Polaris Inc. (PII) Q4 2012 Earnings Report, Transcript and Summary

Richard Edwards - Director of Investor Relations Scott W. Wine - Chief Executive Officer, Director and Member of Technology Committee Bennett J. Morgan - President and Chief Operating Officer Michael W. Malone - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

James Hardiman - Longbow Research LLC Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division Scott L. Stember - Sidoti & Company, LLC Jaime M. Katz - Morningstar Inc., Research Division Edward Aaron - RBC Capital Markets, LLC, Research Division Gerrick L. Johnson - BMO Capital Markets U.S. Jimmy Baker - B. Riley & Co., LLC, Research Division Rommel T. Dionisio - Wedbush Securities Inc., Research Division Timothy A. Conder - Wells Fargo Securities, LLC, Research Division Mark E. Smith - Feltl and Company, Inc., Research Division Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

Good morning, everyone. My name is Sarah, 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. [Operator Instructions] I would now like to turn the call over to our host, Mr. Richard Edwards. Sir, you may begin your conference.

Thank you, Sarah, and good morning, everyone, and thank you for joining us for our 2012 fourth quarter and full year earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning’s call. The speakers today are Scott Wine, our Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. During the call today, as always, 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 2013, 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 turn it over to Scott. Scott?

Thanks, Richard. Good morning, and thank you for joining us. January's typically one of the busiest months of the year at Polaris, but our pace this month just seemed even more aggressive than the years past. I see it in every business unit, in each functional area, and the energy and excitement about the year ahead is encouraging. Certainly, part of our activity is devoted to preparing for the challenges and risks that we expect to face, but what is notably absent is any reflection of the tremendous growth performance the team delivered in 2012. We will take some time to review those results this morning, but trust that the rest of Polaris is hard at work to make 2013 another record year. From the introduction of the Jagged X RZR, our highest performing vehicle ever, and the announcement of the KLIM acquisition to strong double-digit retail growth, we drove hard through the final 3 months of 2012. With strong demand for our industry-leading ORV lineup and also for our On-Road and PG&A businesses, fourth quarter sales increased 15% to a record $900 million. Increased competitive activity kept us on top of our game and our 210 basis point improvement in gross profit margin in the quarter indicates we are continuing to win with innovation and execution, not overly costly discounts. Fourth quarter net income and earnings per share both increased 38% to $88.1 million and $1.24 per share, respectively. This strong end of the year performance was the capstone to a third straight record year for Polaris and bides important momentum to begin our quest for a fourth in 2014. Full year 2012 sales increased 21% to a record $3.2 billion, marking the first time Polaris has exceeded the $3 billion mark, just one year after passing the $2…

Thanks, Scott, and good morning, everyone. Fourth quarter operational performance was excellent and Polaris remains on the gas. North American retail sales increased 13%, the 11th consecutive quarter of double-digit retail growth, and for the year we were up a robust 14%, identical to 2011's stellar retail growth rate. We built further on our #1 market share position in North American powersports and for the third consecutive year, we gained share in every business we competed in. Our operations and global supply teams continue to deliver production upside to meet increasing customer demand, and we have initiated new investments that will expand our global manufacturing footprint into Europe and India. As we projected on our third quarter call, North American dealer inventory finished 2012 up 25% versus a year ago, as we continue to better match product availability to retail demand. Our dealers and our internal metrics continues to confirm inventory levels and quality are in excellent shape, while our new capabilities in the retail flow management and MDP will enable us to reduce dealer stock while optimizing point-of-sale availability. ORV inventory was up 26% to support incremental side-by-side and ATV new market segments and our increased retail velocity. Motorcycle inventory was up 43% driven by new dealer adds and RFM implementation. RFM has already reduced order-to-delivery time by over 75% and reduced stock outs by 35%. In 2013, we anticipate Victory customer order fulfillment in less than 18 days. Snowmobile inventory was up 16% due to higher beginning-of-season inventory levels. So all in all, as we entered 2013, we feel good about our dealer inventory levels and, more importantly, our increased capabilities to meet dealer and consumer demand moving forward. For 2013, we do not expect dealer inventory levels to increase or decrease significantly. Moving onto business unit performance.…

Thanks, Bennett, and good morning to everyone. As both Scott and Bennett mentioned, we're very pleased with our record 2012 results, as the execution of our long-term strategy continues to deliver outstanding results for the company. For the full year 2013, we expect to report another record year. However, we will need to overcome a continued weak European economy and uncertainty around policies that may be enacted by the U.S. government in the area of spending, taxes and the debt ceiling. Taking into consideration these impediments, our 2013 full year guidance is as follows. Total company sales are expected to increase 7% to 10% for the full year, with the individual businesses contributing as follows. Sales of Off-Road Vehicles are expected to increase in the high-single digits percent range with retail sales of side-by-side vehicles and ATVs continuing to outpace the overall market, both in North America and internationally. We expect to gain additional ORV market share in 2013, although at a more moderate rate than the last 3 years. We do expect our sales volumes of ORVs in the EMEA market to be down in 2013. At this time of the year, it's always difficult to predict the outcome of the snowmobile selling season, but with the current level of higher dealer inventories and below average snowfall, we currently expect our snowmobiles sales to be down in the single-digit percent range during calendar year 2013. As usual, we will know much more as the winter selling season winds down and we've begin taking dealer orders in March. On-Road Vehicles sales, comprised of Victory and Indian, as well as the company's small electric vehicles, GEM and Goupil, are expected to be up in the range of 25% to 35% in 2013. Victory is driving solid retail sales demand and additional…

To wrap up, I will offer some additional insight into how we see 2013, now that we have a perspective 4 weeks into it. Here in the United States, we have a more stable political scene than we did a year ago, but the potential economic risks of Washington's actions, or inactions, with respect to our national debt, taxes and regulatory policy is still a very big concern. As such, we expect muted GDP growth here and for Europe to be flat or perhaps even contract. In North America, we project the powersports market will, once again, outpace the economy but will grow less quickly than last year. We anticipate new entrants and better products in the side-by-side market, but believe our strong, growing stable RANGERs and RZRs will again win the competitive battle. I am extremely proud of the work the Victory team has done to accelerate the growth and profitability of their business and believe their 15th anniversary year could be an inflection point for long-term global growth for what is now our younger motorcycle brand. Indian Motorcycle is clearly the older brother or, more accurately, the great-great-grandfather to Victory with a birthday some 97 years earlier. We have learned a great deal building the Victory business, and we will apply that knowledge to ensure we give Indian the best possible introduction to the market later this year. I've ridden the bikes, seen the drawings and know the business plans, and feel confident that we will finally bring choice back to the market for great American motorcycles. Indian apparel and accessories will certainly be a growth driver for our PG&A business and, along with KLIM and many new product innovations, we expect to see strong growth of our highest profit margin business. We have invested quite a bit…

[Operator Instructions] Your first question comes from James Hardiman of Longbow Research.

I guess a couple of questions on the ORV segment. I guess, let's start out with just the industry growth assumption, the assumption that's going to be slower in 2013 than 2012. Is that just generally being conservative or are there some specific events that happened in 2012 that may not ultimately be repeatable in 2013?

Well, from an industry standpoint, James, we were really pleased to see the ATV industry grow for the first time in 8 years. But while we believe it's stabilized, that's not an industry we're modeling yet for long-term growth as we go forward. And obviously, we've seen a tremendous amount of growth out of side-by-sides over the last several years and in the way we've been modeling that, again, is that it will continue to grow nicely but at a slightly decelerating rate. And then, obviously, you got the backdrop of a lot of uncertainty around the economy with the higher taxes from most of our customers. And so I think that's a balanced approach as we head into '13, the way we're looking at the industries.

Very helpful. And then just on the inventory front. I think the dealer inventory increases are pretty straightforward, in terms of both motorcycles and snowmobiles. I was hoping you could help us deconstruct maybe the 26% growth in ORVs at retail. You talked about that -- some of that being to support new products, new segments. I guess, if you were to strip that away, how much would still be remaining, if any? And was this more a function of exceedingly low inventories last year and sort of building up over those?

I think, James, you're right. You're really right on. It's really 3 factors. I mean, obviously, retail velocity is up significantly and so, by nature, we're going to need some higher inventory levels of support. We do have 5 new segments that we created over the last year, in both side-by-sides and ATVs, so a significant portion, more than half of that inventory increases is for essentially new retail segments. And so those are the 2 primary drivers.

And James, just remember throughout the year, we talked about the commitment we made to our dealers to improve availability of products. I mean, despite the progress we've made with MVP, we were not meeting our dealers' demand to have the right products for all of their customers. And so part of this increase was reacting to dealers' demand and fulfilling our commitment to make sure that they have products to win the competitive battle, and we think we made tremendous progress towards that in 2012.

Your next question comes from Scott Hamann from KeyBanc Capital.

Just on the Indian business, can you kind of give us an update as to where you are with some of the dealer openings? I think the launch timing is later summer, but then just kind of what's incorporated in guidance as we kind of move '13 into '14, if you can help us out a little bit with that?

This is probably going to be one of those nonanswers, Scott. We talked about this. Obviously -- and we've put a lot of energy and effort and money into the Indian business. We feel very good about where we are. The dealer development activity is really moving along exactly as planned. Our target is to have between 120 and 140 Indian dealers by the end of the year. Some of our best Victory dealers will fulfill that, but mostly these are going to be new distribution points, really focused on the top motorcycle MSAs in the country. We're not giving specific guidance. I think you can expect it. Sales in 2013 are not going to exceed $100 million so you got the range between 0 and 100 depending on when we actually get the bikes launched and how retail demand flows. But obviously, based on what we've seen by consumer reaction and interest in these products, and what I know about what the guys are doing with the bikes and then building our distribution, we feel very good about bringing choice back to the heavyweight motorcycle industry.

Okay. And then just on the European facility, I mean timing of the investment on the P&L this year, I mean, have you started to break ground there? And then, is that gross margin adverse impact this year and when can we expect the savings to really start to hit the P&L in '14?

Sure. Scott, this is Mike. We're expecting to break ground some time later in this first half, so you'll see the cost and the P&L kind of ramp up through the year. Nearly all of that will be in gross margin, so the $8 million to $10 million of cost that we've guided to this year will -- is embedded into the -- up to 40 basis points of gross margin during the year. The savings, we obviously won't get any savings until we start production. The startup production is currently planned for the second half of '14. We'll still have, obviously, startup costs in 2014 so, for your modeling, I don't know that I'd plan on a whole lot of net upside in '14, but as we start to ramp up production in '15 and beyond, we should start to get some savings and our projection is that, at maturity, that this European facility can generate over $20 million of incremental benefit.

Your next question comes from Scott Stember of Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Talk about the competitive pricing environment that you guys alluded to, how it's picked up, maybe side-by-sides versus ATVs. With some of the new entrants into the market, how do you expect that will progress as 2013 goes on?

Scott, I think you got cut off on the beginning of your question. Can you just repeat that portion real quickly? Scott L. Stember - Sidoti & Company, LLC: Just talking about the competitive pricing environment. You alluded to the fact that it has picked up, maybe just talk about ATV versus side-by-side and how you would expect that to progress throughout 2013.

Yes, this is Bennett. I think from an ATV standpoint, what we're seeing is -- again, it's a competitive market. But for the most part, promotions are reasonably stable and, I think, we haven't seen a tremendous amount of innovation in new products, in ATVs, which again is not surprising to us. So I think as we go forward on that, we think that's status quo. In the side-by-side industry, obviously, that's the growth market. We're seeing a number of new entrants. We're seeing more escalated promotion, as people try to get their share of the pie. And as we go into '13, we expect that we will see more new product offerings, and we expect that the promotion environment will continue to remain competitive. As for pricing, again, with the -- you've seen how aggressive we've been on our product plan as we look to the future. I mean, we feel very confident about our product plans going forward in side-by-sides and so I think we're well positioned to compete with the competitive threats that come forward, but we do expect side-by-sides to become increasingly crowded and competitive in '13. Scott L. Stember - Sidoti & Company, LLC: Okay. And as far as the guidance for 2013, could you talk about the amount of contribution from the new product that you're developing with Bobcat?

No, we're not going to really be specific on how much that contribution is going to be.

I think on the charts, we indicated the sales increase from our Bobcat commercial business, again, without any numbers but relative increase. You said it, double-digit -- I'm sorry, forget that, that was small vehicle. So on a profitability, Scott, remember this is codeveloped vehicles, so on a margin perspective, the incremental commercial business won't add to our margins. It'll be a little bit dilutive as we distribute product through the Bobcat channel. Scott L. Stember - Sidoti & Company, LLC: Okay. But just trying to basically ascertain if we -- if you're expecting any contribution from it whatsoever or would you prefer not to comment on it?

Yes, I mean, again I can see we're being a little elusive for you here. But it -- but from what you've traditionally tracked in our Bobcat relationship, with this new product entrant along with what we'll be doing on the Polaris channel, this will be a meaningful increase and it will be a meaningful increase in profitability versus that small segment as we reported it. That's as specific as I want to get for you. But yes, we will positively feel the difference of the new product, in both the Polaris and the Bobcat channel, this year.

Yes. And Scott, this is a -- it's not just a 2013 play. I mean, this relationship with Bobcat and really the entry with a significantly better offering into the commercial segment is something that we expect will be beneficial in 2013 and really a great growth platform for us over the next several years.

Your next question comes from Jamie Katz of Morningstar.

I guess I have 2 questions. First, obviously last year was pretty difficult for snowmobiles and this year looks not so promising either. Is there some part of the technological advances that has made the replacement rate a little bit slower than in the past? And do we anticipate that to kind of be the case going forward or is it kind of more snow driven? And then I know, in the press release, you guys talked about countermeasures to take if economic conditions worsen. Does that include kind of financing incentives and pricing promotions, or is there something else we should we thinking about?

Jaime, it's Scott, I'll start and then I'll let Bennett finish up. On the snowmobile side, I mean, obviously, last year's snow, especially across the plant, was not very good at all. But we were extremely pleased with the way our team and our dealers executed and then, I think, we did reasonably well. The snow in the mountains this year is actually fairly decent and that -- remember, that's where we have most of our market share. And it's actually just the opposite of what you said. The technology advances that we're making with our sled is actually encouraging people to buy more frequently, so really it's a factor of snow. And as Bennett said in his prepared remarks, the relaunch of the indie product has done well for us in the flatlands and we feel good about snow business as a profitable contributor to the company this year and going forward. And obviously, the growth rate depends on snow and that's not been ideal. But because of our strong market share number, leading market share in the mountains, we tend to do reasonably well. The pricing stuff, Bennett, you want to cover that?

Yes. I think, Jamie, from a Polaris perspective, I mean, obviously the snow conditions haven't been ideal last year. We did get some snow in December and that was helpful. We're not alarmed where we are in snowmobiles as we sit here in late January. So we expected the way the first quarter is progressing, we're going to end up okay, maybe a little heavier than we'd like in a perfect world. Maybe we won't get a lot growth. Mike talked about being down single digits in snowmobiles. But we think our inventory levels and our dealers and our build, as we head into the spring, will be okay. And from a standpoint of promotions and so forth, I mean, if we continue to see less snow than we'd like, you might see promotions escalate some. But again that's modeled in our guidance. So I don't think you should expect any kind of hair-raising concerns from us in snowmobiles as we head through the rest of the season.

And I think more broadly, when we mention countermeasures, I mean, I think, if you followed us, we've figured out how to get through 2009 recession pretty well. We have numerous and big levers to pull rather quickly in terms of reacting to any downward pressure in the market. That was the comment I think about the countermeasures we referred to.

Your next question comes from Ed Aaron, RBC Capital Markets.

I wanted to ask about kind of your expectations for what the sales cadence is going to look like over the course of the year. I know you have tougher comps in the early part of the year than the latter part of the year in terms of retail growth and then some of the -- kind of the new products don't kick in, presumably, in full force towards the second half. So should we expect that your growth rates are going to look stronger in the back half versus the front half?

I don't think we're going to give any more detail on the quarterly splits in the quarterly guidance. I don't think there's anything other than what you already commented on our normal product releases, those kinds of things, that I don't think we'll comment any further.

I mean, obviously, as Mike said, we commented on Bobcat's is going to be coming out, that codeveloped product; second, later in the year, the Indian is going to be coming out later in the year, to the extent that they contribute, I mean, I think you would see it. But every year we have new product entrants coming later.

Okay. And then I guess back to kind of the promotional question. I mean, I think, in my perception is that your retail sales numbers are -- as strong as they are maybe been viewed with a little more skepticism than was previously the case because the cost of doing business in side-by-side is starting to go up. And I just was looking for like a little bit more clarity on how much of a change have you already seen in that? In the marketplace versus what your expectation is for future change that's still to come?

Yes, this is Bennett. You know, again, we -- certainly competitors are trying harder to get what they think would be their fair share and we've seen in side-by-side the promotion rate escalates some. But again, remember, we're dealing with a higher average selling price as well. And if you look at what we're able to do in our largest business, and you look at what we're doing to gross profit margins, again, it is a more aggressive environment. But I think from, at least the Polaris standpoint. We're not alarmed at all. This isn't a surprise to us and we're feeling very good that we're still seeing margin expansion in a lot of our largest business. I think we're trying to be appropriately mindful as we look forward of what competitors could do to us in '13 and try to make sure we're responsible from a P&L standpoint to make sure we're putting ourselves in a position that we respond to what they do. You know I'm not alarmed.

One more quick one, if I could. Mike, the balance sheet accrual for compensation expense was down a fair amount sequentially and that usually doesn't happen. Was there like a meaningful P&L benefit from lower compensation this quarter versus prior quarters?

Yes. If you recall, a year ago in the fourth quarter, we had a significant hit in the compensation -- incentive compensation area largely related to the stock price movement and the impact is about $6 million beneficial in the fourth quarter of this year compared to the fourth quarter of last year, most of which ends up in SG&A line.

And Ed, I'm going to give you a little more clarity on your earlier question about the quarterly sales splits. What I'll tell you is the first half would maybe lend more to the bottom end of our sales range, and the second half more to the top end of the sales range that we've issued.

Your next question comes from Gerrick Johnson.

I was just wondering how much the KLIM acquisition added to PG&A in the quarter? And then if you could just go over briefly the strategy behind that one, I know you're operating it as a standalone, but eventually will this be sort of exclusive to Polaris dealers, will it be an umbrella brand for all sorts of other products? What do you plan on doing with this over time?

I'll start with the strategy piece and let Mike talk about the financials. Clearly, we, as you know, we love our PG&A business, with tremendous profitability and we're increasingly, obviously -- Indian kind of got us started, we think, -- increasingly recognizing the power of really strong brands. And when we looked that our apparel business, we had everything but a strong brand. And with KLIM, we got an industry leader, we got a great team and we have an opportunity to really help them expand their distribution and help us make us a better apparel business. So I think this is exactly in our wheelhouse and we get great riding gear along with it.

And as far as the impact, we purchased the business in early December so it was very modest sales in PG&A for the month of December.

Okay. And Mike, one more for you. Your liability for sales promotions and incentives was up about 30% year-over-year. Can you talk about that a little bit?

Well, again our inventories are up in the dealer channel, so what's on the balance sheet represents the anticipated cost to move that inventory through to the consumer. So as our inventories are up in the channel, then our balance sheet needs to be up to reflect that. And then as we've indicated throughout the year, in our gross margin analysis that the promotional environment has been heavier in 2012 than earlier and so we're preparing through the P&L and to the extent it's in dealer inventory on the balance sheet for that heavier promotional environment.

Your next question comes from Jimmy Baker, B. Riley. Jimmy Baker - B. Riley & Co., LLC, Research Division: First, I just wanted to dive a little bit deeper into your gross margin expectation for '13. You note that product mix is going to be a headwind there again in '13 despite your expectation for PG&A outperformance. Is that simply a function of On-Road Vehicles sales picking up and maybe that dilutive shift within your ORV portfolio towards Bobcat? I'm just looking for any color there?

I think, Jimmy, you've got the primary drivers identified. The On-Road Vehicles sales growing 25% to 35% and that, obviously, being at lower margins have a big impact on the mix. PG&A is growing, as you say, so that's helpful. But also within PG&A, our best margin is in Parts, and Accessories are good margins and apparel, historically, have been lower margins. Our mix within PG&A is moving away from parts, more toward accessories and apparel. And so within the PG&A category, even though PG&A is going to grow 20%, it's not necessarily helpful to the overall mix. So those are the primary drivers. Jimmy Baker - B. Riley & Co., LLC, Research Division: That's helpful, Mike. And then in your balance sheet expectations, your cash balance will be down if acquisitions are completed. I'm just kind of running through the math and I'm trying to trying understand if that's because you're evaluating more sizable acquisitions or is it simply that before incorporating any acquisitions, because of the elevated CapEx, you'll be essentially breakeven from a cash perspective after you return your planned amount of capital to shareholders?

I think it's both. I think the answer is both. We -- as you point out, we do have more cash needs to grow our business with the CapEx at $200 million, and we are optimistic that we'll be able to execute some meaningful acquisitions to utilize our balance sheet.

Your next question comes from Rommel Dionisio of Wedbush Securities.

A couple of questions about the new European plant. First, obviously there's probably some underutilized facilities out there these days. Could you just walk through the buy versus build decision, why the decision is made to construct as opposed to just buy an existing facility and refurbish it? And also, two, and obviously that you're going to save money shipping vehicles across the Atlantic Ocean, but thinking about Monterrey, that was pretty much on track with the cost savings and all of that. [indiscernible] given the labor benefits as Mexico, but could you talk about some of the intangible factors that -- benefits of having Monterrey, you alluded to, in prior conference calls, superior product quality and some other -- the other cost savings. Some of the lessons you've learned that you can bring to a new European facility?

Rommel, good question. As I've mentioned in my remarks, we've been looking at this for quite some time and we spent that time -- with the first priority to find one of those used spaces and we quickly ruled out any available buildings in, what I'll call, Western Europe, but parts of Spain, Italy, France, where we really don't want to be because of labor issues. And then looked over in, what I'll refer to as Central Eastern Europe, where we have lower labor cost, great engineering capability, yet still close enough from a logistics standpoint to get the savings. We feel like we found a very good location there and when we weighed all of the costs, the shell of the building for us is really not the big cost. It's the tooling investment and the equipment that we put in. And it just made sense for us to go with a greenfield that specifically meets our needs. The other aspect is, we only have one ATV line in the world, and that's in our plant in Roseau, they do a phenomenal job. But as we, as Bennett alluded to, achieved a #1 market share position here in North America, we're very close to capacity there. So it made sense, we needed to add capacity somewhere and this was yet another reason to put it in Europe. The other benefit as we talked about with Monterrey as being closer to serving those customers in Latin America and the southern part of the United States, we'll now be closer to serve those customers in Europe. And we'll also be able to start designing more products specifically for those European customers. Obviously, in the U.K. they drive on the opposite side of the road and we'll be able to start putting more emphasis on exactly what those customers need, not adapting and adopting and emolugating [ph] products that we build here in the U.S. So lessons out of Monterrey, I think, we had learned to get the team in place early, really focusing on product quality and validation instead of volume shipments from the beginning, and we're really confident in our ability to execute this one over the next 18 to 24 months.

Your next question comes from Tim Conder of Wells Fargo Securities.

Just wanted to revisit the channel inventories, Bennett, if -- remember from the third quarter call, I think you alluded then that probably you kind of had things in balance because you said that the turns should be flattish. And can you maybe just bridge us from there to fourth quarter? And then again, Mike, you responded, I think, in one of your prior -- to one of the prior questions that you cranked up the accruals because of the channel inventories. Are you gentlemen implying that maybe it's slightly above where you would like it in North America? I guess, again, one collective question there. And then on Eicher, you indicated that you're going to be launching in calendar '14. If I recalled correctly, you previously, I think, when you did the JV, talked about '15. So is that going a little bit better than anticipated, your ramp up there?

All right. Tim, this is Bennett. I'll try to take a couple of those and these guys can clean up. On the Eicher one, just since I was the last one on top of mind, basically that plan is going exactly as we've kind of outlined it. We might have alluded to a maybe, a model year '15 type of product which maybe was -- is the confusion, and now we switched nomenclature to calendar year '14 but that one's right on track, off to a very good start. I wouldn't say we're ahead of plan. I wouldn't say we're behind plan. And we're feeling pretty good about, what we got going there. On the dealer inventory standpoint, from the third quarter call, I guess, in our view, and I don't think I necessarily, specifically, spoke to exactly where we would end the year. In my mind, we ended up right where I thought we were going to end up. I mean, you have a little bit of a seasonal build in the fourth quarter as you're shipping snowmobiles, and as you get into pretty strong seasonality, particularly, in ORV, and so, by nature, your inventories rise a little bit in the fourth quarter. But I would tell you, as you could tell from my remarks, I think we're feeling pretty darn good about where our dealer inventory position is. I know the number might look scary to you but again when you do your surveys and when we do our surveys and we look at our metrics, the quality of our inventory, the segment stock and our ability to take care of our customers is profoundly better than where it was 12 months ago and we're feeling quite secure where we are in dealer inventory positions. If there was one area we'd say we wish we were a little bit better on, we wish that our snowmobile inventory was modestly a little bit lower, but frankly, that's been coming down, frankly, as we expected through the season and we expect we should end up okay there as well.

Yes. And as it relates to the promotions, that's the one area that we did beef up a little bit, on the promotions, was in the snowmobile area, as the inventories are still a little bit higher than we like.

Okay. And then Mike, just a follow-up, a couple of housekeeping items. You mentioned that -- if you could just revisit your statement on the tax impact of the R&D catch-up in the first quarter? And then on Indian, do you anticipate some of these ramp ups start up costs to be -- to fall off in '14 and maybe give a little bit of tailwind as we look out a year from now?

Okay, on the taxes, Tim, just to refresh everybody on this, the R&D tax credit, the federal R&D tax credit was not allowed in 2012. So our tax provision rate is higher year-over-year primarily because of that. The legislation was passed in early January retroactive for 2012, so the actual '12 benefit of our R&D credit will show up in the first quarter of 2013, which will impact positively our provision rate in the first quarter.

Any magnitude there, Mike, you can quantify?

Yes, I figured you'd ask. What I would suggest you do is to go into the footnotes and look at our tax footnote from the prior years and it maps out what our R&D tax credit is worth over the last couple of years, and you can guess from that. You want to do the Indian?

No, I mean, as far as Indian relates to what's going to happen in '14, obviously -- and just to remind you, these are ground up bikes. We didn't borrow parts from Victory. I mean, we started over in both the engineering and product development spend, the manufacturing spend and the marketing spend are big startup expenses. And obviously, a lot of those happened last year and a lot of those are happening this year. Next year should see a turnaround from a cost to a benefit. And we're looking forward to that.

Your next question comes from Mark Smith from Feltl and Company.

First, can you talk a little bit about gross profit margins? You talked about mix kind of herding with on-road. Is there an opportunity with Indian, maybe not initially, but down the road, to improve those gross profit margins?

Certainly, Mark. Obviously, one of the reasons -- don't forget, we still love the Victory business and then there's the profitability improvements we see there, are encouraging. But when you add a great, iconic brand to what we know are going to be great bikes, that is a recipe for a much higher gross profit margin. And that's certainly something we expect to see from Indian probably '14 and beyond.

Great. And then second, just to revisit the KLIM acquisition quickly and kind of the opportunity there, I think, Bennett, you talked a little bit about Indian apparel and an opportunity is, is that something you guys can shift that kind of towards KLIM and that total apparel business? And second, is there an opportunity in side-by-side, and even more so on ATV, to convince people if you're going to spent close to $20,000 on a side-by-side and accessories that you may as well get a $300 coat while you're at it?

Yes. Well, clearly, we think this is going to turbocharge our apparel. I mean, these guys are awesome at what they do and their particular strength is, obviously, snowmobile apparel. They've done a nice job of -- in the recent years, really building out their kind of performance motorcycle and off-road apparel. Nobody's really done a great job, frankly, in off-road side-by-side apparel. We continue to have passion for that. We've not succeeded on a couple of previous tries over our career, but we do believe that with the power of our team, along with the KLIM capabilities, that's, that something that we can take crack at as we go down the road. I don't expect that to be huge numbers but, again, we're pretty excited strategically how this is going to improve both our sales and, frankly, our capability in apparel, long term.

Okay. Then lastly, just looking outside of Europe, any other markets that you see that you're nervous about, that you see weakness in? And then also on the upside, Russia, maybe any other places where there's maybe opportunity going forward?

As we commented on the call, Mark, we feel pretty good about the Asia Pacific, Latin American markets. We're building a powersports business in there and so it's not exactly a smooth upward trend. But from an end market perspective, we continue to expect those economies to do better than the U.S. and Europe.

Your next question comes from Michael Swartz of SunTrust.

I guess my question just concerns maybe the broader M&A environment. And understanding you have your hands full with the bunch of investments in 2013. I mean, has your thought process changed with regards to different product lines or geographies that you may be interested in?

Not really. I mean, we have learned and gotten smarter and very, very importantly, we've gotten more capable. I mean, our leadership team is stronger. I mean, we've added a couple of thousand employees. So we feel like we're well prepared to take on more, but we don't feel like we have a gun to our head at all to go to pull the trigger on anything. That being said, we see a lot of opportunities for global market expansion to help our small vehicle business. I mean, lots of our adjacency businesses offer us opportunities for growth. So I think we've been disciplined so far, but part of being disciplined is continuing to find more and better opportunities and, I think, what Mike alluded to as we go into '13, we see more and better opportunities.

We're going to take Joe and Craig and then we'll be done. Go ahead with Craig.

Your next question comes from Craig Kennison of Robert W Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: I wanted to dig in to Bobcat quickly. What have you done, Bennett, to prepare the Polaris dealers to sell Bobcat? And then what are your plans internationally for that product line?

Craig, I'll try to answer that the best I can. We have not formally launched the vehicle, so I'm going to be somewhat elusive with you on this. But again, this is a -- again, what we've said is this is a commercially targeted product. And so one of the opportunities for Polaris, particularly, is to improve our share with that customer segment. That's not a customer that we've traditionally done as well as many of the other customer segments. So we see this as a big opportunity. We have a number of dealers in our broad dealer network that have quite a bit of capability on this, but we've never really provided them a product solution or a product family that really allows them to go after that with them. So we have a pretty comprehensive plan as we go to market as both from a marketing standpoint, as well as from a dealer development and a training standpoint to make sure that we do more than the traditional Polaris MO, which is roll out great product and let them go sell it. We're going to need to do more and we're prepared to do more, as we put that into parts of our channel. From a Bobcat standpoint, I mean, this is in their wheelhouse and we expect them to do quite well because it shapes up very well with the, frankly, the customers that they're targeting today. And I think internationally, I think you'll see us slow ramp with it. Frankly, it'll be -- you'll see it going to our developed channel over time. But I think that, frankly, the international benefit will be more material as we go forward in outer years, Craig.

And last question comes from of Joe Hovorka of Raymond James. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Just a quick question on the capacity, just between Europe and the -- I think you said you were creating capacity at all existing plants as well. How much is capacity going up, first question?

A little bit. Well, obviously, Joe, we're -- we are... and I think Mike talked about it in his comments. I mean, our focus on continuing to maintain extremely high returns on invested capital, and in order to do that we have to make sure we're careful with our capital investment. What we're doing now, we're probably late to add this in Europe just given the opportunity to take cost out and better serve those customers. We're -- and we saw ourselves based on projected growth rates at limits for capacity in our off-road vehicle business in the next couple of years. So this is just really making sure we're getting ahead of the game, but it's not like we're adding more than 15% or 20% capacity.

It's a little complicated because, frankly, a number of our investments are in things that we have to outsource on componentry or capability, whether it's paint, it's injection, molding, it's additional line in a product line, it's hard to quantify that that's why you've heard us pausing. It's a material number. But again, we're not doubling the size of our capacity by any means.

We are, however, adding a great deal of capacity to our motorcycle business. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Okay, and the -- so the spend, the ramp up from $100 million to $200 million, and I guess $50 million of which is Europe, but I take it all of Europe is done in '13, does the other capacity flow into '14 as well, or does it go to kind of $100 million, $200 million, $150 million or something like that, from a capital spend standpoint?

The answer is, and I'll let Mike try to clean that up, the answer is, is that it depends on the investment. Some of it is very much focused it '13. Some of it, like Europe, flows into '14. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: But the capacity additions at the existing plants aren't -- is not going to flow into '14? Or it is?

No, some will.

It's probably a high watermark. I would say the $200 million is a spike.

The high watermark for us.

Yes, it will come down.

Okay, that's all the time we have, guys. Appreciate everyone hanging on and participating this morning, and we look forward to talking to you again next quarter. Thanks and goodbye.

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