Polaris Industries Inc. Q4 2009 Earnings Call Transcript

Jan.28.10 | About: Polaris Industries (PII)

Polaris Industries Inc. (NYSE:PII)

Q4 2009 Earnings Call

January 28, 2010 10:00 p.m. ET


Richard Edwards - Director IR

Scott Wine - CEO

Bennett Morgan - President and COO

Mike Malone - VP Finance and CFO


James Hardiman - FTN Equity Capital

Greg Badishkanian - Citi

Ed Aaron -RBC Capital Markets

Joe Mackey -Wells Fargo

Craig Kennison - Robert W. Baird

Bob Evans - Craig-Hallum Capital


Good morning. My name is Sheena and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Polaris fourth quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there'll be a question-and-answer-session. (Operator Instructions).

Thank you, Mr. Richard Edwards; you may begin your conference.

Richard Edwards

Thank you, Sheena and good morning and thank you for joining us for our 2009 fourth quarter and full year earnings conference call. A slide presentation is accessible at our website at www.polarisindustries.com/irhome which has additional information for this morning's call.

The speakers today are Scott Wine, our Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer.

During the call, we will be discussing certain topics including product demand and shipment, sales and margin trends, income and profitability levels and other matters including more specific guidance on our expectations for 2010, which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. Additional information concerning these factors can be found in Polaris' 2008 annual report and Form 10-K, which are on file with the SEC.

Now I’ll turn it over to Scott. Scott?

Scott Wine

Thanks Richard. Good morning and thank you for joining us. A year ago we used this call to issue an unprecedented wide range of guidance for 2009, and I spoke to the fact that we are prepared and ready for a tough year.

It was no easy trail through last year's downturn, but I'm pleased with the way this Polaris team and business performed. Earlier today, we reported results for the fourth quarter and full year 2009, and the results were encouraging.

For the fourth quarter, Polaris delivered earnings per share of a $1.31 an increase of 18% from the prior year period, and also a new Polaris record for quarterly earnings. Net income was up a strong 21% to $43.9 million.

It is worth noting that 300 basis points of difference in the EPS and net income growth rates is attributable to the dilution in share count that occurred in the fourth quarter, and will continue to be a slight drag on earnings per share throughout 2010.

With our focus on margin expansion and improving cash flow, we are very comfortable with the quality of our earnings growth. The strong increase in fourth quarter results represents the culmination of a tremendous team effort, diligent execution and the transition to favorable variances and currencies during the quarter.

Margin expansion was the key driver behind our record earnings per share in the fourth quarter. Gross margins moved higher throughout the year and expanded an impressive 450 basis points in the quarter. More than half of our benefit came from pricing, cost reduction and lower promotions, and we also benefited from the currency tailwinds that I just mentioned.

The resulting fourth quarter gross profit margin of 27.3% is a strong indicator of our longer-term margin potential. Importantly, we follow through on our commitment to have gross margin expansion fall through the net income, resulting in a 240 basis point increase in net income percent to 9.3% for the quarter.

While fourth quarter earnings growth was strong, [now tired] term less bad remains the most accurate descriptor of our sales. The 10% drop in sales from the prior-year period slightly exceeded our expectation, but was still down year-over-year in nearly every part of our business. The majority of the decrease was driven by the 12% drop in off-road vehicles sales, but it is important to note that ORV retail sales turned positive in the quarter, up mid-single digits on strong side-by-side performance.

Product sales of Victory motorcycles to dealers were down 14%, but Victory retail sales were also up an impressive 30% in the quarter. Our very profitable PG&A business was the first to return to sales growth, up modestly in the fourth quarter. International sales were up 18%, benefiting from currency movements and increasing demand in Europe for our RZR and RANGER products.

A few calls ago, I described our recovery in terms of the poorly written U and it is looking like that was an accurate descriptor. Overall Polaris, North American retail sales were down 4% in the fourth quarter, which was a market improvement over the prior quarter, and it was the third straight quarter of sequential improvement.

As previously mentioned, we were encouraged that both our off-road vehicle and Victory motorcycle businesses recorded positive retail growth for the first time in over a year. We saw a strong and steady improvement in ORV retail starting in the third quarter and continuing throughout the year, which is in contrast of the sharp turnaround in Victory in the third and the fourth quarter.

We will drive both businesses to maintain momentum as we enter 2010. Our retail performance was notably better than the industry, but we project to be down again in 2010. We expect the players to perform better than the industry in all categories.

Full year net income of a $101 million was down 14% from 2008, resulting in a 13% decrease in earnings per share to $3.05.

Strong margin expansion enabled us to keep a drop in earnings well below the 20% decline in sales. The Polaris team worked hard and smart to take cost out of the business in 2009, driving more than $80 million of product cost and operating expense reductions throughout the year. These savings were important, as we also had to overcome the 18% per share KTM impairment charge that we took in the first quarter of last year.

We have commented regularly on how Polaris business model and operating system is designed to quickly respond to changes in demand. And our 2009 execution proved that. The 20% decline in sales impacted every business unit in every region of the world where we sell. We maintained a strong focus on our dealers, managing shipments to help reduce dealer inventory by 24% throughout the year.

The largest decline in sales was in our ORV business, off $285 million in 2009, with ATV sales down nearly twice as much on a percentage basis than side-by-side. Despite a strong fourth quarter performance, Victory motorcycles had the largest percentage drop in sales off 44% in 2009. With Victory retail off just under 30%, we made significant and needed progress in reducing dealer inventory for Victory.

Sales in Canada were down just 12% for the year, solidly out performing the US and European markets. On the growth side, our military business continued to perform well up more than 50%. While sales were done significantly and we recorded an unwelcome decline in earnings, I do want to review a few of what I'll call controllable metrics that highlights the strong performance of our team. Despite the pessimism over the few nay sayers, gross margins were up 220 basis points in 2009.

Operating profit increased to 110 basis points to 10.5%, and we achieved our goal of a 50 basis point increase in net income percent. An important barometer for the quality of earnings is cash flow to net income percent, and we achieved a 191% in 2009, up significantly from last year. Importantly, our hard work and results contributed to a 60% total return to shareholders in 2009.

We certainly expect to have these metrics, including sales and earnings, green in 2010. While we were laser focused on reducing costs and delivering results last year, we continued to invest in the future of Polaris. We reorganized into an off-road vehicle division combining our side-by-side and ATV business unit to create a true market leader in both share and execution.

We provided a necessary boost in resources and support for our Victory business by creating an on-road division that includes our new Breeze Electric Vehicle. On the international front, we added resources and capability with the Vice President of Global New Market Development and also added two General Manager Positions to drive growth in Europe to Middle East and Africa and to lead our growing presence in China.

We also added resources and capability to our business development efforts with a new and experienced Vice President of Business Development. We continue to invest in our military business with new products and new customers. And investments we made on our strategic alliances like Bobcat, which will contribute to the bottom line in 2010.

Lastly, while competitors retreated from investments in new products, we launched 34 new product innovations in 2009 that helped us capture additional market share gains that will pay dividends well into the future.

With that, I'll turn it over to our Chief Operating Officer, Bennett Morgan, who will provide additional insights into our operations and business unit performance.

Bennett Morgan

Thanks, Scott. I'm going to begin with off-road vehicles. Our off-road vehicle wholesale sales were down 12% in the fourth quarter and 22% for the full-year 2009. The ORV industry improved modestly in the fourth quarter as we came up against weaker comparables. North American ATV industry retail sales were down low 20% in the fourth quarter and ended the year down 28%.

While we don't have clear side-by-side industry data, we are estimating that the side-by-side industry was down about mid teens percent for the year. So we are seeing modest industry improvement, but not as much as we had expected or hoped for. Polaris fourth quarter retail sales, on the other hand, improved considerably with ATV sales down just mid single digits and side-by-side sales actually up double digits.

We gained a significant amount of market share in the fourth quarter and for the full year 2009 in both ATVs and side-by- sides. Overall, we've extended our leadership as the number one ORV, OEM for 2009. The secret to our success is pretty simple in off-road vehicles. First, we have stayed on the gas while most others have not in product development and innovation. In 2009 alone, we introduced over 25 new ORV products.

We have superior product advantage. Second, we have improved the ORV business model with our MVP program for dealers, by lowering inventories, reducing risk and increasing focus on retail. And we have worked extremely hard to drive synergies in non-value added cost out of the value chain through our now consolidated ORV division and value engineering cost reduction efforts.

Polaris's new product innovation continues with our just recently announced Robby Gordon Edition RZR 4, the industry's first purpose built four-[seat] side-by-side product. Building on the tremendous success of the original RZR and the popular RZR S, the RZR 4 is perfect for sport side-by-side enthusiasts who want to ride with up to four people.

Its performance is consistent with RZR DNA providing more performance, more agility and a superior ride experience versus competitive side-by-side two-seaters. Initial dealer response and dealer orders have exceeded our expectations. The RZR 4 just began shipping in the past few weeks and we expect will take a couple of quarters to meet initial demand. Consumer acceptance and demand also remains strong, and supply remains tight for a number of our new model year '010 side-by-side Ranger and RZR family products, which bodes well for continued retail and market share momentum as we began 2010.

Dealer inventories are better than expected. Core ATV dealer inventory was down 35% in 2009, and we would expect to modestly decrease ATV core inventory in 2010. Our military business had an excellent quarter with sales up 32% over a record Q4, 2008 comparable, and our order backlog for customers is up versus a year ago at this time.

Our sales were driven by our recent contract win from the national guard and continued demand for vehicles to support domestic and international missions for the US military as well as foreign militaries. For the year, our military business grew 51%, and we expect this business to continue to grow nicely and make a bigger impact for us in 2010 and beyond as we continue to expand the emerging ultra-light vehicle segment.

For 2010, we expect North American off-road vehicle industry sales to improve relatively, but remain weak down in the 10% to 15% range, while Polaris sales are expected to be flat to up slightly. So we expect that we'll outperform the industry again due to continued share gains, military and international expansion along with our new Bobcat sales.

Snowmobiles; fourth quarter wholesale sales were down 14%, and for calendar year 2009, sales were down 13%. The [Snowmobiles] industry had a mildly disappointing fourth quarter as industry retail sales were weaker than expected, down mid 20% despite solid snow conditions across most of the Snowbell, Polaris fourth quarter retail sales were similar, so our market share was flat for the quarter and down modestly for the calendar year.

Dealer inventory levels are flat and remain at acceptable levels. On the positive side, RUSH, this year's industry [Snowmobiles] year, is the top selling model for '010 sled. As we look forward, priority number one for Polaris [Snowmobiles] business will be achieving and delivering on industry leading consumer satisfaction. It's too early to provide meaningful guidance for 2010, and so we'll wait until the end of the snow season and our 2011 dealer meeting to provide that direction, though at this time we would expect calendar year 2010 sales to be within a reasonable band of our 2009 results.

On-road vehicles and Victory motorcycles; it was an exciting and productive fourth quarter for our new on-road division. Fourth quarter wholesale sales were down 12% as we continue to restrict shipments to assist with the weak industry and assist dealers in improving inventory levels. For the full year 2009, sales were down 44%. The North American heavyweight motorcycle industry remained weak in the fourth quarter and full-year 2009 with industry retail sales down upper 20%.

Victory was a different story with Q4 retail sales up over 30% as our new team, new products and increased channel focus started to gain traction. We gained significant amounts of market share in the fourth quarter, which is relatively low seasonality for the industry, and that enabled us to hold market share flat for the year versus 2008. Victory dealer inventories declined by 27%, for this 2008, but some additional reductions we think are still necessary.

For the sixth year in a row, Victory owners have the highest ownership satisfaction in the industry, a tremendous accomplishment of which we are extremely proud. As previously communicated, we are making investments in bringing different thinking and strategies to our Victory business. We began shipments of our new model year '10, cross-roads, and cross-country touring bikes in the fourth quarter with more aggressive pricing and early dealer and consumer retail reaction has been very positive.

We are aggressively going after cost and lead-time reduction to make us more competitive, and we will unveil shortly, a new Victory brand position and marketing strategy that is more relevant to our targeted customers. Finally, we consolidated the Polaris and Victory sales force to drive greater efficiencies and more dealer phase time for Victory dealers. For 2010, we expect significant Victory retail sales growth and acceleration in our heavy weight cruise and touring market that we expect will be down double digits.

We will continue to under ship retail demand in North America, but still expect sales to grow in excess of 50% due to increased demand across the globe. Our newest on-road adjacency had a solid fourth quarter. The new Breeze, low-emission vehicle has been well accepted in the marketplace, and we continue to learn the market. The LED industry declined mid 20% in 2009 as customers struggled with the economy similar to our Power Sports markets.

We currently have 10 dealers signed with plans to aggressively expand dealer count in 2010 as we continue to penetrate and grow into our master planned community customer target. For 2010, we expect the industry will grow mid single digits and Polaris to grow much faster as we rapidly expand our presence.

Parts, garments and accessories; PG&A had a strong fourth quarter with sales improving to up 2%. For the full year 2009, PG&A sales ended down 9%, nicely outperforming the overall Polaris business portfolio and now account for 20% of Polaris's total sales. Our highest margin business continued to expand gross margins in the fourth quarter and for the full-year, thanks to outstanding productivity gains, cost reduction and expense control measures and continued product innovation.

For the year, we introduced over 200 new model year '10 accessories. For 2010, we expect our PG&A business to perform similar to our overall business with sales up low single digits. International had a strong fourth quarter with sales up 18%, ending the full year 2009 down just 17%.

Global industry markets improved in the fourth quarter, but for the year, sales were still down low 20%. As in North America, our fundamentals continue to improve. Dealer and distributor combined inventories are down approximately 30% versus a year ago, and we continue to gain significant share in ORV market, thanks to our distribution and innovation advantages.

Contrary to our challenges in North America, Victory is growing rapidly, up 40% for the full-year 2009 as we continue to gain, share in existing markets and penetrate new markets in Europe. Global growth remains a top priority for the organization, and in the fourth quarter, we signed a formal distribution agreement to begin selling our ORV products in China in 2010 and beyond. We also made our first sales inroads into Brazil in 2009, and while both markets are not expected to be large in 2010, they are key strategic markets for Polaris long term.

For 2010, international sales are expected to outperform the Polaris portfolio growing low double digits. Operational excellence; Polaris's operational excellence initiatives continued to pay dividends in the fourth quarter and for the full year 2009, paving the way for the strong gross profit margin expansion that we delivered in the fourth quarter and that was up 220 basis points for the full year.

Our integrated value engineering and strategic sourcing initiatives drove significant product cost reductions in 2009 and beyond. Lean initiatives in the [plant] drove strong productivity gains despite much lower production volumes. Our lean system wide focus kept sales promotions and operating expenses in control and our speed once again enabled us to get exciting innovate product to market ahead of our competitors.

We expect to drive positive gross profit margin expansion, up to a 100 basis points in 2010, even though commodity costs are expected to turn unfavorable.

Polaris dealer count decline approximately 3% for the full year 2009, less than our expectations thanks to the lower inventory levels, MVP business model improvements and timely innovative product. We expect, in 2010, that our dealer count will decline low single digits as dealers continue to deal with a weak Power Sports industry environment.

Despite weak industries that were down over 20% for the full year, Polaris working with our dealers reduced dealer inventory 24%. Dealer inventories are now at their lowest level since April of 1999. While we have made tremendous progress, we expect to continue the lower dealer inventory levels further in 2010 as our MVP dealers continue to mature and expand.

Polaris factory inventory declined by 19% and $43 million versus 2008 to our lowest levels in five years as our lean initiatives in the plants and logistics and our increased speed throughout Polaris drove inventory waste out of the system.

Similar to dealer inventory, we expect further reductions in 2010, but we will be prudent to ensure we are positioned to meet changes and increases in demand. Our operational excellence progresses Polaris in a stronger healthier position than when we entered the recession. Arguably, our fundamentals and competitive position is much stronger than a year ago. It is enhancing our product innovation and remains the fuel behind much of our success.

With that, I'll turn it over to Mike Malone, our Chief Financial Officer.

Mike Malone

Thanks Bennett, and good morning to everyone. We are very proud of how the team navigated the company through the most difficult and uncertain economic conditions in recent history and generated the results announced this morning that exceeded our expectations.

I'll begin my comments this morning with our 2010 guidance with some reference to 2009 results to highlight a few specific points. Guidance for the full year 2010 is as follows: Total company sales are expected to increase 1% to 3% for the full year 2010 with the individual businesses contributing as follows:

Off-road vehicles are approximately flat to up slightly with the growth coming outside of North America and the adjacent military and Bobcat markets. Snowmobiles are expected to be down slightly to up slightly. We will know more as the season progresses.

On-road vehicles will be up over 50%, and PG&A is expected to grow similar to the overall company growth. Gross margins for the full year 2010 are expected to expand again, up to a 100 basis points. I will give additional clarity on the regions for our continued confidence and expanding our gross margin shortly.

Operating expenses are expected to increase in both dollar terms and as a percentage of sales for the full year 2010, primarily due to the incremental investments being made in our growth opportunities internationally as well adjacent market and business development.

In addition, we expect increased incentive compensation plan expenses in 2010, resulting from the reinstatement of longer term plan expenses that were reduced or eliminated in 2009. The income tax provision for the full year 2010 was expected to be in the range of 33% to 33.5% of pretax income similar to the provision rate for the full year 2009.

Earnings per share for the full year 2010 are expected to be in the range of $3.15 to $3.30 per diluted share, which is an increase of 3% to 8%, compared to the $3.05 per share earned in 2009.

Net income for the full-year 2010 is expected to increase at a higher rate, approximately up 7% to up 11% compared to 2009. The percentage rate increase for net income is expected to be higher than the earnings per share due to an anticipated increase in the number of diluted shares outstanding throughout 2010, resulting from the elimination of our open market share repurchases in 2009 and a higher anticipated stock price.

You will note that this trend began in the fourth quarter of '09. Our reported EPS was up 18%, while net income was up 21%. This was due to an increase in the diluted share count in the fourth quarter of about 800,000 shares or an increase of 2.6%. This trend is expected to continue throughout 2010. The gross profit margin percentage generated for the fourth quarter was 27.3%, up 450 basis points. As Ben had commented on, the primary driver of the improvement in gross margins was the ongoing focused attention on taking costs out of our products, both from an engineering and purchasing perspective.

In addition, we adjusted our manufacturing capacity and cost structures, while driving productivity gains in order to minimize the fixed cost absorption impact of the lower product volumes. The gross margin percentage in the fourth quarter continued to benefit from commodity cost decreases, higher selling prices and lower sales promotion costs. In addition, during the fourth quarter, the currency movements turned positive for the first time this year.

These gross margin benefits were somewhat offset by higher than anticipated warranty costs and higher tooling expense during the fourth quarter. For the full year 2009, the gross profit margin percentage increased 220 basis points for largely the same reasons.

For 2010, we expect the improvement in gross margins to continue throughout the year, from a continuation of improvements and momentum experience in 2009. We are confident in our 2010 guidance of up to 100 basis points expansion, given the success we have experienced in taking costs out of our model year 2010 products in addition to the expected benefits from higher selling prices, lower warranty costs and the currency rate favorability, in spite of anticipated higher commodity costs throughout 2010.

Income from financial services for the fourth quarter 2009 increased 20%, primarily due to higher interest rates paid to [Polaris acceptance] by both Polaris and our dealers during the fourth quarter.

For the fourth quarter of 2009, we financed through our retail credit programs HSBC, GE and Sheffield Combined, about 31% of products sold to consumers in the United States, which we believe has stabilize at these levels. The approval rate in the fourth quarter increased to 54%, compared to 48% for the first nine months of this year and 51% for the fourth quarter of year ago.

In the fourth quarter 2009, the wholesale portfolio related to floor-plan financing for dealers in the United States was approximately $555 million, a decrease of 22% from $710 million at the end of 2008, reflecting the decline in the dollar amount of dealer inventories.

This 22% decline in dollars compares to a 26% decline in unit outstanding in the portfolio. The higher unit decline is a result of the mixed change to a higher priced side- by-side inventory. Credit losses in the dealer wholesale portfolio remain very reasonable, averaging well less than 1%. During the fourth quarter we continued to see a modest number of dealer failures, repossessions of inventory and credit losses as expected, but these issues remain well within our expectations.

For 2010, we expect total income from financial services including each of Polaris acceptance, retail credit and other financial service activities to be similar to 2009. Moving now to our balance sheet and liquidity profile, our debt position finished at $200 million at the end of 2009, unchanged from a year ago, and our cash balances are at a record level of $140 million.

We continue to have ample borrowing capacity under our attractively priced long-term $450 million banking arrangement which expires in December of 2011. As Bennett mentioned, factory inventories at the end of the year were $179 million, a 19% decrease from a year ago. We expect factory inventory levels to continue to decline in 2010 to below the $179 million by year end. For the 2009 year, we moderated our investments in capital expenditures and new product development tooling to about $44 million, which is 43% lower than a year ago.

For the full year 2010, we expect our appetite for capital expenditures to be in the range of $50 million to $55 million. We believe this level of capital expenditure is adequate to remain competitive with innovative new products and targeted investments in capital projects to reduce our production costs and improve efficiencies, which will allow us to continue to improve our product margins. We expect depreciation for the full year 2010, to be in the range of $65 million to $70 million.

Operating cash flow provided by operating activities was $193 million for the full year 2009, an increase of 10% from last year. A decrease in factory inventory, accounts receivable and current deferred tax assets during 2009, offset partially by a decrease in accounts payable and accrued liabilities were the primary reasons for the increase in cash flow compared to last year.

We expect cash flow provided to increase modestly for the full year 2010. During 2009, we repurchased only a minimum number of shares under our share repurchase program related to employee stock benefit plans. As I stated in past calls, we've changed our view on open market share repurchases and will instead focus the majority of our excess cash flow on any potential acquisitions that make sense for the company going forward.

The company paid dividends during 2009 of $50 million, compared to $49.6 million for the full year last year. Last week, the board of directors approved a 3% increase in the regular quarterly cash dividend, which represents the 15th consecutive year of Polaris increasing the dividend effective with our first quarter 2010 dividend payment. We are very proud of our dividend record and believe paying dividends is one of the important ways we can continue to deliver value to our shareholders.

I will conclude my comments this morning with our expectations for the first quarter, 2010. Total company sales are expected to increase in the range of up 1% to up 3% from the $312 million a year ago. Earnings are expected to be in the range of $0.45 to $0.47 per diluted share for the first quarter 2010. You might recall that our 2009 first quarter included a one time non cash impairment charge of $0.18 per share related to our investment in KTM.

In conclusion, we're very pleased with our 2009 results given the economic environment and we are confident we can deliver another solid year in 2010.

This time, I'll turn it back over to Scott for some concluding comments.

Scott Wine

Thanks Mike. To summarize, we had a darn good fourth quarter and a strong finish to 2009, which has us well positioned for 2010. We do not expect a strong recovery, and we are not planning on any tailwinds from the US economy or from our key international markets in 2010. We have a conservative outlook for the Power Sports industry and are predicting double digit retail sales declines in both North America and Europe with somewhat better performance in the brick countries.

This outlook is primarily driven by expectations of continuing high unemployment after a long period of increased personal savings and a new era of tighter credit. We can react fast and will be poised and ready to aggressively take advantage of any improvements that materialize in our end markets. We will continue to diversify and seek growth outside of North America as we add more investment to our business in Europe, the Middle East and Africa as well as South America and China.

We expect that the investments we are making in China and the infrastructure investments in Europe will gain traction in 2010. We anticipate continued growth in our military business as we further leverage the unique benefits, our products can provide to forward deployed forces. Our Bobcat relationship will begin to generate revenue and profit in the second half of 2010 with faster growth in 2011 and beyond.

We will continue to devote energy and resources to business development and will likely complete at least one acquisition in our portfolio this year. We have a number of excellent opportunities in our funnel, but we'll maintain a strict discipline to ensure we generate incremental value for Polaris and our shareholders.

2010 will be an important year for our newly formed on-road business as we drive much needed improvements in our Victory business to expand margins and generate sales growth with a priority on accelerating retail sales as we did in the fourth quarter.

We will also see growth in our new low emission vehicle product line. You should expect further margin expansion. We will stay on the gas with operational excellence, which would be a key part of our ongoing efforts. The opportunities for us to improve quality, cost and speed are real, and we are committed to capturing the benefits for our Polaris stake holders.

In summary, we have more certainty about the year ahead but are projecting continued weakness in our core markets. We are confident that we can outperform the industry and expect to benefit from the progress we made in 2009 that will enable players to return to limited revenue growth and continued marketing expansion. We are committed to being the best in Power Sports plus continuing to diversify our business to provide additional opportunities for profitable growth.

Execution will be the key to our success, and expect Polaris to stay on strategy and deliver another year of strong results in 2010.

With that, I'll turn it over to Sheena to open up the lines.

Question-and-Answer Session


(Operator Instructions). Okay. Your first question comes from the line of James Hardiman with FTN Equity Capital.

James Hardiman - FTN Equity Capital

Congrats on a great quarter, a great year, and we certainly appreciate all the disclosure. A couple of questions for you, on Victory, you've given us all the numbers. Can you just run down one more time sort of what do you expect from the industry and then how you sort of get to your 50% plus growth? I think you said you felt the industry would be down at least in the US obviously international is a big piece of your growth. Can you just run through sort of the industry to your numbers once again?

Benett Morgan

Yeah James, this is Bennett. We think the heavyweight segment which we compete in, which may be different than from some of the others it's going to be down 10% to 15%. The reason, we are guiding in excess of 50% frankly is you saw we were down 44% this year. We dramatically [undershiped] retail this year even in a down market. We will do that again the in '10, but not to the same magnitude. We also have tremendous traction with global expansion, and that continues to get to be a bigger part of our mix. So we think we are going to accelerate retail gain, a lot of share. We want to have to undership retail by as much, but we expect the markets to still be down. It's still the law of relatively small numbers.

James Hardiman - FTN Equity Capital

Right, but ultimately would you expect obviously international is going to be up huge, but you also expect your US business to be up at retail as well?

Benett Morgan


Mike Malone

This is Mike. The only thing I would add to that in addition is that the way we're communicating. This is non-road division number of about 50% which also includes a modest amount of LED products that will be incremental year-over-year in 2010 as well.

James Hardiman - FTN Equity Capital

Great, and on the Snowmobile side, obviously there is a lot of snowfall in December, doesn't seem like it really moved the needle well really in terms of wholesale or retail. Is there the feeling that that snowfall may have helped January sort of what's the color on sort of the early January retail given how much snowfall we got in December?

Mike Malone

We're seeing January retail not a trend like the fourth quarter, no major up or down movements. The snowfall we had in December, and was kind of contrasted with the rain and warmer weather in the last couple of weeks here in the Midwest. So we've not seen any major directional shifts in the trends that we saw in the fourth quarter.

James Hardiman - FTN Equity Capital

Okay. And then just real quick on the MVP program, I think last update; you said you were about 50% rolled out. Should we expect that number to grow in the near term, and can you give us any color on how the MVP versus non-MVP dealers have performed?

Bennett Morgan

Yeah James, this is Bennett again. We've talked about MVP, as we are still at 50%. We generally will make moves around the model year if we do that. We have the intent over time to expand the MVP as we continue to master and learn that. That would be our hope as we go forward. We're not going to be specific about exactly what that timetable is, but we would expect to continue to increase MVP dealer penetration as we move forward.

From a performance standpoint, the MVP dealers are performing well. They gained a significant amount of share in the fourth quarter.

We have some that have been on this for over a year or two now, we have some that are just getting on it so there is a learning curve. But they're performing very similar right now to our existing dealers from the retail standpoint, but I would tell you in general, their inventory metric and perhaps their profitability is a little, is more favorable.


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

Greg Badishkanian - Citi

Obviously great job on the quarter, just a few questions; first seems like the credit environment has improved a little bit. What would you expect over the next three quarters? Just continuing sort of moderate improvements?

Mike Malone

This is Mike. The way I would characterize that Greg is that, the retail credit environment is stabilized. It was very uncertain, very volatile a year ago and earlier this year, it's settled out. You can see by the metrics that we talked about; that it's in my view stabilizes. Going forward, I don't expect significant changes, although with new regulations coming out of Congress, there will probably be a mix change from less revolving credit and more installment credit going forward with some of the new rules and regulations. We are prepared for that. We have both GE and Sheffield doing our installment loans for our dealers. So we are very well prepared for that mix change if, in fact that happens. But other than that, I don't really anticipate any significant change in the retail credit environment.

Greg Badishkanian - Citi

And also on the side-by-side market, obviously excellent performance there, but what are you seeing from your competitors that you are taking share from? Are you seeing any new products that might create a threat? How are their inventory levels, and also just in terms of pricing on the side-by-sides?

Bennett Morgan

I think Greg, the fact remains that side-by-sides have become the most profitable and then perhaps important part of the Power Sports industry, so we expect and we've seen lot of people to start to enter that market. Honda came in with a Big Red. We feel extremely good about our product portfolio about where we are positioned. We demonstrated that with a performance in 2009 from a share perspective.

We do expect some of the key competitors to bring new products to market. Some will enter the market for the first time, and I suspect that we'll be well prepared and have another good year in side-by-sides. I think dealer inventory for everybody didn't make nearly the progress that was made on the ATV side of things, but we are comfortable with where we are positioned on side-by-side inventory, and I haven't heard of too many problems with the competitors to expect the high promotional pressure that we've seen in ATVs.


Your next question comes from the line of Ed Aaron with RBC Capital Markets.

Ed Aaron -RBC Capital Markets

So I never want to talk to you for conservatives in here, but as far as the guidance goes, you ran out of record level in the fourth quarter from an earnings perspective, and the 2010 guidance is still, these are not below the 2008 peak earnings year and just, is that just real conservatism, or are there some factors about Q4 relative to the forward outlook where maybe we shouldn't assume that, sort of that record quarterly earnings rate is achievable going forward?

Bennett Morgan

Obviously as both Mike and I spoke to, we had some shift to favorable currencies and just had a year-over-year benefit. But overall the fourth quarter was about strong performance across the business, and we do expect 2010 to be a year of strong performance across our business. As we try to spell out, conservative outlook is based on what we expect in our core industries.

There is only a limited amount that we believe we can do to outperform the industry, and with expectations for double digit decreases in Power Sports industry in North America, we think we are going to be fighting an uphill battle throughout the year. As I tried to indicate, if we see our end markets improve, we've proven we've got the speed to react and take advantage of it. But right now, our primary growth is coming outside of North America and in some of our new product adjacencies if you look at our core markets, they are essentially flat. If the industries improve we expect our results to improve.

Ed Aaron -RBC Capital Markets

Fair enough, and then from just a mixed standpoint, I think you kind of guided to 2010 as a mixed neutral year. I'm a bit surprised that mix wouldn't be a tailwind again in 2010 obviously in the ATV business side-by-side is expected to do better than they've been core ATVs, and then you have other businesses, higher margin businesses like military that are still ramping. What sort of weighs back down the other side of that from a mixed standpoint?

Mike Malone

Ed, this is Mike. There is a number of factors in side-by- sides where growing a new product category of the midsize with our Ranger 400 line and that's a smaller price point, with modestly less margin percent than some of our bigger side-by-side products. So that impacts the mix a little bit. Some of our newer adjacency type things aren't quite to the margin percent that our other businesses are. For instance Bobcat, when we are going to source the product to them, our margins are good, but they are not as good as it would be if it was Polaris product that we were [sourcing]. So, some of those factors that weigh down a bit.

Ed Aaron -RBC Capital Markets

And then just, my last question if I could. Just on Victory, you tend not to talk about profitability levels there, but can you give us to some sense I know you have some initiatives in place on how to improve the performance of that business, and just what has to happen for that business to make money in terms of either kind of the internal operational stuff you are working on or the end market recovery? Just trying to get some context for, how far away we are from that business being economically a positive contributor?

Scott Wine

I don't think we are too far away from that, Ed. I think it's pretty simple what we need to do. We need to sell more bikes, which Bennett talked about. We expect to do that. We need to bring down dealer inventories, so we don't have the overhang of non-current to drive high promotional cost and we need to take a little bit of cost out of the product. And we have very clear action plans to do all of those things throughout 2010. So, it's not years away, but as I've said several times, I am committed to a profitable Victory motorcycle business, and we still see that in our future.

Mike Malone

And that being said, the improvement in Victory in 2010 will be incrementally beneficial to our margins in 2010.


Your next question comes from the line of Joe Mackey with Wells Fargo.

Joe Mackey -Wells Fargo

I guess quickly sticking with Victory's for a minute here. The retail sales increased in Q4, you were up significantly. I mean, how much of that was due to new product introductions, and how much of that was due to maybe closing out the non-current stuff?

Bennett Morgan

About a third of the retail was represented by the Cross bikes. We expect if we ship more those into channel that may increase. But we had numerous initiatives underway from employee referrals and customer referrals, and it was a lot of energy and effort from the team, and I think that as much as anything drove it. But, this is an ongoing initiative that's going to require a lot of focus and effort, and I think you see what can happen when we provide that as we did in the fourth quarter.

Joe Mackey -Wells Fargo

On Victory's and core ATVs, you are still going to ship a lot, less into the channel than you are selling. How close are you to getting to the point where you are comfortable with channel inventories? And you know is it maybe sometime in '10 where we could see a pickup in production, so that at least you are producing as much as you are selling?

Bennett Morgan

That's a good question. We've certainly been on that March for the last three years, significantly undership retail. We will do that again in '10; but to a lesser degree, we are much closer than we've been, and we are feeling decent about our inventory levels right now, and I guess we would hope that based on how we think the '10 plan goals, we would think that we would be at a balanced kind of flow through level by the end of '10 would be our hope.

Joe Mackey -Wells Fargo

And then last question here, you kind of hit on competitor inventory levels with the side- by-side, but on core ATVs, motorcycles, they seem to be a little bit behind the curve at least from where you guys are on inventory. Can we still expect to see some pricing pressure from competitors in those two segments, the core motorcycle ATV segment in order for them to kind of catch up to where you guys are?

Mike Malone

I think that would be what we built into our plan essentially. I think that a number of the competitors did make progress, though in 2009, and I would tell you that while I don't know that they won't be considering themselves healthy and I think they are behind where we are, I think that they are arguably better than they were a year ago. And so we still expect promotion to remain aggressive in ATVs, and motorcycles, but most of them made progress because they did significant cuts to their build even though the retail wasn't very good. So it's still tough, but I don't know that it's as bad as it was a year ago.


Your next question comes from the line of Craig Kennison with Robert W. Baird.

Craig Kennison - Robert W. Baird

Bennett, how has the MVP program impacted dealers that are not on it? And are they working harder to get on that program? Are they looking at other potential partners in the category?

Bennett Morgan

Well I would tell you that as many dealers that are waiting (inaudible) for us to be ready to expand it into their area or to their dealership. They continued to run business as usual. We've made a number of improvements, Craig and how we run the business model with those folks as well even though they are not official MVP dealers, which I think has which has helped alleviate some of that pressure or have versus have not, and that's why we continue to go as fast as we can to expand the business model as we learned. So, I think there's certainly advantage for an MVP dealer, but we are trying to minimize those advantages and trying to get to as much of an MVP world as we can as we go forward.

Craig Kennison - Robert W. Baird

And then Scott, as acquisitions potentially heat out, can you just reiterate the (inaudible) for Polaris? Thanks.

Scott Wine

I think the (inaudible) enables us to drive profitable growth and value for share holders, and that is what we will strive to do with everything we do. Obviously, if you look at our stated strategy, we have opportunities for growth outside of North America and Europe. We have opportunities for growth outside of the Power Sports industry to give us a little bit of offset to the inevitable ebbs and flows of consumer demand there.

And as we've looked at Todd Balan joined us the middle of the last year. We put a disciplined process in place to manage the funnels, and we see quite a few of interesting opportunities; but as you can tell by the last year and a half we haven't done anything. We're going to be very disciplined as we go through this. But I do suspect it will become an important part of our ongoing growth strategy. But again, it's all about profitable growth. We are not going to buy anything to get bigger. No interest in that at all.


Your next question comes from the line of (inaudible) Wedbush Morgan.

Unidentified Analyst

I wonder if you guys could just provide us an update on MVP. About how many of your dealers, or rather what percentage of your dealers are now on that, and as you look to expand that, what we might expect by the end of 2010? How many would be on that and also just a follow-up to that how much of the dealer reduction inventories is really coming as a result of MVP as opposed to just lowering inventories on the wake of a tough economy? Thanks

Mike Malone

I'll try to take a crack at that. We kind of answered the first question. We have and what we stated and will continue to state as we have 50% of our North American ORV volume on MVP. It's slightly less than that from a dealer's standpoint, but close. We haven't quantified an expansion level other than we intend to be aggressive about that and continue to expand MVP as we continue to learn and master that.

From a standpoint of the inventory levels, I think it's both. I mean, we are certainly rolling inventory levels across our channel, but MVP business model drives those reductions in a more accelerated manner. So certainly MVP is driving a lot of those reductions, but we are also lowering levels for all of our dealers across the channel. So it's both.

Unidentified Analyst

And just one last follow-up if I could, it wasn't that long ago when the motorcycle business was positive profit. If you were to achieve that 50% plus growth this year, would that get the motorcycle business back to profitability by year-end?

Mike Malone

Ronald, as you know we don't really discuss profitability by product line in any specifics. We've said that we're disappointed with our Victory business this year, with sales down 44%. We are obviously not in a profitable perspective at the present time, but we expect to return to profitability. When and how, we get there and at what pace, we're just not going to talk about specifically.


Your last and final question comes from Bob Evans with Craig-Hallum Capital.

Bob Evans - Craig-Hallum Capital

First can you comment on the Bobcat business? Can you give us any sense of magnitude of size for the business, maybe '010, '011, how big a business you think that could have become?

Mike Malone

Bob, this is Mike. We're not prepared to talk in specific terms on dollar growth. What we have said is that this is going to ramp up starting in the second half of 2010, as we start to supply the source product to Bobcat. It obviously in 2011, while the full year of that relationship; and then, as we move forward beyond 2011, we'll continue to have that business as well as our core developed products that's coming in the future would more than likely start to ramp in. So there is some growth in the second half of this year, quite a bit more actually than in '011 and then it should go up from there.

Bob Evans - Craig Column Capital

Okay. Fair enough. And on the commodity cost side, I think you said it's going to be a bit of a headwind in '010: Can you give us a sense again of magnitude there?

Mike Malone

No. We're guessing. We don't really know what's going to happen on commodity. We really don't know what's going to happen on currency. So we're looking at the trends that we're looking at most recently; and the price of fuel and the price of aluminum, the price of steel is higher today than it was six months ago. So we're expecting those trends to continue in 2010.

We've got budgets built. We think conservatively that anticipate a higher-cost environment for commodities in 2010, and we're prepared for that, and we'll see how it plays out.

Bob Evans - Craig Column Capital

And that was my next question on currency. Can you give us a sense of how far out you're hedged?

Mike Malone

So right now, we got a lot of currencies that we are down Canadian dollars was the biggest, and then we've got the Yen and some European currencies. Generally speaking, we are hedged about half of our exposure in the first half of 2010, and we are hedged, currently we are hedged favorable to the comparable 2009 periods.

Bob Evans - Craig Column Capital

And final question just on acquisitions again, I know you discussed this, but should we look for something, a smaller business that you're expecting to build versus something maybe more transformational, like KTM would have been?

Bennett Morgan

We're not going to look to make a transformational acquisition. Those rarely work out welt, and given the risk involved in that size and the type of acquisition it wouldn't be a prudent place for us to start.

Bennett Morgan

Okay, thanks. So that's all the time we have this morning. I want to thank everyone for participating in the call this morning and we look forward to talking to you next quarter. Thanks again good bye.


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

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