So last night, we introduced a bunch of bikes. Really, the market went decontent, go black and go down a little bit in price, and the consumers are responding. And we were able to make sure that we hit that right in stride. We got a lot of good opportunities for value propositions with our customers on our bikes.

The factory custom paint is just a start of what we can do because of RFM. RFM allows us to deliver that quickly. For those who have been following Victory for a while, we [indiscernible] the custom order program, and when the dealers took a custom order program, we would deliver that product in about 6 to 7 months after order. RFM allows us to deliver in 30 days. And we're going to continue to work on that. Where we'd like to get to is that we're on that 14-day, where a dealer could order -- or a consumer can order a custom bike, paint it and then be able to -- us to be able to do the work and then ship it to them. The faster we get at it, the more value it will create for the consumer and the dealer.

RFM continues to roll pretty well. There's some learnings in it for both the dealers and us. We're adjusting our programs to help the dealers get used to it. It's kind of funny, we do have some dealers were like, "Wow, I want to be at 0 by the time July hits," in their inventory, and they're struggling with that. And I was like, "Why would you want to be in 0 at one of the peak seasonality months?" So we're still working through some old habits. And ourselves, we're getting better at what we're doing and improving our shipping and so forth. So it's been a really well-received program, and we just have to keep -- continue to hone it and make it better.

Victory international retail is going really well. Teams are opening up new distribution points, as well as growing same store sales. And you saw last night, we opened up in Tokyo, Japan. Our new dealership happen to be an Indian dealer at the time, too. So they're going to have both brands in that store. It's phenomenal. And it's nice that the branding carried over for both brands into that store. So the consistency of our brand is going really well around the world. We're working at that. We have a lot of work to do, but we know we're -- we got the foundation laid for that.

We did add a Motorcycle sales force. We have so much growth that we want to capture it in the Motorcycle division. We're starting off with 3 regions. We've got about 30 people working for us solely focused on motorcycles, which also alleviated some of the load off of our current ORV snow force, so we're getting some benefits there. We've got a lot of new people we're training up, but it's growing really well. Our dealers appreciate that they're getting that kind of attention and that kind of investment into their business, so it's pretty cool for that.

On the Indian strategy, it's pretty much the same, except for the notch up, that premium level. So again, we have a great name and a great logo, but we have to go back and rebuild that brand. And we're working on that every day with all the -- in the information that we're putting on the street. And the big part of that is having that confidence from Polaris.

We'll continue with the product news; make sure that we start off with RFM to make sure we have LEAN operations going on inside the dealerships and inside our plant; go after international growth; and start building distribution network around the world.

So as we see our brands, we see do Victory and Indian starting to move away from each other, Victory, more aggressive, more bold, more modern; Indian, more classic, more heritage. And really, we'll start seeing Indian compete head to head with Harley. And we'll see Victory start moving against Euros and the Japanese manufacturers.

We also see it in the types of riders. The overall industry for heavyweight -- or for overall motorcycles we see is about $4 billion, but we also see multiple riders when we do customer segmentation. The performance riders, the distance riders, they'll be more on the Victory area. The more classic riders, the more image conscious riders and so forth will go towards -- sorry, that will go towards Indian. The more performance and distance will be Victory.

Customer experience, as you heard last night, is a big deal to us, so we have a team set up inside the Motorcycle division to tackle this and go after it hard. We have some areas that we want to go after early, making sure we're building ride communities, the online. The service has to be key, aftersales products and so forth. So we have a whole group of people that are going to be working on this. This is where we're going to win for the long-term. And we have a lot of tools in place. They're going to get started and launched here with the dealers. And then continue to add in this area. So this will be a great opportunity to continue that loyal customer coming back into our brands.

So what we're learning in Indian and doing for Indian, we're also going to bring to Victory. So we're going to get the benefit in both brands as we learn and grow our tools here.

You saw it last night, we tried to bring the Chief out onstage. So right now, we launched that in Sturgis on Saturday night. And so we're seeing and teasing the consumers with a little bit of silhouettes and chrome controls and handlebars and a little of the $18,999. The feedback has been fantastic. It's -- they're really excited, and the Choice campaign is really working for us.

Just to shake this state a little bit and let the consumers know that there is a choice in American motorcycling and that we're going to bring some quality, high premium product to the marketplace.

It will be RFM for Indian. We have to figure out all of the different profiles for the dealers, and we'll be working through the same plants and materials handling processes and so forth.

So the team has been doing a phenomenal job of working inside Spirit Lake and Wyoming [indiscernible] bringing that all together. So we won't get out with having inventory in the wrong place or, like Bennett said, lumps of inventory. It will be spread nice. The dealers will have nice working inventory and will be able to spin pretty quickly.

We are out building stores. This is Arlen Ness store in Dublin, California, just needs a few bikes in it to start retailing them. But really, what you saw downstairs in the display room is what we're trying to put into the dealerships. And it is a white glove service, literally, with the dealer. When we get -- come to an agreement, we have a third-party company who walks in, and they just take care of everything. They plastic off their stores, and then they set the whole dealership up for the dealer. And then they take the plastic down, and you're an Indian dealer. The same guys the who set up Apple stores. So we've got those guys walk in. So the dealers, when they come onboard, they feel that premium experience. So we want to treat them that way so they can extend that same experience to their end riders.

Our dealer network is on plan for our 120 to 140 in North America by the end of this year, about 70 around the world. You see we're hitting the hot -- the big MSAs. And when you look at developed countries in Europe, Japan and Australia, we'll be ready to go there.

You can see the mix of where they're coming from, a lot from the Victory players side. A few Harley dealers are coming in. And we have some folks that really are motorcycle enthusiasts that may run another business, but what we look for is that special operator. Even if they're in the auto business or in some other business, if they're clued in to motorcycles, they get it. They can create the premium experience that we want.

We will be launching in Sturgis, like I said. We chose the HISTORY Channel. It's been a phenomenal partnership with them. It's one of the hottest products right now, one of the hottest brands in media. And we'll be on their 3 shows. Mike Wolfe will be part of our launch process with us. He's been a phenomenal spokesperson for us. And we're excited about what next Saturday night's going to bring. And a lot of the information that we have in terms of ads, our vignettes and so forth will hit this HISTORY Channel through the first ever Bike Week next week starting at Sturgis. And at the end of the week, we will actually have the footage that we taped for Saturday night, will play on HISTORY Channel as well. So we're growing pretty hard to get our message out on Indian. We're showing you the [indiscernible].


Steve Menneto

We are going to launch at the most famous intersection in Sturgis at Junction and Main. We have a pretty big spectacular going there. A lot of folks are coming. And it's just a real nice place to launch the bikes. Like I said, our Indian's home with the Jackpine Gypsies who started it. They're part of the launch as well. So we connect with our heritage, but talk about where our bikes are going to go in the future. So we've got another vignette that will take you through.


Steve Menneto

So once we leave Sturgis, we have demo trucks that will go to dealerships. All of the major shows, you could see them by the logos of the next major motorcycle shows that are out in North America. And so we'll be hitting all those, as well as the IMS shows, full into next year. So you'll see Indian at every motorcycle event. All the dealerships will be riding bikes, so it will be great to get back to the grassroots of driving the brand and connecting the riders onto the seat.

So we move from the "Choice is Coming." Next Saturday, the "Choice is Here." Questions?

Question-and-Answer Session

Richard Edwards

Yes, Gerrick?

Gerrick L. Johnson - BMO Capital Markets U.S.


Steve Menneto

Yes, when we set up the RFM program, some of the dealers wanted longer flooring as they look at some of their bikes, so it's just the natural, "I need more flooring, need more flooring." So we're going to work with them and put into that turn and earning. What basically they're saying is just, "I don't want to get caught with any type of bills." But when you look at year-over-year, it was the consistent flooring. So we put in that turn in the earning bonus, where if you turn your bikes faster, we'll throw you some more money, it's almost that you can earn that flooring back. So we're going to work a little bit with them and protect them a little bit on some of maybe the slower moving models.

Bennett J. Morgan

One more thing, just, again, what we're doing is -- maybe you talk a little bit about the profile, Steve, and the segment stocking. I mean, that what's driving. There's not pockets of inventory. It's just that we're pushing all the segments that really represent the marketplace. And so our challenge is to drive velocity in each and every one of those segments, and I think that's kind of the angst.

Steve Menneto

Yes. What they feel is, before, they would load up on cross-countries, right, and have a bunch of those, but they wouldn't stock maybe a Hammer 8-Ball. So the profile with our dealers, we ask them to take a full spread of our segments. And then what happens is, maybe 1 bike or 2 bike gets caught a little off flooring, and it costs them a little money. So they're asking us to cover some of that. That's what your feeling. And then, that's what we'll work through. And really, from amount of money, it's not material. But it's more of making sure that they feel good about RFM, they get the concepts of turn and earn and keep flowing. And it's a little different for them, it is a little different for them. They're used to seeing a stack, and then they work the stack down until they get the next stack on 1 order. And now, it's just that kind of flowing it through in all of the segments and -- that they got to work through. So it's a little bit of that uneasiness.

Unknown Attendee

You said to look at dealer and profitabilities were fixed or stable. Fast-forward 3 years, can the [indiscernible] stay along with your [indiscernible] overall profitability or higher [indiscernible]?

Steve Menneto

Yes, we have looked at that in terms of profitability and dealerships. And we do -- there is going to be some investing in the Indian dealerships, we tell them up front. We do see 3 to 5 years on both Indian and Victory that the dealers are going to be able to make money. They're going to be able to hit reasonable market share goals. They don't have to hit 30% to make money. So we've got them in that reasonable market share goals where they can make money. And also, with our apparel and our accessory business, it's just going to be a real good profit opportunity. Like any entrepreneurial person who -- there's going to be great opportunity, if you work it, right? And that's the thing that we always talk to our dealers about. And you heard Bennett last night about investing and so forth. If you're going to just open up the doors and kind of, we call it, display and pray that somebody's going to come in and buy, that's a tough, tough business model to run. But if you're working and investing, you can -- you're going to make money.

Richard Edwards

Okay, question over there?

Unknown Attendee

I have a few questions. So first of all, can you talk more about the Red Tag Victory sale that you announced last night? And I think you alluded to [indiscernible], but what are the implications of this [indiscernible] in terms of margins [indiscernible] separately, can talk about how many dealers have already signed up? How is that [indiscernible]?

Richard Edwards

So kind of repeat the questions. So a question about the Red Tag program, then also, number of dealers for Indian.

Steve Menneto

Sure, Red Tag, this is our fourth year of Red Tag. So it is our -- every year, we signal to our dealers and our customers that this is the time that we're making our model year transition. So when -- it's been a normal standard practice that we have in our Motorcycle business, it's to move out the what we would be called or become non-current models and move in the new models. And we like to get the customers excited to do that, as well as get the dealers to improve their margins. In terms of the de-contenting, we're good with dealer margins, and our margins improved. So we're making the right calls. And we've put a lot of features into the bikes. And, of course, you've got to see which ones really resonate with the consumer, and then if you can pull off the ones that don't resonate, you get the price more aggressive, but it improves our margins and it's a good story. So that's what we've done on Victory. On where we are with the Indian dealers, we are on track with where we're going, like I said, on the 125 to 140. We have a lot of dealers right now that are in process. So it's a moving number for us all the time. We feel good about where we're at. We have a stage gate process that we're working through, and we've got quite a few dealers in that.

Richard Edwards

Yes, Robin?

Robin M. Farley - UBS Investment Bank, Research Division


Richard Edwards

So question is the engine, is the air cool versus water, and the power capabilities [indiscernible].

Steve Menneto

The Indian engine is actually oil cooled. They're oil cooled, so it has an oil cooler under it to help. And usually, when you go into bigger engines, they clearly start throwing up more heat. So we have an oil cooler on our Indian engine. And we've taken -- the engineering team has done a phenomenal job on dissipating heat from the engine. So before we even started, we modeled the engines off computer dynamics to make sure that we got where the heat was coming from. And then they put in heat shields on exhaust. They have the big fitting on our engine, dissipates heat better. So we've really done heat management well. We've paid attention to that right from day 1. What makes the engine better is it's a bigger 111 engine throws off a 119 foot pound. A Harley is 103, it's about a 100-foot pound of torque. So we're highly competitive. It's going to be -- and it just rides really, really smooth. It's just a phenomenal engine. So we're excited about it. It's been a real big hit since we launched that in Daytona, and consumers are going to love it.

Richard Edwards

Okay, one here, yes?

Unknown Attendee

Can you talk about your [indiscernible] cannibalization of Victory by Indian?

Richard Edwards

Sure. So the question is cannibalization of Indian -- or Victory by Indian.

Steve Menneto

So we did a lot of homework on this before, right when we purchased Indian before in our due diligence. And then we -- when we went through our focus groups, cannibalization, we look at right now, is going to be low single digits. That's kind of where we think that's going to end up. All of our homework, our focus groups, when we talk to consumers, when you talk about -- to a Victory consumer and an Indian consumer, you can really see the difference on how they think, on how they ride and what they like and what they buy. So we think we're pretty good with that.

Richard Edwards

Yes, James?

James Hardiman - Longbow Research LLC

Let's talk a little bit about the evolution of price that needs to be [indiscernible] the brand and, I guess, competitively in Europe, particularly Harley that you're sort of comping this against [indiscernible]

Richard Edwards

Sure. So it's the question around the price of the new Indian Chief.

Steve Menneto

Sure. So where we went on pricing, when we took over Indian, they were starting at around $22,000 for the bikes that didn't sell really well. The Chief Vintage was the best selling bike when we took over. Now it's about $35,000 to $37,000. And clearly, when we did our homework, the consumers were saying, "You have to make these bikes accessible to us. We want to be a part of Indian, but we can't afford that type of a bike." And to be fair to Kings Mountain, they were riding -- when they made those decisions, there was the ultra-premium market, and you saw Titan and Big Dog and all those guys addressing that with $40,000 motorcycles. So the strategy was a little bit different there. So when we took over, we went with a different strategy to make Indian more accessible. So that's where -- we wanted to make sure that we hit that part of the market and bring those price points down. We do look at particular models with HD, and their heritage soft tails where we look at. And then we want to make sure that we are competitive with our price. But real -- more importantly, we can win on value. And when you see what you saw last night, there's a lot of opportunity for us to bring that Thunder Stroke 111. Just one example, if you wanted to upgrade your Harley-Davidson with a 110 engine, it's $5,000, okay? So we're a little bit more expensive with -- to them at the MSRP. But when you just try to upgrade from their 103 to 110, throw $5,0000 onto the price tag of that bike, and then our Chief Classic just became a little bit cheaper than theirs. So we think we have a pretty, pretty strong value proposition in our Indian line.

Richard Edwards

We have time for 1 more question. Greg?

Gregory R. Badishkanian - Citigroup Inc, Research Division

Can you talk about [indiscernible] where you think your market share will be, and how many bikes will be in your portfolio? And then looking at [indiscernible], it looks like Harley dealers represent about 15% to 20% of [indiscernible] dealers right now. [indiscernible] over half of Polaris to [indiscernible] more Harley, but Polaris dealers in the next 3 years [indiscernible]?

Richard Edwards

So it's the next -- kind of the trend for the next 3 to 5 years, and then how many dealers coming from Harley-Davidson.

Steve Menneto

So I smile because as my boss tells me as though my job depends on it. We are pretty excited about where we can go on market share. And we think we can carve out a good space in our business to hit that. We hit that upper single, we get into double-digit marketer, we'd be excited about that. And our product portfolio is anything else, right? We have to get the foundation of our powertrains out of frames and so forth. And now, we can build off of that. So we're going to be pretty robust in our product plans over the next 3 to 4 years. And we're in good shape, we're in good shape to be successful. And the second part of that question, sorry?

Richard Edwards

Dealerships from [indiscernible]

Steve Menneto

Dealerships from Harley. Early on, we're -- we have gone out to the marketplace with people that are in powersports, which includes HD, auto, RV. We get a lot of entrepreneurs that are contacting us. Right now, it just happens to be that there's a few HD guys that are really excited about the opportunity. They're trying to expand their opportunity. We have talked to them. We won't be entering into their stores, so when they do this, it will be a separate store. So that's real key. And we're excited about where we're going with the opportunities on who we're seeing in, who are interested, the entrepreneurs that are interested in Indian. And it's a benefit also for Vic. We're getting some of those better operators for Victory as well, so it's really cool.

Richard Edwards

Thanks, Steve. That's all the time.

Steve Menneto

Thanks, everybody.

Richard Edwards

Next up is Steve Eastman, Parts, Garments & Accessories.

Stephen L. Eastman

Good morning, everyone. All right. Just to ground everybody in the PG&A business, I'm not going to cover all of this, as Bennett referred to it, it's the quiet group inside of Polaris. We're starting to make a little noise.

Couple of things that make PG&A unique, though, is it's a very SKU intensive business. We have over 60,000 SKUs. And again, the majority of those are the service parts. It's our highest margin business. But our competitive set, we pay a lot of attention to the OEs, but we also pay a lot of attention to the aftermarket industry. Our competitive advantages, much like the rest of Polaris, are in innovation and our Lock & Ride capability for our Accessories, which help our dealers out quite a bit and help our consumers and sell accessories and create better overall solutions for them.

Each of these business segments -- just a couple of highlights on each. The Parts business, again, of the 3 segments, is the highest margin business, again, 57,000 or so part numbers. We pay a lot of attention to the logistics and operations on the Parts business. It's important for our dealers, obviously, that we can respond quickly. So keeping our fill rates up above 98% is critical. We had a very strong start to the year, a tough end to the last year related to snow. That was very helpful.

Our Accessories business is growing very rapidly right now, as we develop more solutions, like the RANGER cab solution, which you'll hear more about. That's driving high and healthy dollar per unit growth in our Accessory business, again, largely because we're developing more integrated solutions. We're approaching Accessories as a total solution for the end consumer.

And then our Apparel business, which is a relatively small business, but an area that we think is ripe for growth. The addition of Klim adds $30 million or so to our base and, more importantly, adds new capabilities for us to develop the total Apparel portfolio.

Our strategy is to strengthen the core business. Again, our Accessories -- our Parts, Garments & Accessories business is a critical area of growth for us. But also developing more multi-channel capability, including our ability to sell direct to the consumer online. And I'll talk a little about how we're involving our dealers in that equation.

Developing new growth platforms, focusing on how we can be more relevant locally in our international markets. And then driving our global operations excellence, and our investment in the new Wilmington facility is a big part of that.

Our progress on a year-to-date basis, business is great. We had a very strong start to the year. We're on track for what we think will be the largest growth here in the history of PG&A for Polaris, dating all the way back to 1954. That's a big deal.

Internationally, we're seeing strong double-digit growth in all of our markets; good margin expansion despite the fact that our Accessory business, our Parts business being our most profitable business is -- has that mix shift. We're finding ways to make up for that, and we're still seeing decent margin growth across all the different businesses.

Klim, our preseason order activity -- remember, most of the Klim volume ships later in the year. So most of the Klim business will ship in August and September. But our preseason order activity, the work that the Klim sales teams have done has been absolutely phenomenal. We haven't skipped a beat since we acquired Klim. We're adding dealers, dealer engagement. Stocking is up significantly.

Operationally, the Vermillion, South Dakota distribution facility continues to drive productivity gains. They're learning how to operate more efficiently. We have an outstanding safety track record. And now, we're adding this Wilmington, Ohio distribution center, which gives us new capacity and new capabilities for the eastern half of the United States.

Internationally, we've opened up a new facility to serve the EMEA market. But we're also starting to do more direct sourcing into that market, which helps drive margin opportunity in the EMEA market.

And then our apparel center of excellence, part of what we said when we acquired Klim is that we're going to leverage Rigby, Idaho as a -- an Apparel Center of Excellence to develop all of our apparel brands, and that's up and running. We have people dedicated to the Polaris brand products, working in that facility and leveraging the shared services that we have in Rigby.

In terms of growth initiatives, we're seeing great product launches. We have a record year of new product introductions, great focus on quality and innovation. Again, we've talked a lot about Apparel.

Our go-to-market approach is evolving as we spend more time engaging with our business unit partners at enthusiast events. You heard a lot of examples from [indiscernible] last night about work that we're doing with Camp RZR as an example. We're making sure that PG&A is represented in those events.

Digitally, we're seeing some good progress in our Online business. I'll talk a little bit more about the growth that we're seeing. And our supply chain is evolving nicely.

All this chart is intended to do is to show trajectory, and it's much like the rest of the Polaris business. Our PG&A business is accelerating. For a long period of time, we're running a CAGR of about 9%. More recently, we've been running a CAGR of about 17%, and our guidance for this year is up 27% to 30%. Again, a record year for PG&A.

All segments of the business are growing. Klim is a nice add to the mix. But even if you back Klim out, this growth is on track for a record year. And our strategic bets are progressing well.

One of the things that we focus on for Accessories is dollars per unit. So we measure very closely how many accessory dollars go out the door with every vehicle that we're selling. And the one that I'll point out here is the significant increase in RANGER. Last year, we introduced to you the new cab solution, and Dave Longren hit on that last night. We've seen phenomenal results and uptake in terms of dollars per unit for the RANGER products, and we're starting to see this across all the other product lines as well.

What's driving that is more focus on innovation, more focus on signature and differentiated products and just a bigger focus on pumping out exciting new products to get our customers and get our dealers excited about accessorizing their vehicles. Behind that, we have a lot more focus on disciplined execution.

And specifically, on the RANGER 900 XP, last year, we were talking about the promise of this cab solution. The results are absolutely phenomenal. The RANGER cab volume over the prior model year is up 200% in terms of dollars per unit. But more importantly, it's also driving higher Net Promoter Scores, not just for the cab system, but for the vehicle itself.

Some of the key success factors is we really spent time listening to the consumer and understanding what their pain points were, what was interfering with the Net Promoter Scores. And we addressed those solutions. We improved the SKU mix, reduced the complexity significantly, integrated with our engineering teams. So the whole vehicle and the accessory solution was conceived together. And then, as we launch the product, the go-to-market execution was conceived as a total solution. So as opposed to thinking about PG&A as a separate business, we're really starting to think about this as a total solution for the end consumer.

Next up is the RZR 1000, which was introduced, obviously, yesterday. We have very high expectations for this as well. A lot of the similar philosophy has gone into this, and in the lower right hand corner of this slide is the new Lock & Ride innovation that we've come up with that allows our consumers, but more importantly, our dealers to attach this product in a very simple expeditious way.

So what I'm going to show you here is a video. The targeted audience for this video is really the dealer. This isn't a marketing video, but this is a video that's intended to show our dealers how accessorizing these vehicles and the way we're innovating with our accessories helps them drive profitability.

Again, apologize for the folks on the webcast, there's no audio behind this. This is just a video to showcase, again, the margin expansion opportunities and some of the new innovation for the RZR.


Stephen L. Eastman

So this is the new attachment point, the new Lock & Ride feature that I'm talking about. It's a significant innovation for us. New audio system from MTX.

So again, like the RANGER 900 cab solution, we think we've created a total solution for RZR that's going to drive significantly higher dollars per unit for our dealers, significantly higher profits. And we also think this will contribute significantly to higher Net Promoter Scores for the RZR product line. And I think you get the idea.

So for Indian, Indian as another accessory opportunity for us is a little different, it's the reason I wanted to highlight it a little bit. In this case, we understand how important the brand heritage and the premium positioning of Indian accessories are. We think it's important for our end consumers and for our dealers that we support that with premium packaging. The whole experience has to be very consistent with the vision that Steve has laid out for Indian Motorcycle, and we've got a dedicated team working solely on Indian Motorcycle accessories to deliver on that vision.

Rider X, you heard a lot about yesterday. We're really excited about Rider X and the promise of Rider X for PG&A. But more importantly, Rider X is a tremendous opportunity for the total company and for our rider community. But for PG&A, it creates a tremendous opportunity to develop an accessory lineup.

We're highlighting a few simple examples here of things that will allow our riders to connect their smartphone devices to their vehicles to measure the performance of the vehicle and connect and control their audio pod and so forth. But down the road, there's opportunities to tie in the tire pressure monitoring, add in capabilities for action camera so people can document and share their experiences and so forth. So we think the opportunity for Rider X from a PG&A perspective is a tremendous opportunity for growth.

Klim, as we mentioned, one of the things that we paid attention to with Klim is, how would we do with dealer engagement, would we see some dealer falloff. We've seen 0 dealer falloff, 0 dealer exits and a significant amount of new dealer adds since we've acquired this business. The team is executing at a very high level.

And the other piece of this is that we've launched this Center of Excellence in Rigby, Idaho. Rigby and the Klim team have a tremendous amount of capability to raise the level of technical quality across all of our product lines. And we're excited about the promise of that going forward.

One of the things that we love about Klim is that they understand the grassroots nature of building a brand. They're very connected to the riders. They listen to these riders.

This is the Red Bull Romaniacs in Romania. Klim had a podium sweep there. It's just one small example. But generally speaking, this is the kind of performance we're seeing from Klim across a number of different consumer and rider events.

As we think about our lifestyle apparel, we also -- so Klim is largely technical apparel. As we think about lifestyle apparel, we see a tremendous opportunity to enhance our brands by developing brand-specific product lines. If you haven't had the chance, I encourage you to get into the display room and see what we've done for RZR and RANGER. We're really excited about the growth potential of lifestyle, as well as technical apparel.

Digital and online shopping, we're up 63% year-to-date in terms of our online performance, pretty significant. Traffic is driving a good part of that.

And one of the things that we're launching right now is something that we call Internet Commerce Exchange. Externally, the product is called Shopatron. It's an order management solution that allows our dealers to access fulfillment partners. That's exciting for a number of reasons. One is it keeps the dealers engaged in the equation, but it also allows for pick up and dealer capability for our consumers, which is important, particularly for parts that need to be installed at the dealer.

Our brand direction, this is a subtle thing, but as we've started digging into some research in trying to understand the role of the Pure Polaris brand, what we were getting back is that we were actually introducing a lot of confusion for our end consumers. And we needed to clarify our brand architecture. And we needed to shift the way we communicated to our customers and our dealers to focus more on solutions, having the right stuff and simplifying the overall message. So we've launched this new brand and eliminated PURE. We've retired that brand from our brand strategy. This is how it's being expressed through catalogs. The catalogs are much more brand specific, much more focused on total solutions.

And then finally, I'll wrap up with our North American distribution expansion. We needed to add a facility to address capacity as we grow and support more product lines, but I don't want to lose sight of the fact that this creates a tremendous opportunity for us to capture transportation savings as well and to improve service levels, particularly for our East Coast and Eastern Canadian dealers. So we're excited this building is up and running. They are receiving product now. They're starting as they shift the first cart in the other day. This will ramp up significantly here over the next several weeks. And we're excited that this new facility gives us new capability within our distribution network.

And that's all I have for PG&A. And I'm happy to take any questions.

Richard Edwards

Yes, Scott [ph]?

Unknown Attendee

[indiscernible] talk about your expectations [indiscernible].

Stephen L. Eastman

Sure. The RZR line is a -- the excitement around the RZR line is not so much a cab system per se, that's been more specific to RANGER. What we are excited about is how much interest and enthusiasm there is to accessorize and personalize the RZR product with protection products, cosmetic products, better seats, more storage options. Lighting is a really big deal. So if you look at the RZR solution that we've come up with, everything that we've done makes that easier for the dealer and makes that easier for the consumer. Lighting and audio solutions, for example, we've created a simpler way to install those products. We've created routing through the cab frame itself that conceals those wires, which was pain point for our consumers before. Our protection products are bumpers and so forth, attach in a much simpler way. So we think there's a lot of opportunity for our end consumers to add accessories to their RZR product. We're not sure what the ceiling is, but again we're showing 50% growth. Our expectations for dollars per unit on this slide, I think, is potentially higher than that.

Bennett J. Morgan

Yes. And again, historically, that RZR XP customer, it probably accessorizes that at an even higher per-unit rate than even what we've seen in our high-end RANGER guys. So with what Steve and team have done with enabling that across the entire portfolio of accessory products, it -- we're pretty excited.

Stephen L. Eastman

If you haven't had a chance to get into the outdoor display are: We had MTX, who's our audio partner, sort of pushed the limits of what that could be. And they've got a product down there that is something like $20,000 worth of audio products installed, including a 27-inch LCD TV, it's pretty cool. But not suggesting we're going to start selling a 27-inch LCD accessory for RZR, but we do have a different type of consumer that is looking to do sort of the wakeboard culture, looking to do a lot of exciting things with their vehicle, sometimes for performance, but sometimes it's just about showcasing their personal interest and characteristics. Other questions?

Richard Edwards

Yes, go ahead, Jed [ph].

Unknown Attendee

[indiscernible] aftermarket suppliers [indiscernible].

Richard Edwards

So the question is aftermarket providers in terms of providing parts for our vehicles.

Stephen L. Eastman

I can't speak for the aftermarket guys. They certainly, once we have the vehicle out at the marketplace, can attempt to reverse-engineer that product. The level of effort and the level of engineering that goes into these solutions for us, the amount of detail and the capabilities around walk and ride, the fit and finish and the quality, is going to be difficult for our competitors to replicate. And so far, we just haven't seen that.

Richard Edwards

Any other questions? Okay, Tim.

Unknown Attendee

[indiscernible] 50% higher [indiscernible] dollars in a higher [indiscernible].

Stephen L. Eastman

50% higher dollar per-unit performance on Accessories specifically.

Unknown Attendee


Stephen L. Eastman

Yes. That's -- I'm sorry, that's 50% higher than the RANGER, 50% higher than the prior RZR dollar per-unit performance on the 900.

Richard Edwards

Okay, anyone else? All right, good. Thanks, Steve.

Stephen L. Eastman

Okay. Thank you.

Richard Edwards

Next up, Mike Jonikas, for snowmobiles and sales and marketing. So he's going to do a couple of pitches.

Michael P. Jonikas

Good morning. Good to see some familiar faces. Thanks for being back. So I know we're in the middle of the summer. It's hard to get your hand around snowmobiles, but our season starts in about 7 weeks. So let me start with a little video just to kind of remind you of the lifestyle and the passion in this business.

Can you get the volume up?

Steve Menneto

Oh, just it give it up...

Michael P. Jonikas

No, I can't have anything, just to be clear.

Scott W. Wine

Mike, [indiscernible]. Go -- we'll have to work on that, Mike. You...

Michael P. Jonikas

We'll just click through it.

So if you had seen this awesome 4-minute video, you would be on the edge of your chairs, wishing it was snowing outside, but the point of the video is it started with our history. We've been in this business 59 years. This is our legacy product. And we're proud of our history in this business, but as I'll show you today, we're even proud of what we're doing now in terms of driving growth and we're optimistic about growth going forward. And I'll show you why.

Let's start with our industry. Worldwide, over the last several years, we've been seeing growth. And we've been telling you that, when in the established economies there is snowfall, North America, Scandinavia, the category will grow because there's a large sizeable installed base. They still are very excited about snowmobiling, they just need to see the conditions. We've also seen economic expansion in Russia drive the snowmobile industry there. So globally, we're seeing some growth.

When we look at it by segment, we look at mountain usage and performance on trails and crossovers, so the different types of sleds, the 2 fastest-growing segments are in the mountains, for deeper snow-climbing hills; and what we call crossover, so you can ride that on trails, you can go off-trail and play in the snow. It's a little bit longer sleds, so it's a little bit easier to handle. Those segments are growing the fastest, and that's also where we enjoy our largest and strongest market share positions. So we're positioned well in where the category is going.

In terms of engine, that's in lower left, it's kind of good, better, best or what we call entry, core and ultimate in terms of performance. And the great thing here is the premium part of the market is where the growth is coming from. So that helps us not only in unit growth but also margin expansion.

In terms of the outlook, it remains the same. When we see snowfall in the developed economies, again North America and Scandinavia, we see category growth. And the fundamentals are still there. There is a large installed base. They're very passionate. They're in our website, they come to our shows. When we introduce new product, they're waiting for them, they're there, okay? And the average age has gotten a little younger. Some of the products have gotten more higher-performance oriented, it's bringing some folks in. And so we remain optimistic that when we can get Mother Nature cooperating, we'll continue to show you industry growth.

Polaris this past season, which was completed in March, we had strong retail sales growth around the globe. The North American market versus Scandinavia and Russia, it's about 2:1. So our largest market was up 9%; and some of our growth opportunities, being Scandinavia and Russia, was up sizeably at 35% for Polaris. So we had a very good season.

In terms of market share growth. Polaris is the only OEM that's posted market share growth the last 3 seasons. We are the brand on the move with a snowmobile business. We have great products in the key segments, mountain, crossover and performance. We have been way, way more aggressive on marketing support, and I'll give you a little bit more insight on where we've been but, more importantly, where we're going in a little bit later. And we achieved our highest market share level in nearly a decade, securing a very strong #2 position. So we are the brand on the move in the category. That's what we're proud.

Now more importantly, our optimism on where we're headed. It starts with product. This is very much a product-driven category starting with the rider's satisfaction and continuing with our innovative chassis position. We own that today, and we will continue to own that going forward.

Our marketing support is getting stronger. We started that this past season and you'll see more of that going forward, and I'll give you a little detail on that. And we've done a nice job expanding margins, and we see further opportunities throughout the P&L as we go forward. And the approach and the attitude we're bringing is we're pinned to win in this business because we are on the move and we're going to keep moving.

So we launched the Model Year '14 product news back in March, completed orders in April, and we're very pleased with our worldwide orders. And the big, big chunk of the news this year was within our Indy brand segment. We launched 7 exciting models that are helping us penetrate segments where, quite frankly, our share has been underdeveloped. There's about 30% of the category that's touched by the products that we just launched. And in almost every case, we're fairly underdeveloped in market shares. So we're really excited about this in terms of entry performance, in terms of the Touring segment in some of the lighter utility type usages. So this was an important season for us to branch into some segments where we haven't had as much market share. So we're pleased with orders, and the key for us will be aggressive marketing and partnering with our retailers to go get that market share.

More aggressive marketing. It's a 4-part story. First, we are increasing the number of impressions or the number of ads, so to speak, that you're going to see. We had a huge increase in the blue bar this past season, frankly, off a pretty small base. But now we've established a much higher base and we're going to continue to grow this. So number one, more advertising.

Also, broader reaching, getting into mediums that we haven't been in, in the past to reach out to those folks who just haven't heard of Polaris' message over the last couple of years, inviting them in to get in on the game and the brand that's on the move.

Social media. Last season, we were the #1. We had the strongest social media presence. And we're already beginning here in the summer with all kinds of activities to continue to drive that going forward. We also -- if you know our business, we have what we call these terrain-dominating partners. These are some of the best and most well-known riders in the snowmobile industry. They put a face on our brand and lend a ton of credibility to our brand. So Levi LaVallee, the world record distance jump of 480 feet on a snowmobile over the San Diego Bay, X Game winner extraordinaire, awesome personality, awesome rider, consumers love him. Keith Curtis, in the bottom. He is the predominant hillclimb rider, dominates it. If you know NASCAR, you know Jimmy Johnson, he is the Jimmy Johnson of hillclimbing, he's the man. And he is endorsing our folding products.

So we're using these people that our consumers aspire to, to get them to look at brand -- our brand, in Polaris, and to look at KLIM and to join our family. All increasing our marketing support.

We're proud of the margin expansion we've had in the rearview mirror, and we see opportunities going forward. We have further opportunities with the mix and where the market is going with ultimate, mountain and crossover. Those are more premium performance, there's more premium pricing. This is a category where we have positions of strength. We've been able to take pricing, which helps us. Again, when we bring product news, we could price for it and expand our margins. On the back end, we're looking at how we take cost out while keeping quality up. And so we see further opportunity on this front.

So in summary, this is a business that's been generating profitable sales growth, retail, share and margin expansion. We're optimistic going forward. We control our destiny because we know we're snow-dependent by having great products, high quality. We're going to be on the gas with marketing and continue to expand margins.

First half, we had nice percentage growth on a small basis. Our revenue growth comes as we come into season and ship product. And we see some nice growth on this business for the remainder of this calendar year.

So, glad to take any questions on snowmobiles. Yes, sir?

Unknown Attendee

[indiscernible] can you break out some business that you're operating [indiscernible] in your segments? And then [indiscernible]?

Michael P. Jonikas

We do, but...

Richard Edwards

No, no. No, we don't break out operating margins by business, so we can't give you that.

Michael P. Jonikas

They are very specific targets for me, though. I can assure you that. Yes, sir?

Richard Edwards

Yes, yes?

Unknown Attendee

How [indiscernible] can you adjust your marketing spend depending upon the snow environment?

Michael P. Jonikas

Yes, so the question is how well can we adjust our marketing spend basis category in the snow conditions. That's critical. Actually, a lot of what we do is online and it's triggered by snow. So we plan ahead on a base-level marketing support. And then if there is more snowfall, how do we do that in those markets? So this past season, if you're familiar, a lot of the snow came in North America, particularly in the United States, later in the season. So some marketing that we had planned for December, we ended up fusing it into January and February when the snow came. So that's a big part of our marketing strategy, is making sure we have it when the snow is there. Yes, any other questions?

Richard Edwards

Okay -- oh, one more, over in the corner. And then we'll -- then we're going to go to sales.

Unknown Attendee

So you [indiscernible] season, but can you talk about what your competition had done for the season?

Michael P. Jonikas

Absolutely. The question is, what about our competition for this coming season? Frankly, this has always been a competitive category. Unlike some of our other categories during the recession where we saw folks kind of maybe turtling a little bit on the market, this is a category where there's lots of product news from our competitors. And there have been over the last 5 years, and we're performing. So they brought chassis innovation, they brought power train innovation, and they're on the gas as well. So nothing that causes us to be alarmed, but if you follow this category, it's been -- there was no slowdown during the recession. Everybody came out with news in this category. And that's -- we've been able to generate results in that environment and we'll continue to generate results in that environment. Do you want one more?

Richard Edwards

Yes, go ahead. Yes?

Unknown Attendee


Michael P. Jonikas

Yes, the question was around, is KLIM being distributed in every single one of the Polaris snowmobile dealership? The answer is, not today. And what we're looking for is the best opportunities for KLIM going forward. So we will expand the number of dealers, and we already are. I'm not sure it'll be every single one of them, but the -- KLIM's presence will be expanded where it's appropriate.

Unknown Attendee

[indiscernible] dealers [indiscernible]...

Michael P. Jonikas

Yes, predominately the consumer will buy apparel when they buy their new sled. But there are some people that keep sleds and then just update on apparels. You see both. But we are seeing the uptick. Okay? Honestly, it was an awesome video. We'll try to see if we can get it going sometime later on, but thanks, Richard. I'm sure they're excited about that.

Michael P. Jonikas

All right, now I'm going to switch on to my other hat. And as you know, if you've been here for a while, I've been in charge of North American sales since the middle of last decade and have the good fortune of really being a part of the team that's helped turn around the relationships. And you've seen it, if you felt it with our dealers last night, we have a really great working partnership. The cool thing is there's still a lot more opportunity.

So we have been generating growth. Retail, share, brand franchise value, I'll talk more about that; and also the number of dealers that are carrying our product in the marketplace. And we have a very focused strategy for growth. And we don't have a whole lot going on here because we're a group that executes day to day with our dealers, and I'll tell you about that.

So retail sales. Fourth year in a row of posting strong retail sales growth in North America. Bennett showed this chart before, #1 OEM, and we're going to continue to drive this. And as we talked with our dealers last night, it's a big deal for us because when we're growing, it enables us to continue to invest aggressively and it just feeds on itself.

Okay, brand franchise value. The message here is we're growing it and we're growing it the most. The math here is average OEM sales per a dealership. It's really how the dealer looks at our opportunity when we talk to them. When I carry Polaris' lines, what can I sell in a year? That's how they view brand franchise, okay? And you see, we are 1 of 3 brands growing, and we are growing the most aggressively. And I want you to keep this in mind when I go to the next chart so because the math here, again, is volume divided by number of dealers.

We're the only OEM that's been growing dealers. We did it last year, we did it the year before and we did it the year before that. So this is the kind of velocity we're generating with our dealers. The math equation here is we're doing the top and the bottom. That's how dealers look for brand franchise. What can I sell when I carry your lines? And part of that brand franchise value is why we're the only ones, when other people are losing dealers, we're attracting dealers.

Guys, more importantly, where are we going? It's really around continuing to be the leader in changing the business model with the dealers. We started that with MVP. We've just put motorcycles on in the past year with RFM. And again, the whole thing about this is working with each dealer to maximize their retail, their share and improved inventory turns throughout the system. And we'll continue to build strong compositions in the right markets. I'll give you a little bit more detail.

So on the ORV MVP side, we've been at this a number of years and the results are fantastic. If you were with us and followed us years ago and you see it now, the dealer level of stocking has way improved. Our lines are represented at retail the way they should be. We've spent less time on how much they should order and way more time on how they should retail. We have 90-plus-percent of our dealers acting on the retail tools that we're asking them and persuading them and selling them to do, way higher than any of our competition, okay? And you've seen their results.

More importantly, where are we going, going forward? We have an opportunity to improve further how fast we can replenish for our customers. So we're working on shortening our leadtimes in manufacturing, transferring vehicles faster from plants to distribution centers, to our dealers, okay? So that's one part of the equation. And the reality is we have way, way more to go on working with each dealer and improving their retail practices. We're proud of where we've been, but they can do so much more in terms of building their brand, our brand, improving their closing rate. And we'll focus on that going forward.

On the motorcycles side. In the last year, we've set up a standalone sales team so we can focus like crazy on motorcycles and continue to elevate focus on Polaris. And we switched the business model to RFM, which essentially means the dealer reorders after they do a retail transaction to get the products in faster. And year-over-year, our line on motorcycle is represented way better. Stocking is way, way better than it was a year ago. There's still opportunities, as Menneto highlighted, with the channel, yesterday afternoon. But when you go into the motorcycle dealership now, you see our line represented, which you didn't a year ago because they only ordered once a year. And how did you get it right? Now they order when it sells.

We have opportunity to make it better. We're proud of where we are. We're going to get smarter about providing market -- excuse me, model-specific marketing. And each segment may have different velocity turns. We have to be nimble to adjust to that, Steve's team is doing it. A little bit more flexibility on model make coming out of the factory. We've been pretty good on that, we can get better. And the same thing on motorcycles. We're spending a lot of time with the dealers and how they retail, but it's the target-rich opportunities that they can do more. So we will continue to improve our model, we're out in front of everyone else and we're going to continue to run hard to keep that leadership.

In terms of count on our core side-by-side and ATV business, we see some more growth over the next 3-plus years. We're not quite yet at a market leadership position, but we feel like we can get there. We have the #1 share. We're probably get to #1 in terms of count and continue to have that high brand franchise value.

Brutus, our commercial line, we went from 0 at the end of last year. The start on that has been fantastic. The dealer response is fantastic. And we see further growth as that business expands. Snowmobiles, we are the leader today. And we'll stay -- we'll keep that stable going forward with what we're doing in that business. And on motorcycle, there'll be more Victory and certainly a lot more Indian as we get this launched and get moving forward.

And from a motorcycle standpoint, it's not going to be about leadership, but it's knowing those key markets where the volume is and making sure we'll properly penetrate it. Okay?

So with that, would love to take any questions you have on North American sales and our channel. Tim?

Richard Edwards


Unknown Attendee

[indiscernible] franchise value, would you worry about there's competitors [indiscernible] coming up [indiscernible] behind you?

Michael P. Jonikas

Well, I think the ones that you're -- you'll worry about the most is -- are probably the ones that are already doing the growing, Harley and BRP. They're the ones that seems to be spending the most time on it and paying attention to it. But that being said, I don't think we ever ignore anyone else. And so you see from us, we're always there to take it and make it better and make it better. And so frankly, we're going to keep driving and do what we do and keep growing it. But I think you'd probably have to say the guys are already doing pretty well right now. Tim.

Unknown Attendee

And then basically, [indiscernible]?

Michael P. Jonikas

Well, I can speak to that a little bit, and David certainly can cover it later. It's there's -- there are things that are working well in both models, and what we're doing is we're bringing some RFM practices that make sense to ORV and we're bringing some MVP practices that make sense over to Victory. So what we're doing is just because the velocity on those businesses are different, we have a slightly different model, but they're both all about quickly replenishing. So the beauty is that we have 2 different models and we're taking the best of both as we go forward. [indiscernible] question in the -- oh, over here?

Richard Edwards

Bring it, James.

Unknown Attendee


So any incremental color to really the [indiscernible] growth there on Brutus of how many dealers that's in today? Do you overlap this with your side-by-side [indiscernible] dealers...

Michael P. Jonikas

The question is, how many Brutus dealers today in overlap? 400 today, and basically all existing Polaris dealers who are commercially oriented, not just consumer-oriented.

Unknown Attendee

And how that compares with the [indiscernible].

Michael P. Jonikas

Pardon me?

Unknown Attendee

How that compares with the Bobcat distribution [indiscernible].

Michael P. Jonikas

Yes, how many in Bobcat, how many dealers in Bobcat? I think they're around a little over 500. And there's very little overlap between the Bobcat and the Polaris brand. I mean that we had a couple of dealers that maybe handle both, I mean, I can think of 2, maybe, but not too many. And there really hasn't been channel conflict, if you're worried about that. It's going just fine. They're distinct brands, distinct channels, largely different end customer users targeting. So we haven't seen anything on that front. Yes, sir?

Richard Edwards

Go ahead, over in the corner, yes?

Unknown Attendee

It's the metric of attendance of that [ph] of dealer meetings here versus [indiscernible] last year versus prior years. Is that an important metric, and can you share a little bit?

Michael P. Jonikas

Yes. So the question was around dealer attendance at this meeting, and how is it. We'll probably end up with our highest dealer attendance at this meeting we've ever had.

Unknown Attendee

And has it been -- is it [indiscernible]?

Michael P. Jonikas

It has been a steady rise. I think, if it's an indicator of anything, is just the confidence in Polaris and the improved working partnership we have with our dealer network not only North America but we have dealers from EMEA and APLA here as well. So it reflects what we're doing around the world.

Richard Edwards

Okay, Ronald [ph] first here, and then we'll come back over there.

Unknown Attendee

Yes, sure. [indiscernible] in the yen sort of the dollar [indiscernible] change to the marketing spend [indiscernible]?

Michael P. Jonikas

So the question is, are the Japanese brands changing anything that they're doing in terms of promotion and advertising and, particularly, as you've see the yen movement? I don't know that -- we are seeing them being more aggressive as we have been signaling to you and everyone else they would be. They kind of turtled, so to speak, in recession. And now the economic situation is better, so they're back in with promotion and advertising. And we haven't quite seen it yet on the product, although there's more product. I can't tell you if it's yen related or if they're just really looking more from a country management standpoint that the U.S. market and U.S. economy is one of the better ones on planet Earth. So I think that's more of what's going on there.

Richard Edwards

Okay, Chad [ph], and...

Unknown Attendee

Of the 1,500 dealers in North America now, what percentage of those are maybe single lines versus multi-lines? I mean, is there a trend given you guys have this -- or modest strategy on ATVs [indiscernible]...

Michael P. Jonikas

Did you hear that David? You're our modest strategy. That's awkward. So the question is, of the -- in the North American dealer base, what percent are carrying more than Polaris brands? There's 2 ways to look at that. The majority of them are carrying multiple brands, okay? Some of them, maybe 2/3 of them, are carrying multiple powersports brands. But even some of the dealers who just carry Polaris have other things in the -- in there, John Deere, Husqvarna, other product categories. And it is really what it comes down to, it's household penetration of powersports. It's still relatively small, and so for a healthy dealer partner, you want him to have revenue in other categories to compete in. Further, because we've been a brand on the move, some of our highest retail growth is in the stores where there are other powersports brands because those brands are bringing the consumers into the store. And then we're getting the customer because we got better stuff.

Richard Edwards

Okay, one more from Robin [ph], and then we're going to move on.

Michael P. Jonikas


Unknown Attendee

[indiscernible] from the dealers last night there was this [indiscernible] and I think it was [indiscernible]...

Michael P. Jonikas

Yes, so the question was, in the motorcycle presentation, we referenced that about 20% of dealers during a key seasonal spring period didn't have a monthly retail. That's really a phenomena around Victory, as we're working to increase Velocity, increase the dealer's participation, and that was a motorcycle-specific fact and a bit of a, "Come on, let's get going." That's what that was. Okay?

Richard Edwards

Okay. That's -- we got to end it there, Mike. Thanks. Next up is David Longren and Off-Road Vehicles. He's got better video since Mike...

Unknown Executive

No, no, no. You were, last night.

David C. Longren

Good morning. I hope you had a chance to attend the reveal last night. It was pretty exciting. Dealers are pretty pumped up right now. So we did what we needed to do with that. We had lots of good videos. We're -- I got more videos last night but I have time to talk today, so I can't do a lot of the video stuff on here.

So what I'm going to do is give you kind of an overview of the business. I do have slides that we've built in there that's got some of the details that we covered last night, in case you didn't have the opportunity to attend the meeting, so that they'll be there for your reference, and be able to talk about that. And I will go through those fairly quick to make sure we get the right information that you're looking for here today.

So a little bit on the breakdown on the business, just kind of where do we kind of stack up right now? So key to the business right now is RANGERs and RZRs. Our side-by-side business is the biggest segment within Off-Road Vehicles for us. And it is high revenue, high profitability for us. The ATV business is also a very large business for us and it is a very good growth business for us right now. It has turned back and it is growing for us. And we're taking share in that category as well, and it has a significant opportunity.

And then on the far side there is the -- our adjacencies that we're working on, with our codeveloped work with Bobcat and commercial business work there and what we're doing on the Military side of the business and as we work on our national accounts. And that's -- as we focus on the forward side, that's where we're looking for incremental growth.

This is one of the things I get questioned a lot on: What's the customer profile look like right here? So I laid it out for you. So we got the age profile, the income profiles. One of the things to highlight in particular here -- and this on average for the category, this doesn't break into what's the RZR XP 1000 owner look like for us. And we do have all that information and it is slightly different than on here. Then a couple of key things in there, if you look, the average income levels of our consumers, it's rising. That's a good thing for us, okay, on it, and particularly as we're going into the new segments and we're building our categories out.

Second thing, really, to take your attention on there, to look at first-time ownerships. So overall, RANGER right now is at plus 41%. That means 41% of the people that are buying a RANGER right now never have been in our product -- or to Polaris before. So bringing new people in, that's one of our key strategies of our awareness and building it out. And as I spoke last night, the RANGER 900 XP, which we introduced last year, that was plus 50% new customers that we're able to bring in. Similar is going on in the trend on the RZR side, where that's coming up for us, okay? So that's really good. And the ATV side, it's down slightly but it's only off by about a point or so on us.

So what do the trends look like for the business here? In ATV business, and we're seeing it in the industry in the last 2 year, CAGR has turned around from being multiple years of trending down. It's turned back up. First part of this year, in Q1, it was soft. It's picked back up in Q2. And we're seeing nice momentum as we're continuing on right now.

Side-by-side business continues to be doing very, very well for us. We've got nice growth in the last 5 years. We're seeing it continue on in the 2-year CAGR. And again, it's with the newer product that we just introduced and everything that is out there right now. Globally and in the North America, it continues to be very strong.

A little bit on the competitive landscape, what's that look like for us. So we're trying to map out here kind of the competitive actions. There was the question earlier about promotional activity, how is our -- the Japanese reacting. So we are seeing more competitive pressure from -- particularly from Honda, not quite as much from Yamaha, but more promotional activity. They're a little bit more engaged out there. Some new products that they're bringing out into the marketplace. So we try to map out, where does everybody go; are they more active, less active in the promotional world; and aggressiveness out there; and where the product go. And in the bottom, we've positioned ourself in there as well.

And the key takeaway on here is, if you look at that, okay, bottom line, and particularly on the product side, we put out more new product here at the show tonight and in the spring when we introduced Brutus than everybody else in the industry combined. That is -- so when we say that we're aggressive and we're going to grow the categories and grow this business, we're not kidding. We're putting the money where our mouth is and we're out there driving our business.

And so to the point earlier about the armada, this is a slide, armada slide. It's when we're out there competing in the marketplace, we've got a total portfolio that were out there. So our competitors come and try to attack us on a single point. Say somebody wants to attack us in our side-by-side utility category, somewhere in there, they've got one model that they put out, we've got a whole fleet of products that we're competing with. So every customer, every segment, we've got cut out. And we're going after those consumers at a very targeted level versus kind of a broad approach, which is helping us win.

So on the business side, I mean, we talked a little with Mike earlier about what we were doing on trying to transform how we go to market. So our MVP process, we've changed that around from a 6-month order process to every 2 weeks we're taking orders right now. We've taken dealer inventories down, okay, and we're reducing our leadtimes on there. And we're trying to improve our delivery accuracy. That's the #1 thing for us right now. It's when we're -- dealers place an order, getting the product to them on the day we tell them that we get -- we're going to promise to them when they order out in the future. That's our #1 focus that we're driving on.

We're in the segment stocking. So every level, every profile, every dealer, we know exactly where they should be, profiled for their product; seasonality, when they should be in, when they should be out; what's the portfolio look like for them to win in their local markets. And then we work with them on the retail planning to make sure that we're driving what we need to help them to be able to execute and close sales on there.

On the brand side of it, in demand creation, we're really driving our brands. You got Sportsman, RANGERs and RZRs, okay? Those are our 3 primary brands. RANGER is a plus -- billion dollar-plus type of a brand. It's a very big, very, very strong, powerful brand. RZR is a very passionate brand. So if you were there last night, you saw that with what we're doing. And we're tapping into that and we're going to build that one out even stronger as we open that category further out.

Market share. So this is the ORV piece of the corporate pie, what we're looking at. And we're growing -- continue to grow market share in '13 here. We will grow overall market share again. We're at a pace right now that is a little bit even more aggressive than where we were at in 2012 right now. So we will project and go forward and continue to grow.

So a little bit about the business overall, what are we looking like on here? So we've had nice growth from 2010. We're driving this business up on it, 79% growth from 2010 to what we're projecting on '13. RANGER has good, consistent growth that you'll see coming up here. We bring out new products and new categories, and we're building that business out. It's not cannibalizing, we're building on that. Similar with RZR. As we're bringing in products into RZR, we build RZR out, and it's driving nice growth for us. And then in Sportsman, it's really about us reaching out and growing more share and building that one out. And then on the Military and Bobcat commercial side, each just to drive ourself on that whole adjacent growths.

So how are we looking on our forecast? This is how we're seeing kind of the going forward for the year. We see ATVs growth single-digit growth on there, getting a market size of 420,000 units. We'll see that thing growing up for us. In the RANGER side, we'll have high-double-digit growth on there. I mean, we've got nice growth that's going on in the RANGER, and RZR, and depends on how -- with the reaction we got out of the RZR XP 1000. Maybe when we do this one a little bit, it's going to be a really nice growth as well on us. So we're really positioned quite well, as we're looking forward.

So what's really all about -- our growth about? It's really about driving new products. You saw it tonight. We're going to be the industry leader. We're not going to let anybody catch us, okay? We've got a very healthy pipeline of new product coming. There's an R&D center that we just developed -- or opened up this last year. Half of that building is just for ORV alone. So we got all the engineers, we got a pipeline filled, we're -- we've made the investments in the engineering tools and skills to be able to keep this thing going. It's really about driving what we have to do on MVP, getting closer with our dealers and with their segments, getting them the product that they need when they need it as fast as we can get it to them.

Then making our investments in growth adjacencies. We're going in and push over into the commercial side where we seize good opportunity globally there and then continue to push on the Military side of the house. And then making sure that we're expanding our margins as we're working with our operations on our global plants and leveraging our platforms and vehicle designs to be able to get commonality and get improved business performance.

So on RZR. This is what the RZR profile is looking for us right now. See, nice growth from '10 through '13. Again, this is one of the points to comment. If you look at kind of how it builds out from the trails to sports to 4-seat machines to high performance, and we're bringing new products and new categories in, we're growing the business. We're not cannibalizing, it continues to build on it for us.

We clearly are the leader in that -- in the industry in that segment. It is the #2 overall vehicle brand in volume, in the total side-by-side, only behind RANGER. And this is one that will continue to grow.

It's really all about the performance of the vehicle. Our customers are really tied-in to the capability of the vehicle and what it allows you to do. We understand that, and that's what we continue to deliver as we go forward. And then, we are substantially outselling our competition.

So on the brand side, we're really trying to go in and just focus on this as we try to reach this product out. So it's not the core powersport person anymore, we're going out to the broad outdoors person. We're repositioning this product as a lifestyle brand to be able to reach out to those consumers. And the product allows them to go do the lifestyle they want to do. So we're leveraging ourselves on our industry position and it's really about out there and going out there and getting activated with our passionate consumers.

We've got a great lineup of products that we've had our history of new stuff that comes. So our pipeline is full, it is continue to be full. Our new product is coming, you saw it tonight. And there's more coming as we go to the future.

So right now, the key on here that a lot of people don't always pay attention to is the trail sector with the RZR products. We make a big deal of the RZR 1000, the big high-performance machine, okay? And that gets a lot of buzz, and there's a lot out there. The trail sector is a big section, okay? The people that use these on, like an ATV on a 50-inch trail, or a small, just recreational product, this is a big product and it's continuing to grow, okay? This is one that we have had patents in this product category and we continue to aggressively go after and market into the segment.

So a variance off of that was -- for this consumer is we decided that we'd go like we did this last spring and give them a little bit better model. So we introduced the RZR XP, a little wider, more ground clearance, more accessories. We know these consumers, that if they're going to buy one of these vehicles, they want exactly what they want. They go all in. It's not that I just want a base value machine, I want a lot with them. We've learned that with the Jagged Xs and others. And so this is going to be a very good offering that will help us in that trail category.

The 1000, absolutely a phenomenal machine. It is, by far, the best that we've ever built. It is, by far, the best out there in the industry. Our -- the chat boards are just blowing up last night and tonight about how good this thing is, and they're all excited to see it, as the consumers start and be able to have their first chance in to ride that vehicle this weekend. We got our demo trucks out, vehicles being out. Consumers are going to be out giving feedbacks, going live under the social networks, about what their experience on that product is.

So here is how it stacks up a little bit on the competition on there. It's not just about power, it's about the whole vehicle. It's about how we could -- everything works together to create a vehicle that does exactly what you want it to do and completely surpasses anything that's out there in the industry.

So overall, we've got a big strong position on RZR, big share on there, our side-by-side trail category. And the RZR S is growing very strongly right now for us, that's where that X model comes into fitting in there, okay? We've got the 1000 that's out there, it's phenomenal. And we got a huge accessory opportunity, like we've introduced last year with our RANGER XP 900s. Consumers go in, they like these vehicles, they're easy to accessorize them. They put $3,000, $4,000, $5,000 of accessories into these vehicles, on it. So that's good growth opportunity.

Swing over to RANGER, how is that looking? Similar kind of a pattern, if you look at this: bringing new categories in, understanding how we can grow segments, building our segments out, driving nice growth out there as we go forward on there. Again, in every segment within the RANGER category, we are #1 in the industry, okay? Midsize, full size and multipassenger. We're the one that's leading the industry here, driving all the segments and all the growth in the categories in here.

So we introduced this last night here, the RANGER Crews and the RANGER 570s. This is a pretty big input or improvement for our consumers. More power, more speed, lots of enhancement to the vehicle. And that's right in kind of the heart of that midsize market, the fastest-growing, kind of the biggest segment of the market. Again, that's making a play down in there to go in and really go after the heart and help build this one back up.

Again, if we look at it versus some of our new competitive models out there, you got the Yamaha, the Viking; and the Honda Pioneer. They're new models that came in. When we stacked up here, how does the new RANGER 570, where we brought the new engine back in, stack across it, you can see our MSRPs; horsepower-to-weight ratio, it's the biggest thing you ever looked at for one of these vehicles that really talks about your performance level. We're industry-leading across anything on their. As our vehicle stacks up well, we're well positioned to be able to take on our competition.

So the other key thing that you may not have totally caught last night is the addition of power steering to these vehicles. This is the big growth trend. Think about it, your cars, would you buy a car today without power steering? No. Okay? It's same with what we're seeing in our industry. Whether it's ATVs, RANGERS, RZRs, consumers want power steering solutions. As they migrate through and they go through the performance of it, they're paying the -- those amounts, the extra dollars, for it. It's a little bit more expensive option, but it provides tremendous value. So we're the first guy to bring that back down into this midsize category, again to open that back up to that consumer.

Last year's introduction of the RANGER 900 was been a huge success for us on there. We created a whole new segment over-the-top with the vehicle and the accessories, it's better than anything out there on it. Very fast days to retail, 43 days. When product comes in, it's gone. It started very, very quick for us on there, on it. And one of the more recent awards we just got was Field & Stream named us best of the best award, so that's the top award that they give up -- out for a new product in a year. We received that for that product, so that's pretty good. So we're getting our industry recognitions specifically in the category, and broader recognition as well.

And the key on here is, as we look at that accessory integration, we're really driving up for our dealers average dollars per unit on their accessories. This is where they make their money. And as we talk to our consumers, this is the biggest opportunity our consumers are looking for us to be able to provide for them. Think about it when you buy a car: You don't buy a car without power windows or other features on it. You want all the package. You want what you want. You want -- you buy a package a, package b, package c, that's what consumers are looking for, okay? And as we started to swing these models on our product stack over into that kind of capability, our consumers are responding exactly as we thought they would.

So we introduced to you last night the RANGER Crew 900. Again, it's a take-off of what the base 900 vehicle is. It's got all the goodness of the base vehicle. It's got a new center console, like a truck does right now, that's one of the key features, as we listened to consumers, what they were looking for: more storage, more comfort, more capability on there, more passenger room on the backside of it in there and substantially improved riding handle into this vehicle. And the noise level is at a level that we've never been before, it's extremely quiet. Okay?

And some competitive on there. We got more performance kind of any which way we want to look at it on an acceleration on the vehicle versus capacity of the vehicle on it, okay? So we're doing great there. It's all designed to take all the accessories of the vehicle we launched last year. So the dealer channel is already stocked with the accessories ready to go on it. So we're really in good position. We only have 6 new, that's basically the bag -- back doors and a few other variants on it, just the unique pre-configuration on it, but we're in a really good position. Our dealers know how to move this and drive this. And it will really be able to help get our consumers into the right solutions they're looking for.

So overall, RANGER, we're well positioned as we have that going forward. The new value models in the 570s, the Crew 900, okay? We're in great position on the 900 XP and again continue to expand where we're at with our accessory sales.

Sportsman and where we're going in ATVs. So in the ATV business, we're continuing to grow. Here is a chart that shows you, over the years, where we were at, where Honda was at, and our ability closed the gap and then ultimately passed them last year, and continue to expand it this year, okay? We're very focused on this. We understand this consumer in this market. We know what it takes to win with both value and premium products. You have to have both categories out there for our consumers. There are some that are pure value, they just want a base utility vehicle. And there's consumers that want the bells and whistles. We offer both, we've got the best lineup in the industry to be able to go and attack, again, on both fronts for the marketplace.

Again, here's a lineup, a value lineup, from our 4s to 5s to 2-Ups. We replaced the 500 with the 570 now this year, and we had our premium line with the Sportsman XPs.

Last year, this time, we decided we were going to enter the sport segment, the higher-performance category of ATVs. We brought out the Scrambler XP, okay, the 850 HO out there. And we went from 0 share a year ago right now right now, wherein right now we're at over 40 share, okay? And we just got ourself started to go on in this. So clearly, we know how to go in and make an attack at a market like this in the segment and be able to have a really good position understanding our consumers and being able to deliver results.

We got some new high-end performance. This is again a category we spoke to last night where our consumers buy, look for high-end ultra premium ATVs as well. They're kind of like the big RANGER customer. They like to ride our active machine, but if they're in, they want everything with it. So there's a big -- there's an element out there. And so we brought in some LEs in here, limited-edition type models with paint and fully-loaded up with all of the bells and whistles consumers are looking for. This is a segment that we only have a 9 share in today, that we're going to go in and we're going to go grow that segment back up.

570 EFI is what we spoke of. It's kind of maybe one of the bigger news is for a lot of the dealers. They weren't expecting this vehicle from us. And it's just not putting the new engine in the vehicle, it's a fairly highly redefined, redesigned vehicle. New seating; there are new electrical capabilities; new racks capabilities, narrowed it back up; better electronics. It's a really, really nice machine.

So as we stack it up versus the competitors, kind of like into the other charts, we stack up very well competitively, whether it's on the horsepower side. One of the key things that we all looked at is what's our dollars per horsepower, what's the cost to get powered so consumers ultimately buy. Power, power, power. And in the value segment, you got to make sure that you're in a great position. We positioned ourself exactly where we need to be.

So as we've seen, in fact, with our dealers, this is kind of the one of the big plays that we'll push on for the year. And it's a -- it's really changing the heritage of the Sportsman 500 and completely revamping it and upgrading kind of the core of where the business was and, now, where we're going.

So good category in total in this business. We've got EFIs, we've got bringing power steering into the 570 segment. Value segment, that's a new segment for us, that's a 22,000-unit segment that we don't play in today that we're now engaged in. So that has got a good growth opportunity for us.

Commercial side of the business. A little bit on this piece. So the key on here is really, 3 key pieces of -- on the commercial: It's business-to-business sales, it's direct feet sales and it's adjacencies. So in adjacent partnerships, that's what we're doing with Bobcat and where we're going on there. And then we also independently go after the business-to-business business to government, and direct fleet sales.

So we got ourselves positioned with where we're going, with RANGERS and Brutuses going into B2B, and we're growing that business back out. Our fleet sales, we're into national accounts and growing our national account business out there. We have a dedicated force that's working specifically on these customers right now. And that's really about making sure we focus on them and we meet their unique needs. They've got needs that are different than our powersports dealers'. So we have different business processes, different ordering processes to support them and be able to make sure that we are able to capture that business.

Again, you can see our projection as we start to bring the Brutus product out, as well as grow our national account business. This category for us is a nice growth category in '13 and will continue to grow very nicely for us as we go forward.

The Military side of the business. This is a tough business. And we all know about what's going on out here at Washington and the sequestration and the defense budgets out here, on it. But I can tell you, our strategy has been singularly focused on the special operations forces. They're the ones that are getting called to do whatever action is out there. They're the ones that have the dollars today. They have the dollars that are going forward. And it's really about making sure we serve what the products they need for the missions that they have going forward. We've been working very closely. We've developed a very strong relationship with them. And as we're developing products, which you'll see coming up here, we're building a portfolio of family of light tactical vehicles, one of our armadas again, for the Military side of the business to go specifically at them, to give them exactly what they need. So you can see we've got some highlights this year as we're continuing to build the business out on there in both the ATVs and the RZR side of the business, okay? The Boost vehicle, I'll show that here in a second. That's our very light vehicle for special operation forces, kind of a expeditionary vehicle to go out there and help them kind of redefine and be much more mobile than they are today, at a very attractive price point for them, it's very attractive for us as well. And so the -- we're under development, developing the products specifically for them in those applications.

We're into advanced technologies from non-pneumatic tires, airless tires, out there they can be using and never have to worry them -- about them on a battlefield or anywhere else, you can just drive forever. We've got those tires also down in Oklahoma for the tornado relief. We've brought vehicles in there for The Salvation Army to be able to use specifically for that application. And then we've got advanced vehicles like tracked vehicles here and unmanned vehicles or autonomous vehicles that we're working on as well, really pushing out there on the advancement of technology and how we can help grow that business.

So really, 4 key things for our Military business. One is leveraging what we're doing in our core business, okay? We build a lot of vehicles per year. We build more than any defense contractor thus by far. We're vehicle guys, we know how to build vehicles, okay? So what we're doing is we're leveraging our capabilities in vehicle design, vehicle volume, to bring very good cost-effective solutions to the Military to help them on mobility and help them with very cost-effective solutions, be able to help them with their transportation needs. Okay?

Second part, really, on there is our technology insertions. Were leveraging what we're doing in that Military business back into our core business. As we're pushing the bounds on unmanned vehicle technology and all the electronics and electronic controls, that's helping us back into what we need to do into the future for our future vehicles for our core business. Just as well as what we're doing with the non-pneumatic tires, the airless tires, those have an opportunity in commercial business, as in other businesses, as we move forward.

So again, we're swinging that back in as we go forward. And then, leveraging what we have to do in that business with special operations forces to grow our international business on the Military, as well as to get the big army and other agencies to come in and understand what kind of a benefit that we're providing to special ops guys.

So here is what that fleet of vehicles looks like. It's not a big of an armada as in the core business, but you can see, we started off with an ATV vehicle specifically, went to RZRs, okay? We've got RANGER vehicles, both autonomous and nonautonomous, that are used out right now. Here we've got some vehicles that are getting developed, all right, going into production here soon to be able to handle borders, so they can bring ordinance out to a battlefield. And the top vehicle, that's the very vehicle I spoke to that the special operations is in -- contracting on right now as an expeditionary vehicle. It's going to kind of change the game for them versus having to use Humvees or some really big vehicles that they can't get to battlefields when they need to get them there.

So overall strategy. Where are we sitting? We're growing side-by-side business, it is a growth business and we're continuing to drive and grow that business. A very profitable business on there, and it does have much upside as we're going forward on it. We've got a profitable ATV business that's turned around, and it's growing as an industry and we're growing in our market share. We will continue to grow that business out. And we're -- we got new investments going in, again, to pressure on our competitors, but to build awareness as we're starting to see a turnaround and people back into the category. We are expanding the profitability of the business with what we're doing with Monterrey and, over in Poland, bringing those plants up, bringing inventory levels down, improving our delivery out there, and again, just giving better leverage out of the overall business model on there, and again, expanding what we're doing in the military and the commercial side. Open it up to questions.

Unknown Analyst

First about the RZRs, when will that start shipping?How about -- how that just lay out with the 900 and [indiscernible]?

Michael P. Jonikas

So the question is on the RZR 1000 XP? When will it ship and whether we expect on cannibalization on there? So a couple of things on it. First, the vehicle is in production. It's today, we have it in DCs. We are out, going to start taking orders from our dealers in the current order session. Remember, we go through a regular, every 2-week order session. We're doing that as it's coming in right now. It is on the order form. It will start shipping in the next couple of weeks. Okay? And in terms of cannibalization, as we've shown in the rest of the category, when we bring a new high performance product out there, at another higher price point, this is a higher price point vehicle, higher performance out there, think of this as a kind of a value premium for -- in the performance category, we will grow this category back out. On it? We will have some cannibalization on the RZR XPs today, on it? So we expect some but we don't expect tremendous.

Unknown Executive

Okay, go ahead, Jimmy.

Jimmy Baker - B. Riley Caris, Research Division

Last night, I was just so impressed that over half of your Ranger XP went to first-time Polaris buyers.I was wondering if you could talk about your margin [indiscernible] the 5 months over first-time ownership rates. Do you think that's the cause of a some kind of halo effect with the 5x5 business and taking that one step further to your customer [indiscernible] why are you maybe focusing [ph] and RZR there, Camp RZR, you video versus.

On their major Polaris, Polaris GOCO okay, so the sum couple of questions in there in that 1. So you want to go with -- let's go back and pick up I'll go to the camp RZR first part consequence so the questions about coverage and we're going with our map. The reason we are going after that particular element rather than just the Polaris one to start with, we do overall players at the event so we have players offload vehicles on the but if that consumer is a different consumer that our general consumer, it's a very passionate consumer. And so we're really trying to connect very closely who the consumer is and if there unique lifestyle in need. versus bringing in hunters and farmers on it, and so the same event, doesn't mean that we won't going through in the future right now, we're focused in on that specific segment. Okay? And what was the next 1? The ATV growth up and he could affect from.

Scott W. Wine

Okay. So there's a couple of questions in there, in that one. So, let's go back in. Let's pick off -- I'll go to the Camp RZR, first part of that. So the question's about Camp RZR and where we're going with on that. The reason we're going after that particular element, rather than just a Polaris one to start with, we do-over our players at the event. So we have player's off-road vehicles on there. Well, if that consumer is a different consumer than our general consumer, it's a very passionate consumer. So we're really trying to connect to, very closely, with who that consumer is and their unique lifestyle needs versus bringing in hunters and farmers on it, in to the same event. It doesn't mean that we would go and do those into the fut\ure, right now we're focused in on that specific segment. Okay? And what was the next one?

Unknown Executive


The ATV growth has a halo effect from our...

Scott W. Wine

So for us, a couple of things within the ATVs, one, the overall growth of side-by-side and the strength of RANGER and RZR does help us in ATVs. People that wouldn't consider us before, given our -- not only the performance of the products, we build the world's highest quality vehicles. And so someone who just got into the utility vehicle found a great RANGER, it was a great product, and now I want to go and use an ATV for some personal application, he's had a positive experience with us, then they'll come back and buy from us. so we are seeing a halo effect on that.

Unknown Executive

Okay, yes. Go ahead.

Unknown Analyst

Could you provide color on how much the channel filled new models [indiscernible] growth, the back half of the year.

Unknown Executive

Yes, it's this. When guidance that we gave at that -- about a week ago, doesn't take into count the shipments in the back half of the year. So the guidance we have, and it's a little bit higher, the growth we're expecting, a little bit higher sales growth in the back half of the year versus the first half. I mean, that's taking to account the shipments of these new products that you saw last night.

Unknown Executive

Yes. But remember, again, the way we do it with, even though there's a channel-filler model, unless we're adding an incremental new segment and I think Dave has maybe one segment the way it's going, there won't be a lot of big increases in inventory the way were running the model. I mean, what we expect to do is just turn them quicker.

Unknown Executive

It's all about the turns and being able to get the right product into the right segment and fill that back out.

Unknown Analyst

[indiscernible] just higher levels.

Unknown Executive

The question is on Honda and their promotional levels and whether it's increased or not. They've increased a little bit, I mean, their overall is up some over the whole year. The last couple of months, they come up a little, okay? So they're more active out there. They're not going out there blowing their brains out, okay? They're being very responsible in their category. They're very true to their brand and what their brand is about. They don't want to be a brand on sale. But they are being competitive in the marketplace, but we're engaged with them very nicely, they're about in the range that we're expecting them to be able to do.

Unknown Analyst

Just on the [indiscernible . So previously [indiscernible]

Unknown Executive

Okay, so the question is how does the RZR XP 1000 compare against the Maverick? So today, this is kind of a good one. I like -- that was a good question. I like this, that was a good one. I'll be good. As you look at the vehicle performance, if you look at the Maverick, in total vehicle performance versus our current RZR 900 XP, today, okay? The RZR XP, if you put them side-by-side for 95% -- how you ever want to use it, the RZR XP 900, today, is better than the Maverick. Okay? The total vehicle performance, characteristics, handling of the vehicle, it's an overall better vehicle. We've got better drivetrain efficiency, we put more power to the ground, to make him put to the ground on it. I can tell you that the step function improvement of the new vehicle, compared to our current range RZR right now, is a dramatic increase in performance. I mean what you saw, if you saw the videos on it, the suspension, the power, the handling, everything about that vehicle, it's as big of a step up in performance as like a RZR F is to a RZR XP today, it's that level, again.

Scott W. Wine

Up on that a little bit, I mean, the XP, again, you've seen some competitive model introductions, but it nearly didn't slow down the XP 900's growth. I mean, that still continue to retail, it's still the best-selling high performance -- it's all good and I think as they said, it's hard to do what we did, but it's a quantum leap forward. So I don't think there is any competition for this vehicle.

Unknown Analyst

[indiscernible] Can you talk about how the first time buyers [indiscernible]

Unknown Executive

Okay. So the question's about demographics and how they're changing and shifting, short-term, long-term for base vehicles and for RZRs. So as we look at that, the base demographics we're seeing, we're seeing a shift. We changed our marketing shift to specifically go to broader reach. We were looking to try to bring additional consumers and new consumers in. We just don't want to be in a straight market share war. We want to grow categories. So that's a specific strategy that we are executing on, and we're trying to deliver against that. So as you go in to the segments, the RANGER 900, that was where were specifically last. This past year we've been very loud in our marketing about going into new consumers. Who they are, bring them into the category. The consumers are slightly different, okay? That consumer is different than your rancher-farmers. Do these rancher-farmers buy that vehicle? For sure they do. But it also is bringing it out to more multi-acre homeowners, people who want more refinement into the vehicles as well. So we are able to reach kind of the border categories that we're trying to get into and bring people in. RZRs, it's a similar type of a war that's going on in there, but it's slightly different. Again, as we look at that population of 18 million to 20 million that we say are outdoor lifestyle people, that we're trying to get to, on it, versus the 4 core powersports, they're people that right in our space that we've just never talk to. Similar profile. So it's one person can live on the street that owns a RZR, person right next to him isn't buying a RZR, And we just got in to understand, why aren't they buying RZRs? Or where does it go? What's the difference in lifestyles? It's not a tremendous difference, but it's how we reach them how we communicate to them, how we bring them in to the experience.

Unknown Analyst


Unknown Executive

Okay, any other questions? So we're going to take like 15 minutes, maybe come 10 to 15 minutes, maybe 10:20 a.m. we'll get started again.


Unknown Executive

Okay. Next up is Matt Homan. He's going to cover small vehicles and EMEA. So he's got to -- doing double duty, again, this morning as well. So Matt?

Matthew J. Homan

Good morning, everybody. Is this working? You hear me okay? Okay, good. As Richard said, am going to cover small vehicles first, and then we'll take questions, and then, afterwards I'll cover Europe, Middle East and Africa. It will be a little bit of overlap because our small vehicle business today is European driven. So I'll kind of cover that in both presentations and give you a little flavor for where we're going there.

So on small vehicles, really, a few goals for you today, number one, I want to give you a framework for what the market is and why we like the space, okay? That's number one. Number two, I want to talk about the businesses we have in small vehicles, how they're performing, how we expect them to perform, moving part. And then the last thing I'll leave you with this morning is really a snapshot of where we are in the business, where we're going and show you the progress we've made to date. I actually showed this exact same slide I'm going to show you to a group of management at Polaris about a month ago. A lot of people, even internally, were a little surprised at some of progress we've made, because we've make a lot of progress over the past year.

So this is a view of the global market, okay, by segment. And there's about a $4 billion space, so it's a large space. It is growing. We think the growth is a little slower in 2013, primarily driven by Europe being slower. Europe's the second-biggest region after North America. And 5 key segments, we play in 3 of the segments today. But really, if you look at it, 2 of the 3 we play in, we're pretty small. We're just getting going, right? So if you think about this macro space that has growth potential, we're playing 3 of them, one of them, enclosed quadricycles, which is the EQC space, we're the leader, the other 2 we play in, we're small. So we have potential to grow here. Then if you look at the growth drivers and the key success factors on this slide, I don't think there's probably going to be a lot of debate about that, the trends are in favor of these spaces continuing to grow, moving forward, which is one of the key reasons we like the space. If you break it down one step further, by region, I think this is important and, actually, I think it will explain our business a little bit to you, is -- so you got a global market, but it's not the same in every region, not unlike a lot of different markets, right? So you look at North America. North America, golf is the key driver. North America is the biggest market, small single-digit growth right now. And we have GEM, so we really getting going in North America, is how we describe it. I'll take you through what we're doing on GEM. We are making nice progress in 2013 in GEM and actually feeling quite good about where we're going there.

Europe, this is the middle space there, is the second-biggest market, flattish right now. Actually a couple of the segments we actually are down a little bit this year, as the European economy, especially in Southern Europe, obviously, is quite weak. I know you all know that as well as I do. And -- but if you look at where we['re at today, I'll take you through some the metrics here, but we're very strong in Europe with the Aixam Mega and Goupil brands that we now have in Europe. So I'll describe for you where we're going with those businesses and give you some more context here.

And then in Asia-Pacific, Latin America, but primarily Asia-Pacific, although there's opportunities as well, obviously, emerging in Latin America. Right now, light duty haulers and people movers are the segments that are the biggest, but it's changing pretty rapidly. Golf is growing in that space, actually most of the segments are growing in these markets, and we really are just getting going. Mike Dougherty will talk to you a little bit later about our iShare partnership, but some of those things could also fit into these spaces as well to help support the strategy. Okay. This is a quick overview of the competitive space, kind of break it into 3 buckets for you. First one is golf. So you look at the golf players, there's 3 dominant players, you guys know this a s well as I do. There's some great strength in these companies and we compete...

[Technical Difficulty]

significant room still for improvement there. So as they stand in line and make sure we do it efficiently. When we have G3, which is this product, actually, right here on the left, and now launch this G5 vehicle, second platform we launched in January this year, which is a bigger vehicle. It had hybrid and electric engine in it or drivetrain in it. And you have longer range and you can reach more customers with this thing. So we're going to take their existing platforms, not proliferated it with complexity, but expanded simply to reach new customers.

So how are doing? Basically well, I guess, would be the summary with the green arrows here. Double-digit growth, unit growth was our goal, double-digit revenue growth was our goal this year. We needed to expand margins, because as I mentioned, they were not a super efficient operation, and we've made significant progress on margin expansion over the last 18 months, we feel really good about that. And obviously, we're a very profitable company, that's a focus, obviously, you guys hear about it everyday. We wanted to bring that to these guys as well and we made real nice progress on that. So in summary, on Goupil, the trajectory and all the things we want to do, heading in the right direction, we feel really good about it.

Okay. I want to talk about Aixam Mega a little bit. Again, I know a number of you heard about this over the past several months, as we've acquired the company. Actually, the 2 -- 2 of the key leaders of that company are here this week. Philippe Colançon, he was the CEO of Aixam Mega, and he's continuing to run that business for us, along with Goupil, he's this week. But based on these 2 businesses they have, enclosed quadricycles is 90% of their business today. These are cars people use, don't have to have a driver's license and I asked the question myself as we're looking at this company for 18 months, I wouldn't buy one of these, who's buying these vehicles. Well, who's buying these vehicles, if you think about it, if you live in the rural part of France, and you're older, and you don't want to pay EUR 1,000 or EUR 2,000 to get a driver's license, what is your alternative to get around to the grocery store or see relatives or whatever? You don't have one. There's no public transportation. You could buy the scooter, I suppose, but probably not a great idea. And so what they do is, they buy these vehicles. And they've also expanded it to younger people. So people buying scooters, people are nervous about the safety of scooters and they buy these vehicles as an alternative to scooters as well. So it's primarily a French niche, an Italian niche and, actually, there was a large market in Spain, like many markets, until most of those have gone away, which are the small businesses in Spain. You can kind of read the different lineup but these guys are very lean, very efficient, very well run company, and we're doing is bring some of -- a little bit of the spirit of innovation to the company.

They also have light duty commercial business, which is mostly incremental to Goupil, except for this middle vehicle here, it's very similar to the G3 vehicle. So we're doing, as we're taking those vehicles, building a plant for how we're going to expand that together, and really what we're going to see is sales synergies there. So that's Aixam Mega. Why we like it, when you look at what I have to do in Europe, we'll talk about that next, our team has to do Europe, if I want to get Scott and Malone and the team to invest in Europe, with the economy not being where it is, we need to self fund a lot of things, right? This is a profitable company, a strong cash flow company, and it strengthens our overall EMEA business. And it also adds distribution opportunities and talent to our team, which we needed in Europe as well. On this commercial synergies with Goupil, significant ones, actually. So if we want to grow, $100 million-plus commercial business in the region, while it's difficult to do that when you're starting with the 1,000 units with Goupil, adding a thousand units or so with Mega, gives you just a little bit of scale, something you can start to work with on the distribution side. And then this is a longer term, but if you think about what Polaris does well, Chad and I were just talking about this outside, we make what? Heavy off-road vehicles with amazing suspensions, but we're also really good at cost, we're really good at manufacturing and we also have a lot of technologies, like electric technologies, et cetera, we've put into the family over the last few years, right? These guys, what they do is they make lightweight on-road vehicles. So if you can imagine the 2 strengths of each company coming together, we can maybe do some pretty interesting things down-the-road with new products. So we're looking at some of those things in the future. That's why we like the company and I would say, overall, early on, the company's performing as good, or maybe even a little bit better than we expected.

Okay, this is GEM, and GEM's an interesting business. I've kind of got involved in this, starting January of this year, so I had a lot to learn on this business. But really was we've got is a people-moving business and a super light-duty utility business, but primarily of people-moving business. So you got a futuristic, even though the platform is actually relatively old, vehicle, that is -- people want as a premium people-moving product, That's what they're buying. And you also do a little bit of light work with it. Although I tell you, as we look at the future, we think there's significant opportunity to improve that side of it. The other thing that's changing and the team has done a great job of reacting this year is the business used to be personal -- people buying for themselves. And it's shifting to be more of a government, commercial, national account purchase, and so what that means for us is, we're a dealer channel kind of consumer-driven company. We'd have to refocus our sales efforts and hire people and get some talent to go after the commercial and national account side of things. We've done that. We're starting to see the benefits this year.

So our goals this year, we wanted to get back to growing on GEM, and we've did most significantly in the first half of the year, and we expect to see strong double-digit growth throughout the full year on GEM. So this is really good to see and we're really encouraged internally. We also had a lot of basic things we needed to do better. Delivery times had improved dramatically. We had to do that better. We had to improve the quality. The guys are talking to the GEM dealers today, and one of their main message is, is all the quality improvements we've baked into the vehicle this year, so significantly. And we also needed to do some basics. How do we find leads, commercial leads, things that we're not necessarily as good at. So we put some effort, brought some talent in there, and our lead generation is up significantly. So that thing starts to pay off in orders and starts to pay off in sales, that's you're seeing here. So we're starting to see some traction here, which is pretty exciting. And the last thing is we got to start looking at new spaces. I told you we're essentially a niche within a niche, with GEM. We need to start getting after some new spaces. So this is a little sneak peek at a potential vehicle we'll be launching by early 2014. That will be a GEM electric vehicle, a low speed vehicle, but it'll be a little bit harder working in areas we're good at, right? We know how to do this, and very cost-effectively, by the way. And we can expand to GEM brand, we can expand distribution and, frankly, give our channel more to sell and more to expand here. So I think we're going to see some dividends from this product when we launch it later this year, early next year. Okay, so small vehicles, overall, 2 more slides for you, goal is to drive revenue overall significantly and we're doing that, with the Aixam acquisition's obviously a big help. We needed to execute the Aixam acquisition, that was a significant acquisition for us, right? And proud to say that Ballen [ph] and the team and a bunch of people working together, we've executed that quite well, it's on track. Improved profitability. We've improved profitability significantly and we continue to do that. And we have room to keep going there and we're going to keep getting after that.

Launch new products and prepare for growth. We've got to do both those things. We expanded the Goupil line and we're going to expand the GEM line. So we got to kind of prepare for new things. We'll continue to look at future growth opportunities.

Okay. Last slide on small vehicles and I'll take your questions. Just want to leave you with this thought, when you think about, a year ago, many of you were here versus we're at today on this business. We're about $40 million, $44 million, I think, is what we reported last year for small vehicle sales. If you look at the annualized sales, not the 2013 number, but the annualized number, we're about $170 million in sales now. So that's progress. We have a little more scale, we're don't have the scale yet, but we have more scale. We had one North American brand last year that had a lot of room for improvement, that's GEM. This year we saw North American brand, but the business versus last year, the trajectory is significantly different. So we feel very good about that. Last year, we stood here, we had one, we had Goupil. That one small North American -- or European brand had opportunities to grow, right? Now we have Aixam, which is a strong brand in Europe, Mega and Goupil, so we're much stronger than we were last year. And we needed profit improvement last year. We had plans to do that. We felt confident about it. We had to go do it. And the teams have gone and done that. We've seen significant improvement this year. And on a local level, we're seeing the profitability that you guys would expect and we would expect. So I would tell you, if you look at the vision where we're going, I showed you that vision to a billion. You might have asked yourself last year, how's that going to happen? Well, $170 million today and we're making progress towards where we want to go. So with that, I'll open up to questions.

Unknown Analyst

How much opportunity is there to move to a common platform [indiscernible]

Matthew J. Homan

So the question is, how much opportunity is there to move to common platform, as to get out cost versus previously separate companies. There's significant opportunities. I'll give you an example, let's see. So you talk about Mega and Goupil, and building 2 different vehicles in 2 different manufacturing facilities, some similarities, a few common suppliers, but quite different. Over time, there's really no need for that, right? We should be able to do both -- sell both customer opportunities on one platform and still have some differentiation in the vehicles, that's one example. As we look at expanding GEM or other area -- or other potential acquisitions, we have a base now. For example, in Europe, we've got Aixam, which is a really good manufacturer. If you guys could see what they do, you'd be -- it's one of these companies that just surprises you when you get in there, what these guys are capable of doing. And of course, we have our Poland facility going up, so it could be opportunities over time there as well. So we'll see where that goes. We need to get a little more scale before we do that, but there'll be opportunities for that as well. So for sure, that's something we're looking at. Mark?

Mark E. Smith - Feltl and Company, Inc., Research Division

[indiscernible] that this industry's more like maybe the snowmobile industry in that 70s, 80s with a lot of small players that over a decade or so, we're going to see a lot of consolidation and only a handful of players come out of it.

Matthew J. Homan

Well, I guess, we have to tell you that I think that, we're dissimilar as that, I think, over time, there's an opportunity for somebody to emerge as the leader of the space, maybe a couple of players, but for sure, [indiscernible] that's why we believe it and relayed that out. I think there's a lot of other big differences from the snowmobile industry. But from that angle, I think, I would agree with you. In a -- you look at the industrial space, for example, I showed just a handful. There's a bunch more competitors. And each region of the world has the same thing, basically. So, yes. I think -- if somebody can get scale and if somebody can find the synergies we're talking about here to get some common platforms and get some distribution built up in each region, they can start to roll. Scott?

Scott L. Stember - Sidoti & Company, LLC

Last quarter, you posted [indiscernible] growth as you invited [indiscernible maybe just flesh out a little bit more where that's coming from within GEM. What -- which customers [indiscernible] how that growth started to take off in the last 2 quarters.

Matthew J. Homan

Sure. Okay. I got to be Mike Malone. I can't say anything. I can talk about something that sounds great but when I thinking it... No. For us, what we're seeing on, Goupil, as an example, we're seeing expansion outside of France. Although France is growing nicely this year, as well. So we're seeing market expansion in France and outside of France, and we're starting to get some early sales on that G5 vehicle I told you about. When you look at GEM, there's 2 things on GEM. We did a significant expansion of our North American channel with GEM last year, so we found the right dealers who can sell commercially and put GEM in there, last year. And we're seeing some of the things are going well there, as well as our commercial business is doing significantly better there. And of course we do have some Aixam as well. Any other questions? Okay, Gary.

Unknown Analyst


Michael P. Jonikas

So Kubota is their primary source. So yes, I'm glad you brought that up. So Aixam is mostly diesel engines. These are very -- it's difficult to -- these are low performing vehicles. They have to meet certain regulations, in speed regulations. They can't go very fast. And so really the only real solution is a very low-powered diesel engine although the electric vehicles are expanding there as well. So no, they source that in. Of course, that's a high part of the cost of the vehicle.

Unknown Executive

Okay, we've got to move on to Europe. All right?

Matthew J. Homan

Okay, I'm back to Europe. I want to give you a little bit of an overview of the market again, so you kind of understand what it is, because I know you're not as close to our region as you are, obviously, to the North American region. Talk a little bit how were performing and how we see the rest of the year looking. And I want to talk just briefly about the new products in Indian and how it fits, because each year, I talked a little bit about this least year, but each -- some years are better than others, for new products that are going to impact a specific region. And this is a really good year for the products that the guys have launched. They're really going to help our region, so I want to show you that. Then I'll talk you briefly about the future, where we're going. Okay. So this is the market defined. I think about as 2 essential -- essentially different markets, you got Western Europe, which is really more of our developed market. And actually that won't even have to break the north and the south. The north is very -- Scandanavia is different than the southern part, both economically as well as usage. I'll show you that. And then you got the growth markets. We call them Russia, Middle East, Africa, and Eastern Europe, our growth markets. And we're seeing nice growth in those markets. You can see the shift a little bit more towards growth markets. Frankly, we like to accelerate that more, as we move forward. But we're performing relatively strong in Western Europe as well, so it's -- I have a little trouble outpacing that, but we are seeing expansion to the growth markets. And I think that will probably shift a little more over time. This is usage, I talked about how it's different, the northern parts of Europe are primarily utility use. So for example, in most of Scandanavia, you cannot drive our products on -- only on private property. So it ends up being, for ORV, for example, work-oriented. Snowmobilers can be a little more recreation. But for ORV, it's primarily work. Southern is a bigger recreational market and growing utility market. It's also a significant motorcycle opportunity for us. We've had some good success with Victory and we think we're going to have a lot of success as we move forward with Indian. And we're actually doing quite well with motorcycles in Scandinavia as well. Just a smaller market.

If you look at Russia, Russia's a very interesting market, I don't know how many of you have had a chance to go there, but it's a fascinating place. And significant opportunities for us, we do very well in the premium Off-Road Vehicle space and we do well on snowmobiles, but we are under-leveraged in utility snowmobiles right now, so we have opportunities to grow there. And we are under-leveraged in value, low-priced products, since we've had opportunities there over time as well. There's a strong market for both. So look at the Middle East, it's primarily a recreational, we call it an ORV market, by it's really a recreational side-by-side market right now. And we're working very hard to expand. We do most of our sales in Israel and in the UAE. But there's opportunities in Saudi Arabia, and other spaces where we're trying to -- working very hard to expand in right now. Then Africa is a future thing we -- Scott reminds us a lot, do not take care your eye off that because that's going to come. If you take the macro Polaris view of what we're working on, there's a lot of things that are going to fit together over time that are going to help us in Africa. But were primarily a South Africa business, although we have expanded into a number of the other stable countries in Africa over the last year.

Okay. Here's our business defined. The key point here, a lot of numbers, is that we seen a shift over time towards side-by-sides, little bit of away from ATVs. Actually our snowmobile business has gotten stronger over time, which isn't always. We like to see more and more side-by-sides of course. That's our highest margin product on but the snow business, especially in Scandinavia helps our PG&A business a lot, so that's been a nice swing for us. And then of course the shift in motorcycles getting stronger, I would expect that to change more significantly over time as well with Indian. One note here is we did see in 2011 to 2012 side-by-sides drop for the first time. That's something we're keeping a close eye on. In '13, it's back up, which is great, that's what we want to see. But when the economy started to really hit crisis last year, and our markets were down significantly, people went to the value products. But the good news this year, it's stronger again. To give you a quick overview of the growth markets, just to give you a little more color, I have touched on a little bit of this, but Russia, again, is a very interesting market. We have opportunities, as I mentioned, to grow in snow, I think, Johnny just touched on that, just a little bit. Value products and motorcycles, we're doing very little on motorcycles, it's not a big market for heavyweight cruisers in Russia, but we do think there's, over time, there will be more opportunities as that market continues to emerge. Middle East, for us, really, distribution is important. We have strong distribution there. We got have opportunities as I mentioned in Saudi, for example, to expand. And we think with the RZR 1000, I mean, our distributor from UAE is here, he came in and saw me last night in the display room and he was really shaking. He was so excited about the RZR 1000. These guys are -- it's going to be big for these guys, which is great. And also, there's a decent motorcycle market there, and we're under-penetrated there. So we think with Indian, we have a chance to that and they're excited about that. Then in Africa, it's really geographic expansion right now, is what we're doing. We're creating a premium market there, but there's only so much you can sell a premium product, right? We need some value products over time, that we'll work on.

This is the industry trend, to give you a flavor for how things are going. If you ask me, if the European business -- European markets are -- the economy is weak, I will say, yes, it is weak. We have a lot of hope here in America, when -- after you go see how things are running over there. But the ORV market's down in double digits right now. And so it's weaker than -- we expected it to be down, upper single, the low double this year. It's a little bit worse than we expected. Fortunately, we're performing -- outperforming the market, I'll show you that. Snowmobiles, again, primarily a Scandinavian market, [indiscernible] economies are pretty strong was up in the season. And the motorcycle market is down single digits this year as well, which is a challenge for us. Luckily, we're still getting share, and we'd really like to see that market come back to show some growth. And we think, a little over time, it's just going to take a little time.

Okay. This is a competitive landscape, I certainly can answer more questions afterwards if you want, but we're the only brand to be gaining share in all 3 segments here. So we're gaining significant amount of share in off-road vehicles, we're a clear #1, we are gaining -- we gained a significant amount of share in snowmobiles this year, really nice year by our Scandinavian team. These are western European numbers you're seeing here, and we are getting share in the motorcycle business. A little less share than we wanted to gain this year, to be frank with you, but we're still gaining share. And they're going to use Indian to help us accelerate that more as we get in to the fourth quarter. Couple of notes on competition for to see we have framework. The off-road vehicle market, is much more weighted towards value Asians in Europe, than it is North America. So of course, you have your Hondas, your Suzukis, et cetera. But you also have, as you can see, Kymco, TGB and other companies who are playing in end of market 45%, 50% value Asian, which is a different challenge for us, right? So we have to compete a little bit differently. In snow, BRP was flattish this year, the other competitors were down, we were up significantly. And were seeing quite a bit of movement from Harley this year with their 110th. Some of these products, Steve was talking about, are doing well in Europe as well. And then we're really the only other brand there that's growing. Okay, well, Suzuki has grown as well.

Okay. So how are we doing in the first half of the year? Our goal going into the year, we didn't quite know what to expect. As I told you, we were planning for a difficult European economy. We wanted to be prudent there. We wanted -- our team wanted to deliver revenue growth even in those tough markets. I'm happy to say we're doing that. We're up double-digits in the first half of the year. We're up single-digits if you take Aixam out. So even without Aixam we're getting a little benefit from that. We are still growing, which is something we're pretty proud of considering how tough the markets are.

Really it becomes a share battle, right? You've got to gain share in these spaces when the markets are weak. Well, we're doing that. Every one of our segments, we're gaining share in this year. So we feel really good about that.

Talking about Goupil already, in the small vehicle section. But that was a key focus point for us. We needed to keep its momentum going in the right direction. On Goupil, we're doing that. We wanted to integrate Aixam into the team, we're doing that quite well. And it's a challenge, right? It's a much different culture than we are. And it's a French company and we're an American company. But I'm really happy to say it's gone really, really well. They've got a really good team, and we're enjoying working with them.

And we wanted to execute our operations transformation. I'll take you through that here in a little bit. There's 2 pieces to that. It's a distribution center and it's a new plant. So I'll show you a little bit on the plant here coming up right now.

So this is our picture. Bennett showed this last night. I think Suresh will give you a little more detail on it, so I don't want to steal too much of his thunder. But the net of it is we're breaking ground this month in Opole, Poland, on a manufacturing facility for ATVs and side-by-side. These are some of the metrics that you'll see, so it's a fairly good-sized facility, 350,000 square feet, and we do have room for expansion in the future if we see the need for that or have additional product lines we want to put in there.

If you look at the business case here, I mean, just to break it down to its simplest form for you, imagine putting a RANGER in a box, shipping it to a partner, who takes it out a of a box, puts it in another box, takes it to a port in North America, puts it on a boat, sends it across the ocean, takes it out -- somebody takes it out of the box, throws away a bunch of pieces, put European pieces on, and that goes out to our market. Doesn't sound like the most efficient opportunity -- efficient business model, right? So as we got scale, it made sense for us to invest in this to really get some efficiencies and help us invest back into our business. So that's essentially what we're going to be doing starting in the second half of 2014 with limited production. And then we'll ramp that up and add models as we go throughout 2015.

So here's the outlook for the year. I'll give you a little flavor for how we see the year coming together. Approximately $430 million in revenue, strong growth, Aixam is helping drive that. We do still see mid-single-digit growth, potentially a little better, we'll see how it goes without Aixam in the numbers. So we think we'll grow even though the markets are down significantly. Solid margin expansion. The team has done a really good at that. We've had a few things go our way as well in currencies, et cetera, but we're -- the team's doing a nice job of managing the margins and had a plan on profitability. So the business is performing, actually, as expected or slightly better than expected, which is great news.

This is the new product I was talking about. And I won't talk a lot about this because I know you've seen a lot. But when you look at our market, the #1 product across our region that is sold is the Sportsman 500, by far. We use that to compete against some premium models. We use that to compete against value products. We don't have a low-end value line up, right? So for us to get a 570 at a nominal price increase is a significant thing for our region, and people are -- I just heard it from a number of our partners this morning. They're very excited about this, and we saw the Sportsman 400. So we have a nice -- what Dave described last night is completely true in our region, and it's going to be helpful.

The RZR 1000, especially in the Middle East, but also in France and some other markets, is going to do very well. There's a lot of hype and buzz going on, on the websites around the world about that. And then the 570. So again, I'm a little biased, but we, as a company, sometimes get so excited about RZRs that we forget about -- we don't forget about, but we downplay RANGER a little bit. When you look globally at RANGER, especially on our region, the opportunity is significantly bigger for midsize RANGERs than it is for RZR 1000s actually over time and for larger, more expensive RANGERs. We have less space. These things are more expensive. We have things the RZR 570 is going to do -- both those vehicles are going to do quite well for us. That's good news.

We also have good news on Victory. This is -- the motorcycle team has done a really nice job of working with us to develop models that make more sense for Europe, whether it be colors. In the case of these vehicles, these have ergonomics that are fit based on the Judge, the Victory Judge, which is really well received in Europe. Actually, more better received in Europe than it was in North America. So they're helping us create limited editions that will bring some of those ergonomics and those color and those things that the European customer wants. And so we're able to bring this to our partners. So this is -- it doesn't get the buzz, maybe, that's some of the things you see, but this will make a difference in our business here, and we really appreciate that. The motorcycle guys are reporting that.

And of course, the Chief. Chief arrives this summer, right? We're close here. We're all going to get to see the products and experience it. And I'm just here to tell you that I didn't know what to expect when I went to Europe about how Indian would be received. I knew there was a history there. And I knew there was some brand there, but it has, quite honestly, blown me away. The excitement, the passion, the history of that brand, even in Europe, is very significant. We have had significant dealer interest, significant consumer interest. And really, what we've done right now is we've mirrored the North American plan by generating buzz with web teases, short videos, the Chief is coming, just some simple things, and it's really, really been well received. We'll be right along with the North American team doing the global launch at Sturgis. We'll have 30 of our top industry press at that event, covering it from -- for our region, which is a big deal. They're making personal investments to do this. It's going to help us get off to a good start. And we've been building our channel. You can kind of sort of see, I guess, the picture there of how we're doing it. We are taking the North America strategy for dealer development and executing it locally in Europe. So really, the only key differences are we have less space and the markets are a little smaller, so we can't have quite as large of an investment. But for our dealers, these are significant, significant investments they're making. And quite honestly we're having no trouble getting people to do it. We've got about 60 dealers signed up today. We have 80 here at the show, which is a big deal for us, to have that many dealers here. So we have actually more dealers here than we signed up for Indian. We're not gonna sign them all up. They probably all want to. But we're going to take this slow -- or I don't want to take it slow, we're going to go fast, but we're going to get it right. We're not gonna put people in who are not right. And we're going to build the brand, as Steve and the guys have laid it out.

So the summary here is if you had one opportunity over the next 5 years, that's the biggest incremental opportunity for us, it's Indian. And we've got opportunities in RANGERs. We've got opportunities in side-by -- RZRs and in ATVs, and snow in Russia, et cetera. But this is the single biggest incremental opportunity and, certainly, the biggest launch we've done in a long time in Europe, and we'll keep it that way.

Okay. This is where we're going. I'm almost done here. Really, there's 3 things we're doing in our region, build the current business, which is really about market share right now, and getting this motorcycle business jump started with India. That's what we're doing. And we're, as I've shown you, we're being pretty successful in both. We're transforming our operations. This isn't just a plan. We put up European distribution center in this year that frankly was a little bumpy for the first month or 2, but today is now performing better than our old distribution centers. Our fill rates are better, our speed is getting really good. We're saving money on it, and we're also going to add some -- a lot of customer service capabilities to help build these brands and these businesses the way Bennett and Scott have been talking about. And so we'll be making those changes over the next couple of years as well. So we're on track on operations as well.

And then the last strategy is grow in new spaces within powersports. So you'll see, over time, some more tailored European products, but you'll also see us continue to look at new spaces like Aixam Mega, et cetera, because we do want to diversify and give our self a chance to get after some growth markets in Europe and in other parts of the region as well.

Our goal is $1 billion by 2018. We're about halfway there, and we got a lot of work to do. And obviously, the economy is not a friend right now, but it's going to bounce back at some point, and we're going to be prepared to take advantage of it when it does.

Okay, I think I really summed this up already. If you look at the 3 parts of the strategy, we are on track on both the building it, and transforming the operations in, getting after the growth markets. We've got a lot going on in our region right now, and the team is executing well.

So with that, I'll open up for questions.

Richard Edwards


Jimmy Baker - B. Riley Caris, Research Division


Matthew J. Homan

Yes, it's a great question. So the question was PG&A attachment rates versus North America. We're lower than North America. It depends which -- some parts of Scandinavia we're actually a little bit better on snowmobile, but overall we're lower. The primary reason we're lower is because we're 50% subsidiary, 50% distributor in our markets, okay? And so the biggest opportunities for us, and we've got this all matrixed out, our big distributor markets, Russia is a good example of that. So there's 2 things: one is getting the distributors engaged and motivated to make money, like we know they can on it, which we're working on. That's probably the -- it's hard, but it's the easier. The second one is getting the right products. Part of the reason we're underleveraged sometimes is we don't always have the right products for the market. And so we've got a plan with Eastman's team right now. We've got a Product Manager we added earlier this year, who's developed that plan. And over the next 12 months and 18 months, you'll see more products coming out that fit our market, so he'll help us with that. So there's an opportunity there in the $6 million to $10 million incremental opportunity of profit there for us. Great question.

Richard Edwards

Over there?

Unknown Attendee

Talking about margins, [indiscernible]

Matthew J. Homan

Right. So the question is talk about margins and where we see that going. This is a Mike Malone question over the medium term. So If you look at our margins over the years, we're a very profitable business in Europe. We've acquired Aixam, which is a very profitable business. It really runs well. You look at Goupil, we're under-margined in Goupil. We're not anywhere near we want to be. Our gross margins are pretty good, but we're spending -- we don't have enough scale yet to justify the expenses we have there. So we have opportunity to improve that business. And if you look at where we're going over time, we don't see a major shift in subsidiary versus distributor layout right now, and that obviously affects our margin, but we're investing significantly in growing motorcycles, which would be helpful. And we're also getting after 2 other areas, which would be helpful. PG&A, the question was just asked, which is hugely helpful, obviously for our markets, and then side-by-side. We're getting good traction there. So I think we have opportunity to expand margin. And then the last piece, which is a huge one, is Poland. So I talked about a simple example of what we're doing. If you look at our -- if you could see our long-range plan, one of the key drivers, in effect, big driver for the company is the Poland facility in the logistic savings and labor segments we see there. So It's a key focus for us, and I would be very surprised if we don't make significant traction there.

Richard Edwards

There's one over here, yes?

Unknown Attendee

[indiscernible]side-by-side, why not snowmobiles [indiscernible] Russian market?

Matthew J. Homan

Yes, that's a good question. The question is why ATVs and side-by-sides only and not snowmobiles? First of all, volume, right? We have scale. Secondly is we want execute really, really well. Third is if you look at the logistics savings, the bigger -- biggest opportunity is in off-road vehicles. They're much larger. We make -- the homologation needs are much more complex, so we throw -- we end up changing a lot more in Europe. So when you look at the payback on it, it's not even close. ATVs and side-by-sides is where to focus on. We're not saying never to anything in the future. As I mentioned, we have room to expand, but right now the focus is going to be there. That's where we can get the payback.

Richard Edwards

One more. James?

James Hardiman - Longbow Research LLC

Yes, I think a lot of people were pleasantly surprised at the coverage you guys [indiscernible] About brand awareness in Europe.[indiscernible] How do you sort of [indiscernible] the offering above the other American offerings? It seems like [indiscernible].

Matthew J. Homan

It's an excellent question. The question is how does the Indian fit in the European market? Is it harder than it is in North America? I think most of you heard it, but that's a really good question. And quite honestly, I had the exact same question and viewpoint when I came over to Europe. I didn't know the answer to that. I was nervous about that. And France is not that different than North America. The awareness is very strong. You got to remember -- Steve showed us the video. In World War II, how many of these bikes were left over there. There's a strong history for it, and so I'd say the differences are -- we're not going to be able to be as competitively focused kind of poking fun at the big guys much, because we just don't do that in the European markets for legal reasons, and also it's just not -- that's not something you do.

So we'll be a little bit more playing on the genuine authentic part of Indian that Steve talks about. But really, what's beautiful about this, and when you look at the global launch strategies, they're very, very similar. And we actually have, in some ways, an advantage because the Victory brand was actually done quite well in Europe. And we've carved it out in a niche space that is really where Steve and the guys want it to be. And we didn't have to redo it from something else. And so Victory is a little clear in Europe than it is here. And Indian then will fit in a little bit more easily. So honestly, I don't -- I had the same question, but it's not that different.

Richard Edwards

Okay. Thanks, Matt. Next up, Mike Dougherty, Asia Pacific, Latin America.

Michael D. Dougherty

Good morning. Yes, this is Mike Dougherty. So I'll talk a little bit about our business from the other part of the world, Asia Pacific, Latin America. Currently, we have one manufacturing location, that's in Monterrey, Mexico, and we have 5 subsidiaries throughout the region. Our oldest and actually, largest core powersports subsidiary is down in Australia, Australia and New Zealand. And then, more recently, we've opened up offices in China, India and Brazil.

And last year, we established a joint venture in India as well with Eicher. And then we have distributor coverage in most every major market in -- throughout Asia and Latin America.

So what's different from a year ago? Probably the biggest change is our ORV market in Australia, which represents about 2/3 of our overall revenue. It's down about 15%. So the main business is down. We're starting to see a slight recovery in the second quarter, but that's really kind of giving us some major headwind as we move into the second half of the year. The initiative that we kicked off a few years ago of creating the powersports market in both India and China is going a little bit slower than maybe we had hoped, but kind of what we expected, and we are still out there battling in those particular markets. But despite these challenges, we are seeing our BIC organic growth growing. It's up about 50% year-to-date, and we expect that trend to continue into the rest of the year.

Latin America is strong. Brazil is driving that growth. Our motorcycles are strong. We're expanding our Victory throughout the region. And now with Indian coming, we expect this to be a long-term growth opportunity for us. And the joint venture with Eicher that we established last year is on track to deliver our expectations for this year moving into next year.

So the plan is to continue to grow our overall APLA businesses. It's been growing at over 20% a year, year-over-year. We probably want to achieve that this particular year, but we will see some growth. Again, Asia Pacific, down a little bit because of Australia. Latin America up nicely, they recover, and our nice BIC growth. Our overall business is driven by the 2 core businesses of players today. The ORV business, we want to be an ORV leader throughout every market in the world, and that's our expectation.

And then expand our motorcycle business with the Victory expansion and Indian launch, and introducing him to actually the largest motorcycle market outside of North America, which is Japan. And then our strategic partnership to help us develop some new products for our large growing markets moving forward. So the Eicher players team will kind of come to the middle of it more.

So how are we doing first half of the year? Total business, Victory is growing about 25% so far, while our ATV business is down. You can see the split. It's about like what North America is. Side-by-sides is our biggest market. Victory is continuing to grow. Australia market's down, and China and India are slow to develop. But Latin America is doing quite well right now, with Brazil driving that growth. Australia, down year-over-year, fighting for our #1 share. You can see side-by-sides are big part of our business. Victory is getting to be almost 20% of our business down under. Probably the best part of our business going on right now is for Off-Road vehicles is what we've accomplished in New Zealand, which is one of the top 5 International markets for Off-Road vehicles. We've historically underperformed there. But over the last couple of years, we've really convinced people that side-by-sides are the way to go. So we're seeing significant progress in our share and our revenue and profit coming on in New Zealand. And those guys down under, they're doing a heck of a job with our motorcycle business. We own our own 2 dealerships, one in Sydney, one in Melbourne, and also an independent network of about 5 additional. They've been growing our motorcycle business significantly down there, gaining share, delivering some nice profit. And we're aligned with the North American guys and the Indian group to be launched in India and concurrently this Saturday, actually, down at our Sydney dealership. And we've actually already have significant deposits in hand. We've presold the bikes, sold them before they sell at the prices before they've seen them, and we've got -- generated a ton of excitement so far for the Indian brand in Australia.

Plus China. Actually, sales are down year-over-year in Polaris China, that's primarily because we had some big orders last year from some commercial guys that didn't materialize yet this year. But the core sort of recreational market going to our dealers is actually about flat this year, selling mostly side-by-side products in North America -- or excuse me, in China from an Off-Road Vehicle standpoint. You can see the small ATV business. China has a lot of ATV manufacturers based in India -- or based in China, so they can get sort of cheap ATVs over there, but nobody can offer the RANGER side-by-sides that we have. And we're seeing a nice impact for most of our sales right now are the RZRs, and people are excited about it. So the market is slowly developing. We haven't penetrated the commercial segments to the level that we'd like to. The Brutus is giving us an opportunity to go after some new customers there. We expect that to happen sometime in the second half of this year or next year once we are able to land a couple deals there.

The motorcycle sales is really driving most of our growth right now. We launched Victory last year in Beijing, and we've opened up a new dealership in Shanghai this past year, and then also Chengdu. We've got 3 dealers right now. We've got some nice growth happening, and we expect to launch Indian. I'll probably actually be able to start selling Indian early next year in China. So building a foundation for Polaris in China, we're excited about what the future holds.

Here's some of our pictures. One of the challenges that we had is really creating the powersports market in China. And we've got a teach people how to ride. They need to feel the know where to ride, and we're building, actually, an experience center outside of Shanghai, doing a lot of community building events, sponsoring some racing, teach some people how to race and ride, attending the commercial trade shows, and then building some world-class dealerships for our products over there. So there really are a lot of good things happening in China right now for our products.

Polaris India. Year-over-year, the sales are actually going pretty well. This network is established with about 24 dealers. We actually have about 6 of them that are here in the launch this year. It's going well. They're building really a high-class dealer network. I think one thing that they've done differently than we're able to do in China is they've established this recreational riding tracks. There's actually 17 throughout the country right now. Independent businessmen operate these tracks, and they're making money on Polaris vehicles. So we've got great branding throughout -- at each of these tracks. They're charging money. They're using our products. They're actually selling from there. And some of these tracks are owned by our dealers. So there's actually 42 locations now throughout India that are selling Polaris products and promoting it, and they're making money. And if you talk to our dealers, they're jacked up. I mean, they think the opportunity for Polaris in India is quite large. And these guys are very successful businessmen. I mean, see the average person that is a Polaris dealer now, for us, in India, their businesses -- their other businesses are worth about $50 million. So this is just -- they say this is the future, and this is another growth opportunity, growth business that they can grow at in the future. And they're pumped up. So in addition to launching the Off-Road Vehicle business, we're looking at what we're going to do with motorcycles. We haven't launched Victory nor Indian yet in India. We expect to do that sometime in '14 or '15 depending on really what we can execute appropriately. And these guys are helping us also with the joint venture, establishing that, and helping us get that up and running. So a lot of work going on in India, but we're quite pleased with the results. So there's the various pictures of the dealerships and the tracks. And we're winning races and the partnerships. And we just did actually sign last month our first real significant commercial order. So we're getting into that segment as well.

The overall joint venture, I can't tell you too much about the products and the business that we're going into, but a little bit more about Eicher. They're a well-established company, about as old as Polaris is. Under $2 million but a significant -- or $2 billion but a significant player in trucks and motorcycles. They're probably -- they're not the largest motorcycle manufacturer in India, but they have the most premium segment right now. They do 300 and 500 cc motorcycles under the Royal Enfield badge. They're just great guys. And they see the business the way that we see the business. We've been able to establish a joint venture. We're in the process of building a new factory, developing some new products together, putting new team in place. We've got a CEO in place and a CFO in place. And hopefully, sometime next year, at this time, we'll be able to tell you more about what the business is all about and the target market we're going after.

Brazil, out of the big country, this probably has the biggest potential for our core Off-Road Vehicles, moving forward. There's actually an existing business for recreational products in Brazil right now. The business is growing nicely. ORVs, we haven't launched any motorcycles there yet today. You see Honda is the dominant player there. They're dominant in motorcycles, too. They have about 75% market share in motorcycles in Brazil. I mean, they're just a real significant player. They also build ATVs in Brazil, so we're going after that business. KTM got there before we did, and sort of playing a little catch up there, but we think there's a big opportunity for us to take a big part of that pie over the next few years. We've got some good dealers that are established. We also have between 10 and 15 by the end of the year. We're leveraging the Monterrey facility now with some Mexican content products that should get us be able to lower the duties going into places like Brazil and, ultimately, Argentina. And then we are evaluating the motorcycle market. It's a large market for large cruisers like Indian and Victory that we haven't yet entered there. So Brazil has a lot of runway for us moving forward.

Some of the pictures. There's great riding down there. The dealers are excited. We do a good job of marketing. They're really into the digital world down there. So lots of media that we're doing online and really staying connected with our dealerships down there and our customers. And we're doing a RZR Cup. So what like Craig was talking about last night creating that RZR brand, this is exactly what we're going after this. We're doing RZR camps down there. We're doing different clubs for just RZRs. This is our primary focus and really we're selling probably 75% of our side-by-side sales are racers right down -- down there right now.

So our deliverables for the rest of the year, we got to regain that growth momentum in the second half of the year, continue to win in Australia. It does represent about 2/3 of our overall sales. So we'll continue to gain share on both ORVs and motorcycles. Get that BIC business to be meaningful. We're going to -- it should be over $20 million this year, we just started it a couple of years ago, while we develop the ORV market and the overall networks.

We're going to launch Indian. We're going to launch Indian in about 8 markets in Asia in the second half of this year, including Japan and Australia. And expand our Victory reach in these markets as well. Our Asian distributor sales were up 70% this year, so we're excited about that opportunity moving forward with our motorcycles.

And then ultimately, execute the business plan and product development for EPPL and continue to build the business foundation in what we consider to be a very important high-growth region for Polaris in the future.

So any questions?

Richard Edwards

Any questions? Okay. All right. Thanks, Mike.

Scott W. Wine

Next up, Steve Kemp for engineering.

Steve Kemp

Good morning, everybody. I'm going to cover Engineering, R&D and Power Train. So if you think about engineering, kind of 3 things we think about that we got to deliver for the company. The first is developing the most exciting products in the industry. And for engineers that are passionate, and they're enthusiasts, this is really kind of a nice challenge to give them. But it means every part of our company and every global piece of our company deliver exciting product.

The second is about customers and really knowing the customers on an intimate level. To drive the customer loyalty, that means that you deliver the features they're looking for, not features they're not looking for. You understand what's important to them to drive that loyalty. And also, understand what they're looking for in a brand. So the products really meet what the brand means to that consumer. We measure that with Net Promoter Score, with customer satisfaction reliability.

And the third thing is about delivering value. And that means value not only to consumers, and that's about delivering the right features at the right price, and not putting in features that they don't value that they have to pay for. So getting them the right products at the right price. And for the company, that's about getting more efficient. So we can deliver more products with the same development team, getting leaner, doing better with platforming, so we can do more with the teams we have.

So how do we do that? First way we do that is really well-thought-out product plans, that's our long-range product planning. And we do a good job of that. We can develop platforms at the right time, and then we can use those for multiple things. We can evolve engines at the right time, use that for multiple things, and then subsystems all the way from brakes, and suspension and steering at the right time. So we do really well long-range product planning. We can be more efficient at delivering products.

The second is our development process. We have a very formal development process, but also its flexible. We have a lot of different kind of products, motorcycles, small vehicles, electrical, off-road. And we need to customize our development process for those products, and we're able to do that. We have small focused development teams that are very intimate with the customer and understand the customer very well, and they're thinking always about that customer. We add on to those small development teams, technical resources, experts, other functions, and we form an integrated product team. And many times, we colocate those teams in our development centers. But having that small focused team that really understands what their customer wants, not just what's written on a piece of paper, what they really want. That's very important to our success.

High-quality designs. We do computer modeling, a combination of computer modeling, bench test, lab tests and field test, all 3 of those things to go fast and make sure designs are very reliable. We use all of them in combination. You get computer modeling, lab testing and field testing.

And lastly, continuously improving. You can see the growth of our engineering staff. It's pretty large growth in engineering staff. And every one of those engineers learn something as they go through product development. So we're focused on knowledge management, that means capturing that learning from every product development, so you get better on the next one; capturing the technical knowledge that we learned in our product development, so the next design team can take advantage of that; and actively using consumer feedback, Net Promoter Score, the tractor part of Net Promoter Score to find out what can we really do better. And we feed that back in the development team for the next development.

One of the things about an increased staff is we run out of space. I think Bennett mentioned this, I think, last night that -- this is our development facility in Wyoming, Minnesota. And we ran out of space about a year ago. We started to have people -- put people in hallways and conference rooms and off site and temporary locations. About 9 months ago, we made a decision to go ahead and increase and double the size of that facility. So we did get it done in 9 months. We started moving our development teams in there beginning this month. It gives us some great new space and new facilities and tools for electronics development, and noise vibration and handling sound, some great new space for our vehicle teams. So we're really happy about how that turned out.

One of the things about a facility like that is it supports our sustainable advantages. Having an integrated team on-site with the ability to do prototyping and testing, and the whole team on site is part of the reason we can go fast. So that development facility really supports our sustainable advantages. The number one is innovation. You've heard a lot of innovation last night. You've heard about innovation today. It's -- a focus on our development process is to have that innovation for people and processes that support it. We focus on application engineering. What that means is taking technology, like LED lighting or something that's done in industry, and quickly bring it into our products to give the consumers those features quickly. And taking the best of what we find and applying them in quickly in our vehicles and doing that. Working with our partners, working with suppliers to do that quickly.

Quality and customer satisfaction is a sustainable advantage. I'll talk about that in a little bit. How we made that a sustainable advantage and then speed. I'll talk about that in the next slide -- the next couple of slides.

We can always make things better, add something to the process. But if we're to go back and ask our self, when we add that, are we making ourselves faster? Are we making ourselves more innovative? Are we adding features quickly? Or are we getting slower? And we believe speed is one of our sustainable advantages we focus on. So let's talk about speed a little bit. We've cut our development cycle pretty significantly since 2006.

We have world-class staff and that helps with our processes, again very important to make sure we go fast. The colocation is important. We've customized a lot of design tools to allow us to go from concept to tooling, to parts, to production quickly in the things that we repeat, we learn from. We learned how to go fast in specific things that make us quick.

We also focus on LEAN engineering. If you think about engineering, we don't make parts, we make decisions. We make prints, we make designs, and we kind of make a lot of decisions as we go through the process. So our focus on LEAN isn't about part movement, it's about decisions. How do you make decisions quickly? How do you test it quickly? How do you design quickly? How do you get to the concept quickly? And using that kind of logic, we've reduced the waste in our engineering processes to get faster.

And again, that last one is continuous learning. We have a lot of learning, we have a lot of projects, we use the project lessons learned to go back into our process, and challenge ourselves how to get better.

Looking at quality, we've made some great improvements in the last few years on quality. The one on the left is vehicles in no claims. We've reduced our warranty as a percent of sales, also increased our Net Promoter Scores. Overall, the way we do that is feedback loops: feedback loops from dealers, feedback loop from customers. We have a quick development cycle. We feed those things back into our development team, so they can improve the customer experience whether it was an experiential issue or a quality issue. And we've been able to use those investments that reduce cost to make investments in business.

And here's a look at that. We've increased our development spend, total expense -- this is expense, tooling and capital -- about 53% since 2006. But we've reduced the percent of R&D as a percent of sales over that time. We've made that lower. Part of the reason -- way we've done that is to lower warranty cost. The other way is making our projects faster, lower cost. And that's allowed us to have an incremental added investment in facilities like the Wyoming expansion.

One of the ways we measure this is a thing called vitality index. And it's not too complicated. It really just is in the quarter that you are in now, how many -- how much of the product was developed that you sold in the last 3 years? So what was new? So 80% means, 80% of the products of this quarter were new, 20% were designed over 3 years ago. And this is an overall measure because you got to hit every one of these to be good at it. You've got to hit the innovation, you've got to hit the speed, you've got to have new features, you've got have performance, you've got to have value. If you don't have those things, that number is going to come down because the new products aren't going to be as compelling as what you have before. So our number is up above 80%, above 70%. It's very, very good. Most companies are quite a bit lower in this number. And this is what we measure ourselves on as a company. Are we making the right choices, number one? What do we go for, the a product? How we execute the product? What's the cost? What's the features? This is really kind of the proof in the pudding that we're doing a good job in product development, and we're helping drive the growth for the company.

I'll talk about Power Train a little bit. If you were last night, you saw the impact of the 1000 engine on the new XP, the 570 engine on the ATV and the RANGER, and the Thunders Stroke 111, and the new Indian Motorcycle. So Power Train has become a competitive advantage for us. And you could see it in the new product launches and how important those engines were. At the same time, we've done -- we focused on platforming. So we actually get more volume per engine family. So we get scale as we design our platforms. We get more scale per engine family. We've taken the cost per horsepower down, we've taken the warranty claims down. If you go back 5 years ago, about 30% of the engines were designed and built by Polaris, and now it's about 80% of our engines are designed and built by Polaris.

Going forward, we're also looking at electric and diesel drivetrains. For some of the small vehicle markets that Matt was talking about, the electric drivetrains, the diesel drivetrains, are going to be important for small vehicles and work vehicles.

So in summary, kind of wrap it up. If you think about engineering, we're driving for innovation in global -- across global customers. I mean, however you measure that, whether it's market share or vitality index, whoever you measure, innovation is what we're looking to do. Our passionate staff feeds that, partner suppliers, and also the way we go about innovation. The second is operational excellence. And that's about speed, that's about being efficient in the way we use our money, getting more out of what we have. And then lastly, Power Train. As I mentioned, Power Train is -- our drivelines are feeding our future growth. We have reliable high-quality Power Trains covering the span of what customers are looking for, from high horsepower down to some of the lower horsepowers, covering electric and more and more diesel in our future. So those are our focuses for Power Train, our view for Engineering, Power Train being the last one.

And with that, I'll take questions.

Richard Edwards

Any questions for Steve? Okay, good. Suresh, operations.

Suresh Krishna

Thanks, Steve. Richard always saves us the best for the last.

Richard Edwards

Yes. That's right.

Suresh Krishna

So we'll talk about the dry topic of operations. I'm trying to make it as interesting as we can, right, Richard? So I've got a fairly long agenda. So I know we're running a little late, so we'll try and make it up. I want to talk a little bit about what we call operational excellence, which is what we do everyday. We make products, we ship products, we want to make sure that we do that well and we do that better than competition, so we'll talk a little bit about how we're doing.

Throughout the day and you saw yesterday and some of our presentations from Bennett, we are making big bets, we are making big investments in operations. And I want to familiarize you with some of the things. There is some folks who know it, folks have come here before a few times. There's folks over there at our Monterrey facility, so we've -- so I want to give you a little more flavor for what's happening in terms of investments. And finally, cost reduction. Anybody who is in operations knows that we live and die by making cost reductions everyday. And we've got a lot of initiatives that I can give you a little bit of flavor on how we do that.

So first and foremost, operational excellence. For us, there's 4 key areas. We call it SQDC, safety, quality, delivery is a proxy for the amount we build, and costs. So when you look at that, and you look at the journey over last few years, we've made significant progress in all areas.

Safety has been a major focus for us over the last 2 years. We wanted to be world-class. We were, I would say, industry average. And over the last 15, 18 months, we've caught up to where companies who are well known for safety records. Companies like GE, United Technologies, these are companies which took them decades to get there. Based on the way we do things in Polaris, when we put focus on something, we go after it and get it done fairly quickly. So in about an 18-month period, we've dramatically improved our safety performance and we are, right now, tracking to where world-class companies are.

Similar focus in the area of quality. We've talked of -- Steve talked a little bit about reducing warranty, but for our -- the approach is holistic, end to end, making sure we reduce our quality cost. I've got a little more information later on in the presentation, but we're making good improvement there.

Similarly, our ability to keep up with the volume. You see there's a lot of growth, but that's our side-by-side business, our motorcycle business, keeping up with that growth is an important part of what we do in operations.

And finally, delivering improvement in our gross margins. And that's a collective effort. It's not just in operations, it's engineering, it's operations, and purchasing cross-functional effort to drive that significant amount of our costs are in the supply chain. So I'll spend a little bit of time later on in the presentation to talk to more about it.

In terms of big investments, so switching gears. First and foremost, is ORV. We want to make sure we have enough capacity for our ORV business. A lot of cool products coming. We want to make sure that we have the capacity to do that. Last year, when I presented to you folks, we talked about capacity being tight. And the biggest driver for that, at that time, was we were losing some assembly capacity in our Spirit Lake facility, which was being converted to a motorcycle center of excellence. Since that time, we've managed to get another factory building very, very close to our Spirit Lake facility, about 10 miles from Spirit Lake.

It was an old furniture factory that was available for really a very, very throwaway price. I don't think I can say it in public, but we were able to get 300,000 square feet, which is roughly the size of our Spirit Lake facility in a town called Milford. And what we are able to do with that is we're able to relocate our ORV, Off-Road Vehicle, assembly lines into that facility. So we're not losing capacity, which we thought a year ago that we would, and that's giving us a lot more breathing room for the growth that we are experiencing. We're also expanding in Monterrey, and the new facility that is going to come up in Europe in about the second half of next year will add additional capacity for us.

And the underlying theme though, which I want to reiterate, is LEAN transformation. We'll talk more about it from a cost reduction standpoint. But LEAN is also giving us capacity. As we make improvements and reduce and eliminate waste in our processes, we're able to get more capacity on the production lines. So as we remove the waste, we're able to get 5%, 7% more capacity, that's additional capacity for us. So all these, when you're looking at it from an analyst or investor perspective, this goes to the core of what we do in Polaris. We are very, very frugal with our capital. Even though you hear some big numbers, we are very frugal. If it was any other company of our type of product range, they would be spending significantly more than us to get the amount of capability we've got.

So what is the -- some of the expansion we are talking about? So the Milford-Spirit Lake complex, for a brand-new facility, we are going to -- we are just relocating our assembly lines there. We already put a Brutus line over there. Other ORV capacity will come up. Matt talked about Poland. Based on our learning from Monterrey, which is 2 years ago, we have a lot of capability to build a factory in Poland. But it's more than factory. What's Europe is going to have is the ability to do tip-to-tail. They can control their destiny. So today, orders are placed in the U.S. and we ship product from U.S. into Europe. So more than the cost of logistics and homologation and duties, there's also a lead time involved right now. It takes us 3 to 4 weeks to process the orders and ship them, and it's another 3 to 4 weeks on the water before the distributor can get the product there.

Think about it when we are fully capable of supporting all the fulfillment operations in Europe. It's not just a factory, but the infrastructure for operations to support warehouses, order management, all of that, and that's all part of this project. We can respond to customers in 2 to 3 weeks. So our dealer inventory will come down, our inventory will come down, the ability to respond faster to stockouts, so that's going to help retail.

So overall, this page should tell you that we are making the investments that's appropriate for us to drive to the capacity we need. On Monterrey, the facility is new. It's 2.5 years old. We're making 50% of our side-by-side there. And with the rapid growth and side-by-sides, we need to continue to invest. And we are doing some vertical integration, we do injection molding in Roseau. We'll now have the capability to do that in the South. The factory for injection molding is up and running, we started in July. Official start is August, but we started punching plastic this month. So we have got some vertical integration, reduces logistics cost for us. We're able to do more involvements now. We've introduced robotic welds, we are doing manual welds. So factories are a lot more capable than before, and in 2 years time, they're making more product. There's more employees there than Spirit Lake. So you think about the age, Spirit Lake is a 20-year-old factory, Monterrey is 2.5-year-old factory. So we add more people to making more product.

Motorcycles, a big bet for us. We want to make sure we keep up with the volume. The big investments here are assembly lines, new assembly lines in Spirit Lake, new assembly line in Oslo, where we make the Indian engine. And we're investing a brand-new paint system, so that we can keep up with the volume that's expected for the motorcycle growth.

Finally, another project that Mike Dougherty talked about, so this is a JV facility that we are building in Jaipur, which is in the northern part of India.

Again, using a lot of the learnings that we've got starting up factories here, we're going to apply it there, and we should be ready to support production there, early part of 2015. So these are some of the big investments we've got going. I want to take a little bit of time to talk to you about cost reduction and our approach to cost reduction.

LEAN transformation is a big one. And unlike some other companies which focus primarily on manufacturing, our approach to LEAN is twofold: we look at it from a business standpoint, and then we also look at it from a factory standpoint.

A lot of people have heard about Toyota production system and Caterpillar production system. So we don't call it a production system, we look at it as a business system. So we make transformation across the entire business chain. So you think about Victory, and Steve Menneto talked about how RFM, for us, has been a big change. So we are looking at making a business change where we want dealers to be able to order as soon as they retail, and that's a big business model change for us.

And MVP was the first step when we did that for our ORV business, but RFM is taking it further with daily ordering and ordering when you have retail. So that capability is part of the business focus which goes into our LEAN principles.

The second part is the factory part, where we want to have single piece flow. And that portion is very similar to how a Toyota production system works [ph]. So these 2 together helps drive our LEAN methodology, and we've got a rollout schedule. We went first with motorcycles, we'll then attack our off-road vehicle products, and then finally, snow. So we've got, over the next 3 or 4 years, our transformation agenda that will transform the entire business.

Cost down. We look at cost down as a cross-functional support, so between operations, purchasing and engineering. There's a cross-functional team that attacks cost down very, very systematically.

Last year, we kicked off what we call, internally, GDP, which is goal deployment. It's a focused effort on a particular area. Develop processes where we can bring cross-functional teams and not look at what we do traditionally, which is negotiation and alternate sourcing and low-cost country sourcing, but go at it from a design standpoint. Designing products for cost, designing products for manufacturability, those are helping drive cost on a systematic way.

Typically, companies would look at cost down on an annual basis. We look at it on a multi-year basis. So today, there are engineers and sourcing folks who are working on projects, which are going to get us savings 2 to 3 years out. So we already have a funnel of ideas that are being worked. We are staffing it, so we're investing for future returns. A very, very similar approach to what we do with other capital projects. So we are treating people as capital, deploying them on where we're going to get return for the long term. So that's a different approach we've taken year-over-year. We are better than where we were last year, and we've got a good pipeline for the future as well.

Similarly, LCC continues to be -- low-cost country sourcing continues to be an area of focus. Over the next few years, we'll have more products come out of Asia, less products, parts come out of Japan, which is a high-cost country for us. When I look at the number for North America, it's growing for you, primarily because Mexico is a big opportunity for us for sourcing. Now that we have a factory there and we have a presence there, we are increasing our sourcing in Mexico.

Similarly in Eastern Europe. When you look at the EMEA number, currently, we have a fairly Western Europe footprint for suppliers. But with our presence in Poland, we are finding good suppliers over there. Our ability to increase sourcing in EMEA is revolving on the fact that we have footprint over there as well.

Commodities. We've talked about commodities in the past. We have a good process here. Again, it's a monthly cross-functional process. We've got good systems that have been developed, which allows us to roll off, on a monthly basis, what our spend is going to be by various commodity, where the buyer is going to be. And based on volume changes, we're able to estimate that fairly quickly and then proactively manage these commodities. Year-over-year, we're seeing some softness in commodities, which is going to benefit us, which you already -- I think, we covered in the analyst results.

And we also track what we do versus market. And we've seen, historically, that our proactive methodology helps us meet the market on a regular basis, based on some of the methods that we listed down below.

Quality improvement, another opportunity for us from a cost standpoint. The reason is poor quality is cost as well, not only is it detrimental to our customers, it's also detrimental to our P&L. So we've got another GDP effort, which is a focused effort cross-functionally to drive our rework cost down. And we're looking at over a 3-year period, a 70% reduction, which would free up dollars that are being there, spent in the business today. And the second part of that is supplier capability. We have a pretty good supplier PPM number when we compare to our peers and compared to benchmark numbers. But we think there is more room there, primarily because if it's supplier PPM, supplier quality defects, that's waste generated in supplier factories. So that's an opportunity for us to go get. So we've got a focused effort through supply development to these -- those defects in our suppliers' factories in the supply chain. And that's going to get us savings as well, as we move forward.

Finally, factory inventory. From a current standpoint, we are flat. This, I believe, is an opportunity for us. We've done some acquisitions, which is companies which have worse inventory performance than us. We've also increased our sales overseas. And as you know, we still ship products from here all around the world. And those are headwinds for us that is preventing us from making quick improvement. But once we get our factory in Europe onboard, we should be able to reduce the inventory. There are other in activities that is going on. This is an opportunity for improvement that we think should help the company overall in the future. That's it.

Richard Edwards

Any questions for Suresh? There's one. Ted, one there.

Unknown Attendee

How quickly do you think you can improve upon the MVP program? Kind of is [indiscernible].

Suresh Krishna

Just to make sure I understand your question, how quickly can we move to...

Unknown Attendee

Could you talk about when the MVP sort of more RFM, more placing orders, will that eventually become the standard for ATV, side-by-side?

Suresh Krishna

We will be doing a pilot, first with ATVs, and then eventually move it to the rest of the whole portfolio. And that's the goal, that they should be able to order more frequently than once every 2 weeks. In motorcycles, they can order everyday. So that would be the goal standard.

Richard Edwards

Okay. Thanks, Suresh.

Suresh Krishna

Okay, thank you.

Richard Edwards

Okay, Scott has a few closing comments, and then we're going to account the Q&A session.

Scott W. Wine

Yes, I've assured to them I only got 50 slides to wrap this up. And we do have a few minutes for questions and we'd like to take those, but hopefully, you've got a good perspective on why I'm so confident in the future. We've got a good strategy, we've got a great leadership team, and it really goes down beyond the folks you've seen. I mean, it's a deep, deep team and we have really good plans. But ultimately, what differentiates Polaris is that we execute. We've set very ambitious goals, and we work and work and work to execute as well as we can. We will not always be perfect. We've made some really big mistakes in the past and hopefully, we've learned from those. And that as shareholders and customers you will benefit as we place those learnings in our -- the back of our minds and made sure they're employed as we go forward. But we do stand here today, feeling very confident. That's the reason we've raised our long-term guidance a little bit. Very confident about the next 6 months, what '14 holds, and what we can do over the next 5 to 7 years.

So with that, Mike, Ben, and I and actually the rest of the team will be available for questions in the next few minutes.

Gregory R. Badishkanian - Citigroup Inc, Research Division

[indiscernible] 3 biggest new product innovation [indiscernible] 1, 2, 3, that you think you are going to drive sales over, like, either in the near term? Or do you want to think about the next few years [indiscernible]? What 3 products are kind of close to [indiscernible]?

Scott W. Wine

So Greg's question is what is the 3 most exciting -- I'm assuming you're meaning of this model year '14 lineup. It's hard to say. I bet if you'd ask our 2,000 dealers that are here. Or is it -- how many are here, Bennett? About 2,000, globally. So anyway, you get a different -- depending on what region of the country or region of the world they're in, I would believe it goes something like this. The -- over the next 5 years, I would believe that Indian is gonna have the most incremental impact. I think over the next couple of years, the growth we're going to get out of the XP 1000, and remember, the XP 1000 is the industry-leading, high-end sport product. Probably safe to assume it won't be the only side-by-side that takes the learnings we've put into that fixed rates down. So that's going to be quite huge, I think. As Craig [ph] talked about the opportunity to double our RZR sales. And then the next one's really hard to differentiate. I mean, the 570 Prostar engine is just so good, and what we can do by rolling that 570 out throughout our portfolio is going to have a major impact. Because really, that's where a lot of the volume is. But if you're a dealer in Texas, or in other Parts of the West, that RANGER Crew, with the integrated cast systems and all the features is -- and I've described the RANGER 900 XP is not a home run, it is a grand slam. And I think that the crew is going to be followed up by a grand slam as well. That's my -- didn't you have a different take on that?

Michael W. Malone

No. You love all your children equally. It's -- but I think that's true. I mean, if you didn't get that, obviously, the XP 1000 and the Indian have the biggest sex appeal. But those other products are -- they're in big segments and we do big volume, and they're big improvements. And that's the beauty of what you're seeing, at least for the model year '14 stuff, as we've got strength in each of those buckets. And if you really try to quantify them, they're all pretty compelling in the next 12 months.

Richard Edwards

Well, Craig?

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Can you frame the acquisition opportunities that you have? And how you think about what's a good acquisition for Polaris?

Scott W. Wine

The question is, could I frame up the acquisitions and how we -- what makes a good acquisition for Polaris. I think the simplest way to say it is, it's a with target-rich environment, there's a lot of opportunities. If you think about consistent with our strategy, we're not looking to go buy to transform the company. There's really no need to do that. So we're looking for opportunities to accelerate profitable growth. We have 0 desire, and I'm quite sure that we won't ever buy something to get bigger. We don't need more employees, we don't need more revenue, we need the opportunity to grow faster and grow more profitably faster. And that's where we're looking. Small vehicles, lots of opportunities. Our aftermarket business that Eastman has. We see a lot of opportunities there. The Military space, obviously, we need some infrastructure there, so there might be a small opportunity there if we can, again, find technology and an opportunity to grow faster. So it's -- internationally, there's a lot of opportunities to accelerate, the iShare joint venture is an example. And I suspect we're -- but there's a lot going on. Todd's a busy guy. Can I just pull him alone and say nothing?

James Hardiman - Longbow Research LLC

Well, thinking back on that question a little bit, as we think about the more than $8 billion by 2020, the 10% net income margins, are there acquisitions built into those markets?

Unknown Executive


James Hardiman - Longbow Research LLC

And again secondly, if I think about [indiscernible] of growth starting per share, is there a point as we now to 2020 with you guys sort of leverage the balance sheet a little bit more and maybe towards the [indiscernible] to buyback shares? Or is that before or after [indiscernible]?

Scott W. Wine

So James' question is, is there acquisitions embedded in the $8 billion target revenue by 2020? Yes, there is. Obviously, we feel very, very confident about our organic growth capability. But certainly, I think acquisitions are going to play fairly not a major role in it, but somewhere between $1 billion and $2 billion. And again, we feel very strongly that, that's quite possible. As far as leveraging the balance sheet, that was the other part of the question, are we going to leverage the balance sheet, perhaps more share buybacks? We're always going to look to deliver value to shareholders. And right now, we see so many opportunities to invest in our core portfolio and through acquisitions that it's generally a better idea than buying back shares, other than to keep the share count flat. That may not always be true, and we'll continue to evaluate it. But we're a growth company, we pay a solid dividend and we got a pretty good capital allocation model we feel comfortable with.

Michael W. Malone

Okay, the only think I'll add to that, Scott, is we're not afraid of debt. We don't, historically, carry a lot of debt. We only have $100 million of debt. But it's not like we're spooked about debt. And if the right opportunity comes around for a larger acquisition, the deals we've done so far have been at a pace where we could have absorbed that through our cash in the balance sheet. But if the right opportunity comes around, we'll lever up and do the appropriate thing, long term, for shareholders.

Richard Edwards

Anyone else? Michael [ph].

Unknown Attendee


Scott W. Wine

So the question is, yes, she thought that we only had an electric powertrain focus with our small vehicle category. And now I assume you're speaking of Aixam, where they have a lot of diesel products. And really, what we see in the small vehicle category is a very large, call it, a $4 billion marketplace that doesn't have a leader in terms of technology and performance and innovation capability that we think we can play that role. It doesn't mean limited to electric, although electric will continue to play a major role. Aixam is investing in electric, and we think some of our electric technology investments will be able to help them over time. But we're not excluding that from the portfolio. We've got great serial hybrid technology with our swissauto business, the swissauto engineering business, and we think we'll obviously deploy that in small vehicles. But really, looking for the opportunity to innovate and add incremental value for customers in this space and that's the discriminating factor, it's not whether it's electric or not.

Unknown Attendee

Scott, what do you think would be the biggest strategic change if you actually had more of a macro tailwind in your past years? You've got sort of very good growth despite [indiscernible] some macro. What do you think would be attributable to your [indiscernible] any better?

Scott W. Wine

So the question is one that I've honestly haven't even considered, because I don't expect to have a good economy, it's what -- how would the -- how would our strategy -- what would be different if we actually had a tailwind? Every year, we go through our strategy session. We model what happens if it's down 20%. We've never modeled what happens if it gets really good. I think what you see is the competition would be doing better and therefore, probably investing more, and that would be a little bit different. And I think we would probably be going a little bit faster in our adjacent markets spaces, because we'd actually have more cash, because their core businesses, it was growing faster than we do. So we're just probably going a little bit faster in our adjacency growth, as we experience more growth in our core business.

Unknown Attendee

[indiscernible] I just think your -- if you'd give us a frame, you probably won't, but I...

Scott W. Wine

You know me well...

Unknown Attendee

[indiscernible] So I'm just being curious, has their [indiscernible] actually slowed down? Or it's really rebuilt the frame, you got to stay on the throttle to -- I just think that's [indiscernible].

Scott W. Wine

All right. Well, just to be clear, I'm offended that you equated anything with Polaris to the national debt class. Although...

Unknown Attendee


Scott W. Wine

It has been a major investment, but it required a major investment. We knew that going in, it was eyes wide open, there was no -- and actually, the investment has been very much in line with what we thought it's going to be. What we'll introduce at Sturgis on Saturday night at 9:30 is a great, great motorcycle. But it is the beginning of a series of great motorcycles. We're going to build a motorcycle company, not build a motorcycle. And that's going to require another year of -- several years of heavy investment on the engineering front. The brand building investment, I mean, we have to swallow hard. We're good at a lot of things, we're not a great brand company. In fact, Indian has helped us tremendously to reflect on the power of our other brands and what we can do. But we're probably not -- we're reaching a pinnacle, probably in the third and fourth quarter on what we're going to spend on the market. You don't think we're going to spend more than that, do you? I just want to make sure that I wasn't just talking to myself here.

Michael W. Malone

And obviously, we actually get to start generating revenue and margin, too. So that's an exciting time for us as well, so to offset some of these investment.

Scott W. Wine

Yes, our target for profitability -- actually, I think it's possible that we do well to be late next year, we start turning a profit. Minetto has assured me it's going to be '15, that's just all about that marketing spend he wants to make. But no, we're definitely targeting that this is not far off from now before we start seeing a profitable business. It's not lost on it, but by the time as soon as we turn Victory around and started making money, we bought another one, we went back the other way. But we're excited about the opportunity. Anything else? Jimmy.

Jimmy Baker - B. Riley Caris, Research Division

Just talk about the incremental investments of your second and third investments in Brammo. And then also, I don't know how much you'd be willing to answer this, but just given last night's video and your intention to bring [indiscernible] 2014, can you just talk maybe about the challenges you perceive with entering again, a category like that and how you're proactively addressing [indiscernible]?

Scott W. Wine

I'll talk to Brammo and let Bennett talk to -- did you -- I didn't even realize he revealed that last night. I thought he was teasing something, but I'll let him talk about his Slingshot project. The question was about Brammo...

Bennett J. Morgan

[indiscernible] column was new on that, that's pretty good.

Scott W. Wine

And yes, the incremental investments that we're making in that technology. As I answered the question earlier about small vehicles and our focus on electric or other powertrain, we don't -- I'm -- I often say I don't have a green bone in my body, and that's maybe an exaggeration. But we do see a market opportunity for electric powertrain. And especially high-performance electric powertrains, we're not investing in electric motorcycle company. Obviously, that's one of the things they do, but ultimately, what Brammo has is best-in-class electric powertrain. It's not just the batteries, it's the way they designed the system similarly to what we do with Off-Road Vehicle powertrains. We think there's an opportunity to deploy that in both our small vehicles and some of our Off-Road Vehicles, and the investments were just to make sure we have the opportunity to do that as quickly as we possibly can. That's Brammo.

Bennett J. Morgan

Okay. Well, I didn't officially reveal it last night. Because I never, ever comment on future product development. But what we really tried to do there is just obviously, with some of the drawings out there and then public domain and tremendous amount of discussion and frankly, legitimate consumer forms set up, talking about a product that doesn't exist yet. And the dealer network really buzzing tremendously and trying to pin our people down. Since we're here at the show and we have so much of our volume here, what we thought we'd have just a little bit of fun and just let them know what's coming. Because it just tease us up, because they're very excited to hear more and it gives them a timeframe and it also gets us ready so that we can be set up for it. So that was kind of the mindset of what we were doing there, having a little fun. And from a standpoint of the challenges, that anytime you do create a new category, there is challenges. I would tell you that there is what Can-Am has done with Spyder and different things like that. Again, you didn't see all of the product but you've seen drawings. It's a different spin and a different solution in what, I would say, has been a somewhat created category. So It's not all new, but I -- we think we got a way better solution. I'm not going to comment too much further on that, because you'll just going to have to wait and then we'll tell you all about it. But we're pretty confident that there is -- we've done a lot of homework on this. There is a space there, and we think we've got a very innovative superior solution, frankly, as we come to market.

Unknown Attendee


Mike, you guys talked about an ABC strategy in making the cars. As we look at new categories and new product acquisitions someday, do you eat those words?

Scott W. Wine

The question is whether I'm going to eat the words of our -- what we call ABC, "Anything but car strategy" We've got a very strong Board of Directors, and one of our strongest Director used to be the CEO of Saturn. I'm pretty confident that we're never going to be in cars. We like to compete where we can win. And despite the fact that we have scale in Off-Road Vehicles, you take all of our volume of all of our vehicles together, it would -- it pales into comparison with the auto guys. I mean, we just cannot compete on their sourcing, in their infrastructure, and it's just not a space we're going to enter. I'm very, very certain, it's right up there with watercraft. We're not going to go there. Anyone else?

Unknown Attendee

[indiscernible] can you just give a little bit more color without [indiscernible]

Michael P. Jonikas

So the question is, where is Indian targeted? Is it right at the Harley customer, that older demographic, which they're desperately trying to move away from? Or is it somebody different? What we found, and I thought Matt teased it up rather well. The Indian brand is extremely powerful in Europe. It's got a great presence in Japan. People of all ages, their uncles have one, their grandparents have one. The stories we get are phenomenal. We are going to build great motorcycles. I can assure you, we've written it, we've put lots and lots of miles on them, they're great motorcycles. And I think, if you get -- well, with Victory, we've built great motorcycles, but it didn't have any kind of brand association with it. We've got a tremendously strong legendary brand and we're going to put an incredible powertrain, great chassis on it, and we think we'll be able to compete across the board in this category. And certainly, we would be fools to target the older demographic. And of course, we expect a lot of people are going to own 2 bikes. It's not going to surprise me at all if a guy's got a Harley in his garage and he adds an Indian. It won't surprise me at all. But I'll be very disappointed if the average age is 55 of our customer. We will have failed on our marketing campaign. Anyone else? Well, thank you very much for your time. Enjoy the rest of the show.

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