Richard Edwards - Director-Investor Relations Scott W. Wine - Chairman & Chief Executive Officer Bennett Jay Morgan - President & Chief Operating Officer Kenneth J. Pucel - EVP-Operations, Engineering & Lean Michael T. Speetzen - Chief Financial Officer & Executive Vice President.

James Hardiman - Wedbush Securities, Inc. Tim A. Conder - Wells Fargo Securities LLC Robin M. Farley - UBS Securities LLC Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Jaime Katz - Morningstar Research Drew E. Crum - Stifel, Nicolaus & Co., Inc. Joseph R. Spak - RBC Capital Markets LLC Kevin M. Milota - JPMorgan Securities LLC Jimmy Baker - B.

Riley & Co. LLC Drew Lipke - Stephens, Inc. Michael A. Swartz - SunTrust Robinson Humphrey, Inc. Mark E. Smith - Feltl & Co. David S. MacGregor - Longbow Research LLC.

Good morning. My name is Joana and I'll be your conference operator today. At this time, I would like to welcome everyone to the Polaris Third Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. Thank you.

Richard Edwards, Director of Investor Relations, you may begin your conference..

Thanks you Joana and good morning and thank you for joining us for our third quarter 2015 earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning's call.

The speakers today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; Ken Pucel, our Executive Vice President of Operations, Engineering & Lean; and Mike Speetzen, our Chief Financial Officer.

During today's call, we will be discussing topics including product demand and shipments, sales and margin trends, income and profitability levels, manufacturing expansion initiatives, foreign currency movements, and other matters, including specific guidance for our expectations for the remainder of 2015, and some qualitative comments on 2016, which should be considered forward-looking for the purposes for the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those projections in the forward-looking statements. Now I'll turn it over to, Scott Wine, our CEO.

Scott?.

Good morning and thanks for joining us. I was recently with renowned author and speaker, Arthur Brooks, President of American Enterprise Institute, at an event where he gave a keynote address. One of his central themes was the strong correlation between happiness and success.

Brooks is one of the most eloquent proponents of free enterprise and we share a view that competition is a net positive in most every market. In that regard, the off-road vehicle space is quite healthy, as competitive activity is more intense than in any time in my seven years with Polaris.

Our metal is certainly being tested but we responded well, once again gaining side-by-side and ATV market shares.

And although we missed the timing by a quarter, I'm happy to report that we are successfully executing our strategy of accelerating motorcycle sales to carry the growth torch, with Indian and Slingshot expanding sales and capturing market share faster than we expected.

We foresee long-term growth in all of our business units, but do not plan for every business to be strong at once, which is precisely why we are moving forward aggressively with our adjacent market strategy.

I'm certainly happy that our team fought their way to double-digit sales and earnings growth in the quarter, quite an accomplishment in light of the combined headwinds of weak ag and oil markets, continued currency weakness in an ultra-competitive powersports industry. Sales increased 12% to $1.45 billion, and net income rose 10% to $155 million.

Both motorcycle production and retail sales increased dramatically in the quarter. And while our model year 2016 side-by-side and ATV instructions were well-received by both dealers and consumers, our substandard 3% ORV revenue growth reinforces our commitment to get our dealer fundamentals right by the end of the year.

Demand was solid in Mexico and much of Latin America, while the strong dollar weighed on sales and overall gross profit margins in most other non-U.S. markets.

As we assess our industry-leading products and improving execution against this backdrop of slower near-term growth in the powersports industry, we are again holding and narrowing our full-year earnings guidance.

Full year sales are projected to be up 10% to 11%, gross profit margins will finally exhibit positive change in the fourth quarter; and coupled with aggressive expense control measures, earnings per share guidance remains up 11% to 12%.

Our primary focus in the fourth quarter will be to accelerate retail sales, aided by product and process innovation that will also benefit us in 2016. We will also continue generating positive momentum and operational performance throughout the fourth quarter, further strengthening our platform for long-term profitable growth.

To deliver sustainable growth, we must not only drive short-term operational and financial results, but continuously invest in and expand our strategic objectives. Our investments in new factories, new vehicles and even new brands and businesses have been significant and will continue. We will be the best in Powersports PLUS.

Increasingly though, we find ourselves investing more in critical talent and leaders who can champion our response to evolving customer demands and technologies. From India to Opole or from our newest Turbo RZR customers to a gym buyer, we see consumer expectations raising in step with competition.

Whether it's improving how are factories make, our dealers sell or our customers drive we intend to lead. With Ken Pucel and Tim Larson driving much of this effort, I like our chances to win. While global growth is challenging in the current environment, our commitment to global market leadership is undeterred.

The recent decision to promote Mike Dougherty to President of the International Business demonstrates our resolve to shift international sales into a higher gear.

During Mike's 17 years with Polaris, he's led and grown our ATV business, lived and worked in Europe, and essentially built Polaris International, making him ideally suited to lead this important strategic objective.

Mike has the knowledge and relationships to facilitate our transition to global product lines, enabling us to better leverage our scale and brand strength in the more than 100 countries where we sell. I also had tremendous confidence in Mike's choice to lead our EMEA business.

René Bazinet (6:02) bleeds Polaris blue and has the unique passion for driving growth and profits in powersports. We bet on people, and these are two examples where we have the internal talent to make us better and win in the marketplace.

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

Thank you, Scott. Good morning, everyone. Polaris North American powersports market share gains accelerated in the third quarter in a very competitive industry. Polaris retail sales increased 7%, modestly below our expectations, led by U.S. market retail, Indian and Slingshot growth, and continued positive contributions from our ORV business.

However, Canadian retail sales continued to be a drag declining low-single digits for the quarter and year-to-date, and we also saw increased headwinds due to continued oil and agricultural industries' weakness. For Q3, the North American powersports industry growth slowed to low-single digits.

Polaris dealer inventory levels are improving as expected. Q3 ending inventory is now up 14% versus 2014. Specifically, ORV inventory moderated, now up about 10%, and we expect to further improve to mid-single digits by year-end.

Motorcycle inventory levels are now up about 30% in aggregate, including Slingshot, as a result of additional production throughput, although significant order backlogs still remain. Snowmobiles are up mid-20%s related to planned earlier shipment timing of new models and mixed snowfall last season.

We are on track to achieve mid-single digit dealer inventory growth, while improving motorcycle inventory positions by yearend. Moving on to business unit performance; off-road vehicles, Polaris third quarter ORV revenue increased 3%, led by global RZR shipments and stronger U.S.

sales, partially offset by continued weakness in Canada, along with unfavorable international currencies. Year-to-date, ORV revenue is up 5%. Q3 Polaris North American ORV retail sales increased to low-single digits. We again gained share in both ATVs and side-by-sides, adding further to our number one positions.

Polaris ATV retail sales increased low-single digit in an industry that declined slightly, while Polaris side-by-side retail sales grew low-single digits in an industry that also grew, but at a slightly slower pace than Polaris.

New product introductions from Polaris and our competitors are fueling the intensely competitive atmosphere, including our recent announcement of four more new model year 2016 vehicles earlier this month. These, including the much anticipated RZR XP 4 Turbo, are bolstering our broad and growing ORV armada.

Our scale and speed to market remain competitive advantages and we expect to add further to our armada over the next quarter, so stay tuned. Our Second Camp RZR East at Brimstone, Tennessee was a resounding success, with over 10,000 attendees and riders from 35 states and four countries.

Camp RZR Glamis #4 in Southern California will be held over Halloween Weekend and is expected to set all-time attendance records. These events demonstrate the power and reach of RZR as the leading off-road lifestyle brand.

Motorcycles, Polaris' third quarter motorcycle revenue surged up 154%, driven by significant growth in Slingshot and Indian, with a modest contribution from Victory. Year-to-date, motorcycle revenue is now up 88%.

Overall, Polaris' third quarter retail motorcycle sales, including Slingshot, grew in excess of 60% in a North American mid-sized and heavyweight industry that was up low-single digits. So, once again, we gained a sizeable amount of share. Victory retail declined and share eroded due primarily to continued production-related product shortages.

Victory dealer inventory declined sequentially in Q3 versus Q2 and is down over 20% year-over-year. Our new Victory Empulse Electric Motorcycle is expected to begin initial shipments late this quarter. Indian retail momentum remains excellent with retail sales up over 100% and strong share gains in both heavyweight and mid-sized Scout.

We continue to add Indian dealers and we are on track to achieve 180 retailing by yearend. Both Indian and Victory dealer order demand remains very healthy and we continue to have extensive backlogs for both brands.

Between increased Spirit Lake production output, which Ken Pucel will address in detail shortly and lighter seasonality, we expect to reduce backlogs notably in the fourth quarter. With these factors easing our capacity constraints, we can begin to launch new products over the upcoming quarters.

Slingshot; Q3 Slingshot shipments accelerated and its contribution to motorcycle revenue increased. Product margins improved and retail sales remain strong.

We made progress in the third quarter in reducing our order backlog and expect to make further gains in the fourth quarter, thanks to our increased production rate and fall and winter seasonality in some regions. International shipments to Europe and the Middle East began in earnest this month.

Snowmobiles; Polaris third quarter revenue increased 14% and year-to-date revenue was up 19% as model year 2016 shipment timing was executed earlier to provide dealers and consumers with access to our new RMKs and Snowcheck products. The year-to-date increase will be netted out in lower quarter shipments as our guidance is unchanged.

Timbersled shipments began in the third quarter and are included in snow revenue. As expected, the North American snowmobile industry is off to a slower start due to last year's snow conditions.

Polaris is notably outperforming and gaining early share with retail sales declining only low-single digits, as industry retail sales declines are in the mid-teens.

We are cautiously monitoring the risk of poor snow in the Midwest last season, the potential impact of a strong El Nino weather pattern this season and weaker Canadian and international currencies, which we expect to offset with share gains from our new AXYS RMKs and our strongest and broadest product lineup in snowmobiles in years.

Global Adjacent Markets; Global Adjacent Market third quarter revenues increased 10% and year-to-date revenue is up 4%. On a constant-currency basis, year-to-date revenue would be up 14%. North American Work and Transportation revenue grew low-double digits percents, led by the continued expansion of our direct national account business.

GEM retail sales were flat and Brutus revenue and retail sales were up as we continued selling through noncurrent inventory. European Work and Transportation declined mid-single-digits percent, due primarily to currency weakness and some softness in Goupil and Mega.

The European quadricycle industry remains flat year-to-date with Aixam retail up modestly and building on our number one market share position. Third quarter defense revenue increased over 50%, driven by strong momentum for MRZRs and increasing international demand. Year-to-date defense sales are up high-20%s.

Parts, Garments and Accessories; PG&A third quarter revenue increased just 3% due to pre-season order timing, tough year-over-year comparables and weakness outside the U.S. Motorcycle PG&A was strong, up about 40% and each of the PG&A product categories contributed to growth. Year-to-date, PG&A revenue was up 10%.

We continue to migrate dealers to our new smart go-to-market model, which is the PG&A equivalent of the RFM model used in our whole goods business. The SMART model will expand dealer stocking breadth for PG&A, will assist in driving retail and has much more frequent order cycles, which will lean out dealer inventory.

As a result, we will likely see some short-term revenue impact as dealers transition to SMART. International. International revenue increased 1% in the third quarter. Strong growth in Indian and RZR brands and in the Latin American region, again, offset weak currencies, which led to revenue declines in Europe and Australia.

Year-to-date, international revenue was down 4%, but would be up 12% excluding the impacts from currencies. Third quarter EMEA region revenue declined 4% with strong year-over-year growth in our European subsidiaries, offset entirely by Russian market weakness. European powersports industry strengthened in the third quarter.

The European ORV industry improved up mid-single digits year-to-date with Polaris retail up high-single digits in the third quarter, and up low-single digits year-to-date. The European motorcycle industry grew high-single digits in the third quarter and year-to-date, and is now down mid-single digits.

Polaris motorcycle retail is clearly outperforming with retail up over 150% in the third quarter and over 60% year-to-date with both Victory and Indian gaining share. Our EMEA motorcycle supply situation has improved significantly, which should help us moving forward.

Third quarter Asia Pacific revenue was down 1% as currencies in Australia offset significant growth in China and India, with Indian Motorcycles particularly strong in all markets. Multix, our new product through our joint venture with Eicher Motors, is now in market and initial consumer satisfaction is encouraging, though it's clearly very early.

Latin America and, in particular, Mexican sales subsidiary continues to grow rapidly, up 50% for the quarter and year-to-date. We introduced the Indian brand into Brazil earlier this month. And along with Mexico, we are now selling motorcycles in both these key strategic growth markets.

And with that, I'll turn it over to Ken Pucel, Executive Vice President of Operations, Engineering & Lean..

Thanks, Bennett, and good morning to everyone. We spoke at length on the second quarter earnings call about the challenges we have in Spirit Lake as we brought up our new paint facility earlier this year. The system capacity was constrained by design bottlenecks and could not meet the increasing complexity of our product mix.

Since the second quarter, we have made significant progress improving both operational performance and shipments. Our total heavyweight motorcycle output improved approximately 20% in Q3 and our overall order-to-ship time for Indian heavyweight and Victory improved over 30%. We improved total factory and dealer inventory positions as well.

To augment our Spirit Lake capacity, we recently completed the purchase of a paint facility in Spearfish, South Dakota announced earlier this week that will ramp to contribute approximately 10% additional paint capacity in 2016 and allow us to improve how we manage product mix going forward.

In addition, we continue to situationally outsource allowing us flexibility to make system improvements and manage mix. We are taking steps to build capacity to meet 2016 demand, including new upgrades that will improve flow within the Spirit Lake paint systems. These new upgrades will add another 30% capacity in 2016.

The total contribution of the aforementioned improvement and acquisition will add an incremental 40% to our current paint capacity. In 2016, we expect to incur additional costs related to our paint challenges, but the total impact is anticipated to be about half of the cost we expected for the full-year 2015.

In summary, we are positioned to fully recover to target inventory levels in 2016 and meet our 2016 demand. Now, turning over to Huntsville, progress in our new Huntsville, Alabama ORV manufacturing plant continues on plan.

The Huntsville site will complement our already strong and growing manufacturing footprint by reducing capacity pressure on our existing facilities, and will enable us to meet our growing demand for years to come. The program continues to proceed on schedule and early occupancy will occur by the end of this month.

The key management positions have been filled, and we have a strong flow of applicants, roughly 5,000 in total, for the remaining jobs in the plant, approximately 1,700 at targeted capacity. We are now focused on our first wave of hourly hires. The site will incorporate our highest level of LEAN flow and state-of-the-art manufacturing technologies.

We are on target to start production as planned beginning in the second quarter of next year and will ramp up our volume through phased sequencing of lines and new process throughout 2016 through 2018.

The Huntsville site is well-positioned to support our strong customer base in Southeast United States and enable us to access the capable supply chain in the region. Now, I will turn it over to Mike Speetzen, our CFO..

Thanks, Ken. As I visited with many of you in the investment community, I've been asked about my initial impressions of Polaris. Over the past few months that I've been with Polaris, I can honestly say that I've experienced exactly what was described to me prior to joining the company.

Polaris has a strong team of talented, knowledgeable and passionate individuals who are very competitive across all levels of the company. I've also been asked about my philosophy around financial policy, discipline and capital allocation.

The bottom line is that my philosophy is not significantly different from Mike Malone, our previous CFO, and that I believe our first priority should be investing back into the business where we generate our largest and fastest returns.

Next, I believe it's essential to execute the dividend practices that Polaris has employed for many years as a stable for shareholder return.

While M&A is certainly a top priority and essential to the execution of our 2020 objectives, I'm not opposed to buying shares in a more accelerated rate when the stock market presents an opportunity to do so, which is exactly what we did in Q3, buying approximately 680,000 shares.

Lastly, I want to thank Mike Malone for not only his past service to this company, but for building a strong, capable finance organization and for working seamlessly with me to affect a successful transition. Thanks, Mike. With that, let me move on to comments regarding our third quarter results and guidance for the remainder of 2015.

I'm pleased to report that we are, again, able to maintain and narrow our earnings guidance range for 2015. We now expect full-year 2015 sales to grow in the 10% to 11% range, and full-year earnings per share to be in the range of $7.37 to $7.42 per share. By business, our current sales expectations are as follows.

Our outlook for off-road vehicles, snowmobiles, and our international businesses remain unchanged. ORV is expected to grow in the mid-single digit range and snowmobiles and international are expected to decline low-single digits.

With the strength of our Slingshot sales and strong Indian motorcycle business, we now expect our motorcycle business to grow in the range of 70% to 80% for the full year, up from our previously issued guidance of 55% to 70%.

We're lowering our Global Adjacent Market guidance to about flat, driven by negative currency pressures and timing of military shipments. We're also revising our PG&A sales guidance and now expect sales to be up similar to the total company sales growth rate. The lower PG&A sales guidance is the result of weaker and anticipated demand outside the U.S.

and negative currency pressure. Moving down the P&L, we're adjusting our previously-issued guidance for the following items. Gross profit margins for the full year of 2015 are now expected to be down 40 basis points to 60 basis points from last year's 29.4%. Previous guidance was for gross margins to be about flat year-over-year.

I'll explain the drivers of this in more detail on my next slide. Operating expenses for the full-year 2015 are now expected to decline further as a percentage of sales, decreasing in the 50 basis point to 60 basis point range through increased cost control measures implemented in response to the gross margin challenges.

Income from financial services is expected to grow about 10% in 2015, a slight increase from previously-issued guidance. The improved income performance is due to increased volume and retail credit. I'll talk more about financial services later in my presentation.

And we're adjusting our income tax provision rate expectations for the full-year 2015 to be in the range of 34.25% to 34.75%, a modest improvement over previously issued guidance due to favorability realized from recent completed tax filings.

I would also note that we are assuming that the R&D tax credit for 2015 will be enacted by Congress in Q4, and that it will retroactively apply to all qualified expenditures made during the year. Our gross margin percentage decreased by 126 basis points during the third quarter and 28.5%.

Negative currency impacts totaling approximately $27 million continue to pressure gross margins in the third quarter as they have all year, and accounted for more than 60% of the year-over-year basis point decline.

In addition, we continue to incur additional manufacturing costs at our Spirit Lake motorcycle factory and our Opole plant continues to progress, but remains dilutive to margins.

Promotional costs were unfavorable to gross margins during the third quarter as we helped dealers clear out prior year models and protected our industry-leading position as many of our competitors continued their elevated promotional spending.

For the fourth quarter, we expect gross margins to increase year-over-year benefiting from higher selling prices, product cost reduction efforts and lower commodity costs that will more than offset ongoing currency pressures and higher motorcycle manufacturing costs.

Despite significant pressure to gross profit margins, we were able to contain the impact to Q3 net income margin to a year-over-year reduction of 15 basis points, primarily through continued operating expense controls and favorable income from financial services.

Our expectations for foreign exchange headwinds have worsened from our second quarter call. Currencies in the third quarter had a $53 million negative impact on our total company sales and a $22 million negative impact on pre-tax income compared to last year.

On a constant-currency basis, in the third quarter, our sales would have increased about 16% versus the reported 12% increase. And our pre-tax income would have increased about 20% versus the reported 10% increase over last year's third quarter.

Assuming currency exchange rates remain in about the same range as quarter-end, the negative currency pressures have worsened from our second quarter call. We now expect that the appreciation of the U.S.

dollar will reduce full-year 2015 total reported sales compared to last year by about $150 million to $170 million, negatively impacting gross profit by about $75 million to $85 million, and reducing pre-tax income by about $70 million to $80 million, a decrease of approximately 7% from our previous expectations.

While the impact of foreign exchange is significant, I can tell you that our teams are aggressively counter measuring this, which has been instrumental to our ability to hold and tighten our guidance range for EPS.

Lastly, we have a substantial portion of our remaining exposure hedged for 2015 and given that we expect foreign exchange to continue to impact the business as we head into next year, we have started building hedge positions into 2016. Our financial position and cash flow generation remain strong.

Cash flow provided by operating activities is up 22% year-to-date and we expect cash flow from operating activities to continue to be robust for the remainder of the year. The company's ROIC continues to be at an industry-leading level year-to-date.

And as I indicated earlier, given the decline in the stock price, we have been more opportunistic with our stock buyback this year. Financial services continues to outperform and we are increasing our full-year growth expectations. Renewal negotiations for our retail financing contracts have begun and initial discussions are encouraging.

Last week, GE announced that Wells Fargo will be the buyer of their half of our 50%-50% joint venture Polaris Acceptance. We know Wells Fargo well and look forward to working with them through the transition and exploring opportunities to further expand this existing joint venture.

Before I hand the call back over to Scott, I want to notify you of a change in our segment reporting disclosures. We were asked by the SEC to revisit our segment reporting criteria and have come to an agreement with the SEC to modify our segment disclosures going forward.

Beginning with our third quarter 10-Q, we will begin showing sales and gross profit for the following segments, ORV/snowmobiles, motorcycles and Global Adjacent Markets. Under this new segmentation, PG&A will be included in each respective product line.

Beginning in 2016, our guidance, historically given during our fourth quarter call, will be based on these reportable segments, along with supplemental metrics that provide additional insight into our business performance where needed. With that, I'll turn it back over to Scott for some final thoughts..

Thanks, Mike. I'll close today with the two initial thoughts on our outlook for 2016. While I'm not a fan of the Fed's dual mandate or the results it has failed to achieve, a dual mandate is exactly what our Polaris team will pursue in the fourth quarter.

We'll focus intently on delivering the products and results that are our various stakeholders expect in the final three months of the year, while also doing all that we can to position Polaris to set new records in 2016. I'm not yet willing to predict a U.S.

or global recession the next 15 months, but there is ample evidence of an economic and market slowdown. The U.S. will most surely remain mired in a regulatory and policy morass that continues to yield sub 3% growth.

China will again grow more slowly and, consequently, require less of the commodities that support many developing economies, and Europe will improve, albeit not at a pace that will matter much. Interest rates may rise providing continued strength to the U.S.

dollar, although the negative impact this will have on our P&L lessens significantly on a year-over-year basis. We benefit when ag and oil markets in the U.S. and Canada do well, but are not expecting those industries to turn in our favor in 2016. We remain bullish on the long-term trends for agriculture and believe the U.S.

will benefit disproportionately when oil rebounds. While competitive offerings and promotional efforts expand, we anticipate slightly slower growth in the powersports industry in general, and the side-by-side segment in particular.

We do, of course, expect to win the competitive battle in powersports with a consistent stream of innovative new motorcycles and off-road vehicles, improving dealer fundamentals and enhanced execution at all levels of our business. With industry-leading products, brands and scale, we will expand dealer profitability and our own in the year ahead.

I spoke earlier about my confidence in Mike Dougherty and his international team to drive significant long-term growth. But our expectations for 2016 are more modest as they deal with slowing markets and a strong dollar.

After an impressive first year in his role as President of Adjacent Markets, I expect more investment dollars to flow through Matt Homan and his Global Adjacent Market team where we see significant opportunities to leverage M&A for profitable growth.

Polaris has a long history of exceptional returns on invested capital that stems from wise investments and outstanding execution. The investments we have made in infrastructure and talent will accelerate our LEAN enterprise evolution through 2016, as Huntsville ramps up and Spirit Lake and Opole continue to improve.

We will not only be happy if we close the year with positive momentum. We must make sure that this incredibly competitive team puts us in a position to deliver another record year in 2016. With that, I will turn it over to Joana to open the line for questions..

Your first question comes from James Hardiman with Wedbush Securities. Your line is open..

Hi, good morning. Thanks for taking my call. A couple of questions on the retail numbers and sort of bridging that gap.

I don't want to front run Hovorka's question, but can you break down the 3% ORV growth between ASP and volume? And as I think about the 10% North American retail target that you gave following the second quarter, 7% in third quarter, are you backing off of that target or is there opportunity to regain that?.

Yeah. So, from – this is Mike. Good morning. From an ASP perspective, we were essentially flat. And the one comment I would make, if you think about our ORV growth rate in the third quarter of 3%, we had about 2 points worth of currency headwind against that. So, on a constant-currency basis, that will look a bit more like 5%..

And James, this is Bennett. On the retail sales, I think as we articulated, we were pleased with our share gains. That was about what we modeled coming into the quarter. The industry was a little weaker than we expected, particularly in side-by-sides. And again, a lot of that is attributed very much to oil and ag and continued sluggishness in Canada.

And as a standpoint, we don't get into the business of forecasting retail as we go forward. But we still think the rates we communicated were appropriate quarter-by-quarter, but I don't expect to make up what was lost in the third quarter with a miraculous rebound in the fourth quarter..

Got it. And then when we think about the end markets, I mean, you basically touched on it, but the share gains are there, but in both ORVs and in motorcycles we've seen decelerating trends over the course of the year.

Do you think some of that was pull-forward given that the promotional environment really stepped up at the beginning of the year and maybe people bought ahead of time, or was it more to your point sort of the Canadian deterioration and some other items there?.

Yeah. I think motorcycles for us and ORVs may be a little bit different. On motorcycles, I don't think the promotion environment with our new brands and innovation has an impact at all, and even what the industry is doing doesn't have a tremendous amount of impact where we are at least in our – part of our life cycles.

On the ORV side, I mean, it's been a competitive promotional environment for most of the year. Again, a little bit more than we anticipated, but not anything that we haven't covered or planned for. I don't think there's significant pull forward going on.

I think it again is – you could see Texas weak and you could you could Alberta continue to be difficult with oil and ag.

You can see some of the sluggishness in some of the states where the crop prices like corn are down and so forth, cattle pricing is down, and we see that and we saw that more in the third quarter than we did frankly in the second quarter..

Great. Thanks, guys..

Next question?.

Your next question comes from Tim Conder with Wells Fargo Securities. Your line is open..

Thank you. Bennett, if we could just sort of stay on the same subject here, the retail. Can you kind of – pardon me.

Can you kind of talk about the bridge here going from plus-14% to the mid-single-digits here by yearend? And then any color you can give us in the same vein here with that in dollar terms, or if the PG&A is factored in, the dollars from that perspective? And then maybe a question for Ken or Mike, whoever wants to take this one.

The expected cost of the paint system, it appeared that the $20 million that you'd originally laid out for this year, that could be a little bit more given the gross margin guidance there. And then I think, Ken, you'd referenced then you expect part of that to obviously abate, thankfully, going forward into 2016. Thank you..

All right. Let's answer Tim's question, in the next hour, we'll take another one..

I'll start with the inventory, we were up 14%. As you know, our third quarter is generally a quarter where we are in the midst of aggressive new model year launch periods. And I would tell you, we are tracking right to the plan that we've communicated to you about mid-single digits.

It doesn't imply any kind of significant change from what we said before. Again, when you look at those percentages, there is no PG&A in it, it's all units, Tim. Some of that has to do with year-over-year comparables and I would tell you that we feel really, really good.

The 14% frankly is probably maybe higher than some of you may have expected, but I think that's, in all honesty, because we were much more successful in getting motorcycles out than many of you had probably anticipated that being up about 30%.

ORV down to 10% is right about where we want to be and we'll continue to land that glide pattern down by the end of the fourth quarter..

And then, Tim, from a gross margin standpoint, a couple of comments. One, the paint system costs that we articulated, we still largely expect those to be in the range that we've talked about previously. So that's not leading to the gross margin erosion. And you're correct that we do expect some of that to abate as we get into next year.

Really, it's being driven by the degradation we've seen in the Canadian foreign exchange rate. As you know, that rate particularly hits us pretty hard from a gross margin perspective. So, promotion costs are up as Bennett articulated, so that's got a bit of a drag. But at the end of the day, this is really being driven primarily by foreign exchange..

Okay. And then as a follow-up, gentlemen, just more of a comment. Just some early feedback. Whatever flexibility you have in the pending change in your reporting on the segments, I know you mentioned the SEC, you have an agreement with them and they'd requested some things.

But your disclosures now appear very good and it would appear the way things are going to be grouped that the visibility from an investor perspective could be reduced. So, anything you can do to mitigate that, that would be greatly appreciated. Thank you..

Yeah, Tim. So, the only comment I'd make is, we will continue to have robust disclosures. So, I have a feeling your comment is around PG&A, so, we'll obviously still continue to talk about that as a separate discussion..

Thanks, Tim.

Next question?.

Thank you..

Your next question comes from the Robin Farley with UBS. Your line is open..

Yeah. It seems that your off-road sales guidance for the year haven't changed, but maybe came in a little bit light in Q3. So, with no change for the year, should we just be thinking of kind of similar in the existing range? And then my second question is on the comments about SEC disclosure.

Can you just give us a little color behind why would they ask you to combine, or want you to combine, ORV and snow? Just trying to understand that. Thank you..

Yeah. So, let me start with the segment. The SEC did not ask us to take a specific action other than to evaluate the fact that we shouldn't be reporting as one segment. That really is stemmed by the changing profile of the business with the motorcycle business growing and with our strategic intent around growing the Global Adjacent Markets.

As it relates to ORV and snow, we will continue to aggregate those because when you at them from an economic perspective as well as from a non-economic, so of things like distribution method, customers, sales channel, et cetera, the two businesses are very similar.

Now, we'll obviously continue to give insight into revenue patterns and retail patterns as we have in the past, but from a segment reporting perspective they will be aggregated..

And, Robin, this is Bennett. I'll try to take a crack at your first question. Again, I would tell you, we feel very comfortable we'll be able to land our ORV guidance and deliver the dealer inventory levels and are confident in our ability to gain share in the retail.

So, while it might be a little bit lighter than you expected, I think it was right within our expectations the way we were looking at what we expected from that business in the third quarter..

So, you're – and you're expecting a kind of an acceleration in Q4 in off-road?.

Yeah. I guess, I would say the implied guidance, yeah, would be up slightly..

Yes. Mid-single digits..

Okay. All right. Great. Thank you..

Thanks.

Next question?.

Your next question comes from Craig Kennison with Baird. Your line is open..

Good morning. Thanks for taking my questions.

Ken, can you start by maybe commenting on the risk and benefit of adding ORV production capacity in Huntsville at a time that the ORV market is growing but at a slower pace?.

Yeah. So, when we look at our longer-term capacities, we really like Huntsville. In the short term, we're on target to ramp up in the second half. Well, actually it is the second quarter of next year. We need that capacity next year. There is no other way to meet the capacity constraints that we have or get over the capacity constraints that we have.

So, Huntsville is in the plan, it's required, and we're going to leverage it next year. Now, we're going to ramp the facility over the next four years, and so we're looking to make sure that we use it to the best of our abilities..

I'd just add that – Craig, it's Scott. I'd just add that the – you probably don't recognize on a product line basis how constrained we are at times of the year. And so, the specific action to create RANGER capacity there allows us really to implement our overall Lean strategy in each of the product lines.

So, the – while it won't be an immediately full factory, it'll facilitate the Lean transformation of both Monterey and Roseau and allow us to have much shorter lead times and ensure that we don't have these seasonal capacity constraints that we faced the last couple of years, which drive inefficiencies in our factory..

Thanks. And as my follow-up, Scott, powersport, the category is slowing and you offered a fairly realistic view of the economic outlook.

What can you tell us about your plans to accelerate growth outside of powersports with your adjacency strategy and your M&A strategy?.

Craig, we're about as plain vanilla as they get. I mean our strategy hasn't changed in five years. Innovation is still going to be what we do most of all to grow this business, and I think you'll see some of that coming out of Matt's Adjacent Markets and Work and Transportation group over the fourth quarter.

We've got a lot of opportunities to drive innovation in that space and, really, across the business. Our balance sheet still reasonably strong. We're having much better dialogue right now.

And we do see an opportunity, and I mentioned in my comments, for Matt and his team to help us find adjacent markets that have, I'd just call it, different tailwinds that we don't necessarily always want to be – we love the consumer and discretionary market that we're in most of the time.

But we also see opportunities to grow in some of these off-cycle markets and I would expect us to move on those in the next 12 months to 18 months..

Thank you..

Next question?.

Your next question comes from Jaime Katz with Morningstar. Your line is open..

Hey. Good morning, guys. I just have a quick question about that Global Adjacent Market category. I think in the past you guys had mentioned that you expected the market to grow sort of high-single digits and then that might be something close to $1 billion business by 2019.

And I'm curious if we should be paring back our thoughts about that segment or if that grows a little bit faster through acquisitions, either with or without the PG&A that will be included in the category? Thanks..

No. I would – I think you'd be regretting backing off that right now. If anything, we think we've got lots more opportunities there.

You never want to bet on the timing of M&A, but like I said, Matt has done a really good job of building a team and infrastructure for us to better understand that segment of the market and how we grow both inorganically and organically. We still very much like our chances to create a billion-dollar platform there reasonably quickly..

Okay. And then, do you have any additional comments on when in the year, next year you might think you might be working through those backlogs. It sounds like for motorcycles that they might be done by year-end. But I suspect you guys could maybe get through that a little bit earlier.

Any thoughts?.

Well, I mean the clear challenge is to make sure we can meet the spring selling season, and that's what Ken and the team are aggressively working on. I think because of the demand we expect to see there, it will really be the first half before we get through the entire backlog situation.

But we like our ability to be able to barely meet demand going through the early season selling, and we'll kind of hit a better standpoint as we get to the June-July timeframe..

Thanks so much..

Next question?.

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

Okay, thanks. Good morning, everyone. I think earlier in the year, guys, you suggested that 20% of your motorcycle sales would come from Slingshot. Given the increased sales guidance for 2015, is there any update there? And then my follow-up pertains to ATV. Your model year 2016 lineup had a heavy emphasis on entry-level product.

Just talk about the initial consumer demand for this product. And as it relates to the ag end market, I think you guys suggested at your dealer meeting back in July that things have stabilized. Is that what you're seeing, or are conditions getting worse as we go through the back half of 2015? Thanks..

I'll take a crack at it. On the Slingshot, I think we're going to great pains not give you a number, but I think it is very fair for you to assume based on our comments that Slingshot is overdriving and has become a greater percentage than what we've communicated as we go throughout the year.

So, that's how I would hold it for you, is that's certainly driving much of the improvement. In regard to the ATV question, I do think oil and ag, at least from what we saw on retail trends, degraded for us in the third quarter.

And some of that might have to do with some of the financial markets wobble that we saw in mid-to-late August where oil dropped again. But those markets were clearly weaker in the third quarter. Entry rec ATVs has been a pain point for us as we kind of communicated previously.

We made a number of changes to our product plan where we're kind of phasing out the ETX and bringing in the new products. But in all honesty, Drew, those just were hitting the market at the very, very end of the quarter. We did see some improvements in our entry rec performance, but I still tell you that's an underperforming segment for us.

So, we'll see what happens as we go forward here in the fourth quarter as our new products get to the marketplace..

Okay. Thanks, guys..

Next question..

Your next question is Joe Spak with RBC Capital Markets. Your line is open..

Good morning, everyone. I just want to go back to the pain issue again. And I believe you called out that maybe half of that $20 million would abate in 2016. But I'm assuming embedded in that is a much higher volume assumption for motorcycles as well because your capacity's improved.

So it would seem that actually on a per-unit basis it would be significantly lower than half the cost.

Is that the right way to think about it, or are you talking sort of on an apples-to-apples basis?.

Yeah. This is Ken. I would say, you want to consider that we're adding additional capacity investments at the same time. So there are some investments that we're adding and yet we're at the same time improving our rework, our efficiencies, all the material costs and supplies going into it. So, on a unit cost basis, it's slightly improved to flat..

But in your, I guess, commentary, which would suggest about $10 million cost, so a $10 million year-over-year benefit, I mean, that does assume a higher volume output as well?.

That does, yes, significantly..

Okay. And then on gross margins, since you sort of called out the order of magnitude on FX. I think you said it was 60% of the decline, and you're going to be, I guess, giving a little bit more segment gross profit detail next year anyway, is there any chance we could get some order of magnitude as to what mix was? Because obviously PG&A was lower.

So based on what we know, I think that sort of was a drag.

And maybe the promotion impact as well to the gross margin?.

Yeah. So, I mean, I think, Joe, consistent with what we talked in the past, obviously, you saw the growth in our motorcycle business and you should see it when we disclose the new segment that, that business is below the company average.

It's still early in the maturity of that business model and certainly with PG&A being down to a 3% growth level as we've indicated in prior conversations, that is also a higher gross margin business. So, there's certainly some mix at play.

But again, the majority of this is really being driven by the incremental costs associated with the motorcycle business, as well as the foreign exchange..

Okay.

So, order of magnitude, those are the two largest and then you get down to mix and promotion?.

Yeah. I mean, for the most part, on a current quarter and a full-year perspective, those two almost explain the entire variance versus last year..

Okay. Thanks. That's helpful..

You bet..

Okay.

Next question?.

Your next question comes from Kevin Milota with JPMorgan. Your line is open..

Hey. Good morning, guys.

On North American retail sales being up 7% in the quarter, is it possible to give us the cadence that you experienced on a monthly basis through the period? And then secondly, on your second half retail sales commentary that you provided in the second quarter up 10%, with the softness experienced in the quarter is there an update to that about 10% number that you previously provided? Thank you..

All right. Kevin, this is Bennett. In regard to the update on the guidance, there isn't. Like I said, we don't generally comment on that going forward.

What I would remark is that we don't expect because the industry was soft in the third quarter that we're going to make that shortfall up in the fourth quarter, but again our outlook remains generally unchanged as we go into the fourth quarter.

The first question was...?.

It's on cadence in retail..

Yeah. Generally, we don't comment on that as well. And again, if you remember, as we went in, we moved the timing around of our big ORV clearance event, which created what I would call, some abnormalities for us within the quarter.

And so, I think any kind of commentary on what our retail did within the quarter isn't necessarily indicative of anything that's going on. I think the only thing I would tell you is that we did see the market pause for a little bit in late August when the financial markets were unsettled and oil shot down.

That was really the notable bobble we saw for a couple of weeks there in the marketplace..

Okay. Thank you very much..

Next question?.

From Jimmy Baker with B. Riley & Company. Your line is open..

Thanks very much. Just a couple of follow-ups there on ORV. I think you attributed the overall ORV industry deceleration to side-by-sides and certain geographies, Canada and so forth.

Wondering if you could just break that down on an industry basis, side-by-side performance between the sport and utility segments? And separately could you talk about ORV market share in the quarter looking distinctly at side-by-sides and ATVs?.

Yeah. I'll try to give you something, Jimmy. From a standpoint of breakouts between sport and rec utility, as we saw throughout most of the year, sport's been stronger than rec-ut, and that's been the case pretty much all year, not just for RANGER and RZR for us, but also for the industry, best we can see.

From a market share standpoint, we don't really get the breakdown within those segments because it's a much more less current reporting thing. So, I can't really tell you the breakdown other than my belief is that we gained a slight amount share in both of those from what we can gather, but that's far less precise than what we've seen.

Is there anything else?.

Okay.

And then I don't want to beat a dead horse on the segment reporting, but will you continue to offer the same level of retail and channel inventory disclosures specific to each existing product segment? And then separately, since you'll be disclosing gross margin by segment will you be providing gross margin guidance by segment on the next quarter call?.

On the first one, yes. On the second one, we will provide further clarity in the future..

Not likely..

Okay. Thanks very much..

Thanks, Jim..

Next question?.

Your next question comes from Trey Grooms with Stephens. Your line is open..

Yeah. Hey. Good morning, guys, this is Drew Lipke on for Trey. One of my questions has been asked.

But one I was curious, on the more favorable OpEx can you elaborate on the levers that you're pulling there and how we should maybe think about this going into 2016? And then as we look at the both the heightened competitive environment in ORV and maybe a little more promotional environment in motorcycles, how should we think about selling and marketing expense as we look in the fourth quarter and into 2016?.

We often refer to what we call a [obscenity] (53:06) baseline. And I would tell you that our OpEx growth rate over the last five years has been so high, we kind of created that in terms of where we could spend. We are continuing to invest heavily in innovation. We've got a, I think, a fair amount of marketing.

We're not crazy with it, but we're just actually not spending at a same aggressive growth rate that we had in OpEx that we have over the last five years. So, I think you're seeing a slowdown to a more normal rate.

And we feel like we're still able to position the business well for current success, but also future success and not limiting our ability there. So we had that opportunity..

Okay. And then just last one, again on ORV.

Can you talk a little bit about the promotional trends within ORV between both ATV and side-by-side, and then maybe specifically on RANGER versus RZR?.

Yeah. They were both reasonably aggressive both ATV and side-by-sides. I would say generally third quarter traditionally is a little bit more of an aggressive period for the industry because you've got the new model year products coming in.

There's been a number of new products, so I think a lot of competitors are focused on that transition, and that's traditionally when we run our FAC clearance event. So it's a little bit elevated. But it was pretty consistent frankly amongst all the products.

I would tell you from our standpoint, the only anomaly would probably be with our level of innovation that we had on the RZR side, we had less dollars there than we did elsewhere and versus the industry..

Okay. Thanks, guys..

Thanks.

Next question?.

Your next question comes from Michael Swartz with SunTrust. Your line is open..

Hey. Just wanted to follow up on a question I think Craig asked earlier. Just in regards to the capacity going in at Huntsville amid a weakening retail backdrop, and understanding this is capacity you need for the next 3 years, 5 years, 10 years.

Does it at least change the way you assess the return on that project in the near term?.

Not really. I mean, like I said, we don't just quickly say, let's go put a plant out somewhere. There's a tremendous amount of study that goes into it.

And when we went through that study over the last several years, I was personally surprised by how urgent – even in a flat environment, how much we needed that plant to drive efficiencies in our business, and ultimately get – don't underestimate our commitment to creating this Lean enterprise where we can provide vehicles to our dealers on a much more, not only from a timely manner but almost made-to-order manner.

And we couldn't do those things without this capacity. And additionally, it's not very efficient to run plants beyond their capacity limits. And quite frankly, when seasonal demand would hit, we would be in that situation where we're going out and saying, way too much for labor to try to build the product. And we get out of that.

So, we never built into our models that there was going to be 20% ORV growth consistently for the next five years..

Thanks, Scott. That's very helpful..

All right.

Next question?.

Your next question comes from Mark Smith with Feltl & Company. Your line is open..

Hey, good morning, guys.

Just looking at PG&A and maybe some weakness in the snowmobile segment there, was this purely a timing issue, a Canada FX issue, or is there something else going on there?.

On the PG&A side, I think it's – again, that business has been wonderful for us. You've got a couple of unique things going on. There was some timing issues, as you said, that was maybe 2%, 3%. We had really stout comparables. We were up 24% year-on-year in the previous quarter in PG&A.

And then there's a little bit slower retail rate across the industry too, which impacted it. So, I don't think that should put any concerns if there's a dark cloud on our PG&A business.

This business has been frankly spectacular for us and we still feel really good about our innovation and what we're driving there with the team and I feel good about our prospects as we go forward..

Yeah. And the only thing I'd add is our growth rate on a constant-currency basis was just over 7%..

Okay. And then just looking at the new plant facility in South Dakota.

Do you have one product in particular that you plan on running through there or will that just be a mix? And then does that maybe reduce some of the outsourcing of painting that you've been doing?.

It gives us some capability to be flexible on our network. And really, we're overloading the complex bikes into that facility because of the technology that's in that facility and it allows us to take some of the complexity out of the Spirit Lake system, which gives us the ability to increase capacity there. So, it's a win-win for us.

That's the way we're deploying it..

Okay. If I can sneak one in.

Do you have a Slingshot dealer number?.

A Slingshot dealer number?.

Dealer count..

Yeah. It's a little over 430 right now. Right on track..

Excellent. Thanks, guys..

Okay. Thanks, Mark.

Next question?.

You're next question comes from David MacGregor with Longbow Research. Your line is open..

Yes, good morning. Thanks for taking the questions. If you mentioned this on foreign exchange, I must have missed it and apologize.

But what's the spillover impact to 2016? And then secondly, is your international distribution system where it needs to be to support the growth goals you've laid out?.

Yeah. So, from a foreign exchange standpoint, we're obviously in the middle of our budgeting process. But I think it's safe to assume with the rates where they are today, it will be less of an impact, but it will still be a headwind for us, as Scott mentioned in his prepared remarks.

And I think the biggest thing to take into consideration is the degradation that we saw this year from our original expectations was that the Canadian dollar softened throughout the year. And so that obviously have a lapping effect as we get into next year, and that will carry a higher gross margin impact as I indicated earlier.

We'll give you guys more detail on that when we provide guidance early next year..

And on the second part of the question about international distribution, we have really good distribution in Western Europe and we're building distribution into India and China, building it in Mexico. We're pretty well established in Australia.

But overall, as we become a more global company, there is a significant opportunity for us to expand our global dealer network. I mean, I think about India where we, with our joint venture partner, with EPPL and Eicher, we're going to probably add several hundred dealers there for that Multix products over time.

And we see other opportunities throughout the world. And really, that's – with Mike Dougherty taking on this new role, he'll have oversight over all of that and the opportunity to help us figure out where to go faster and where to invest, but certainly a long-term opportunity for us..

Great. Thanks, David. That's all the time we have for this morning's call. We appreciate everybody participating. And we look forward to talking to you again next quarter. Thanks, again. Good-bye..

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