Polaris Industries' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Polaris Industries, Inc. (PII)

Q2 2012 Earnings Call

July 24, 2012, 10:00 a.m. ET

Executives

Richard Edwards - Director of IR

Scott W. Wine – CEO

Bennett J. Morgan - President and COO

Michael W. Malone - VP - Finance and CFO

Analysts

Jaime Katz – Morningstar, Inc.

Greg Badishkanian – Citigroup

Scott Hamann – KeyBanc Capital Markets

Gerrick Johnson – BMO Capital Markets

Jimmy Baker – B. Riley & Company

Craig Kennison – Robert W. Baird

Ed Aaron – RBC Capital Markets

Rommel Dionisio – Wedbush Securities

Scott Stember – Sidoti & Company, LLC

Tim Conder – Wells Fargo Securities

Mark Smith – Feltl and Company

Joe Hovorka - Raymond James Company

Presentation

Operator

Good morning. My name is Sarah, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Polaris Second Quarter Earnings Results Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Richard Edwards, Director of Investor Relations. Mr. Edwards, you may begin your conference.

Richard Edwards

Thank you, Sarah. Good morning and thank you for joining us for our 2012 second quarter 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 shipments, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for the balance of 2012, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements.

Now I will turn it over to Scott. Scott?

Scott Wine

Good morning and thank you for joining us. With the second quarter and first half of 2012 in the books, I am encouraged by the performance of the team and the results of the business. While weak U.S. GDP growth and a likely recession in Europe are concerning, we continue to enjoy surprising strength in our core North American Power Sports business. We are capturing healthy market share gains in both off-road vehicles and motorcycles, in a climate of increasing competition, and the entire Polaris team is executing at a high level. I am more than comfortable betting on them to successfully lead us through this period of economic uncertainty.

Sales for the second quarter increased 24%, to a record $755.4 million, as robust North American retail demand and corresponding dealer orders counterbalanced a 7% growth rate for international business. Slowing off-road vehicle sales in Europe were offset by the addition of Goupil revenue, while our Asia Pacific Latin America business grew over 20% again this quarter. Overall, off-road vehicle revenue was up 20%, with our Ranger and RZR side-by-sides carrying most of the load. On-road sales were up 110%, fueled by substantial motorcycle gains and purely incremental GEM and Goupil sales from our small vehicle business.

Second quarter net income rose 43% to 69.8 million, yielding record earnings per share of $.98, a 44% improvement over the prior year period. Much of the earnings growth resulted from higher volumes, although our manufacturing and product-related cost reduction efforts continue to pay dividends. These gains were not enough to overcome reduced, but still present, commodity headwinds, and a dramatic shift in currencies, which alone cost well over 100 basis points hit to gross margins. For the quarter, overall gross profit margins were down 50 basis points, however as we have emphasized now for the past few years, our ultimate goal is to expand net income margins, which climbed 120 basis points in the second quarter to 9.2%.

Buoyed by the strength of the off-road vehicle category, and with confidence in our new model year ’13 product offerings, we are again raising our full-year sales and earnings guidance. Despite a soft and potentially slowing U.S. economy, we expect a positive reaction to the outstanding lineup we’ll introduce in next week’s dealer meeting. New products and process improvement should contribute to market share gains and margin enhancement throughout the remainder of the year. We are lowering second half expectations for our EMEA business, although they should still surpass 2011 results.

Growth in Asia Pacific Latin America is steady, and international sales overall will be solidly positive for the second half. We are increasing our full-year sales guidance for the entire company to up 14 to 17% over 2011. Coupling this sales growth with productivity gains and relaxing commodity pressure, we now anticipate full-year earnings per share in the $4.05 to $4.15 range, up 27 to 30% over 2011.

Earlier today, we announced we have signed an agreement to create a new joint venture in India with Eicher Motors Limited. We have made excellent progress over the past two years building our Polaris business in India, and are confident that Eicher is the right partner to help us accelerate growth in this important region. Eicher is a New Delhi-based $1.3 billion manufacturer of commercial vehicles and motorcycles, with a rich history and a sterling reputation. Eicher introduced India’s first tractors in 1959, and it was a proud legacy of innovation, including successful stewardship of the iconic Royal Infield motorcycle business. The largest part of the company is their joint venture with Volvo, which produces modern commercial vehicles and components. The 50-50 joint venture anticipates both Polaris and Eicher will invest approximately $25 million over the next three years. The joint venture plans to establish a manufacturing business in India, to develop and commercialize new vehicles for India and other emerging markets. The joint venture will combine Polaris’s innovative designs and engineering acumen with Eicher’s power train expertise, low cost supplier base and intimate knowledge of local consumer trends. Eicher’s strong financial position and powerful brand provide Polaris with firm footing in one of the world’s fastest-growing economies, and this joint venture establishes an important platform from which we can access an expansive group of new Asian customers.

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