Polaris Inc (PII) 2002 Q1 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the first quarter 2002 conference call. At this time, all lines are on a listen-only mode. There will be an opportunity to ask questions at the end of today's conference. Instructions for asking questions will be given at a later time. I thank you for your attention and now I'll turn the time over to your host, Mr. Richard Edwards. Please go ahead, sir.

Thank you, and good morning and thank you, everyone, for joining us for our first quarter 2002 earnings conference call. Mike Malone, our Chief Financial Officer, and Tom Tiller, our President and Chief Executive Officer, will be participating in the call this morning. Tom will spend a few minutes reviewing the current status of each of our business lines. Then Mike will report on some specifics of the first quarter results released earlier this morning and give you some guidance for the remainder of 2002. Finally, we will open it up for questions.

As before, I just remind you that during this presentation we'll 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 future periods, which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements, which, by their nature, involves risks and uncertainties. There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning a number of these factors can be found in Polaris's 2001 annual report and in the 2001 Form 10-K, which are on file with the SEC.

Now we'll turn it over to Tom. Tom?

Good morning, everyone. Thank you all for being on the call. We are pleased to report increased sales and earnings per share for the 16th consecutive quarter.

For the first quarter, earnings were 49 cents per share, up 11 percent from last year on three percent sales growth. The quarterly results were slightly ahead of our expectations. While the overall economy remains sluggish, retail sales of ATVs and motorcycles were quite strong, well ahead of last year's rates. Our expectations for the balance of the year remain unchanged from 90 days ago. We expect 2002 to be our 21st consecutive year of earnings growth at Polaris with earnings per share in the range of $4.25 to $4.40 per share, up 10 to 13 percent.

However, because we experienced one of the warmest winters in recent memory, the mix of how each business contributes to the total will be somewhat different than we thought 90 days ago. Because of the lack of snow, snow mobile riding was way down this year, which will negatively impact both the snowmobile division and the associated parts, garments, and accessories component. Offsetting this decline will be a stronger contribution from the ATV division.

With that overview, let's turn to the individual businesses, starting with personal watercraft. The watercraft business has had a decent start to the season. Although wholesale shipments declined 11 percent from one year ago, season-to-date retail sales for both the industry and Polaris has been about flat. Traffic and retails sales at boat shows have been good, and dealer inventory is at an acceptable level. Personal watercraft seem to be doing slightly better than marine products, generally, which are expected to improve as the economy recovers. We remain focused on improving quality and cost and will continue to follow this strategy. For the full year we continue to expect a modest decline in revenue with expanding margins.

Victory Motorcycles -- this year has seen a fast start to the entire motorcycle industry, including Victory. Industry retail sales of large cruiser motorcycles are up about 20 percent this year, and Victory is doing even better with retail sales that are more than double what they were last year. Not surprisingly, deal attitudes and consumer excitement about Victory are probably more positive now than they have been since the introduction of the motorcycle. Consumer reaction to the new Freedom V Twin-Engine is very positive, and there's also been strong interest in the new touring cruiser models.

Wholesale shipments of Victory motorcycles in the first quarter showed a 132 percent increase from year-ago levels. For the full year, we expect Victory retail and wholesale sales to be up more than 35 percent, up from the previous guidance of 25 percent growth. We also continue to expect margin improvement versus a year ago.

Snowmobiles -- the end of the first quarter brought to a close a mixed year for the Snowmobile Division. The weather this season was unfavorable for snowmobiling across most of North America, with one of the warmest winters in the last 100 years. There were some positives to the season. Despite the warm winter, industry retail sales were down just a couple of percent, and Polaris retail sales were about flat with a year ago. That means that Polaris has gained market share for the fourth consecutive year and has been the number-one manufacturer of snowmobiles for 12 straight years. Our product was stronger than it's ever been, and our customers love the new Snow Check Select program.

That being said, consumers, particularly in the Midwest and East, were not able to ride much this year, so dealers have been very conservative about their orders for the upcoming winter. Dealer inventory is higher than it was a year ago but slightly less than it was two years ago and three years ago. As we have for four out of the last five years, Polaris will be assisting dealers with the costs of carrying their inventory and with promotional programs this fall. The full amount of these carryover programs have already been reserved for.

For the full year, Polaris is forecasting snowmobile shipments to be down about 20 percent from a year ago, which is worse than the high single-digit guidance we gave in the fourth quarter call.

ATVs -- our largest business, the ATV Division, is off to a strong start this year, led by the success of the Sportsman 700. The Sportsman 700 was recently named ATV of the Year and is the largest, most powerful ATV on the planet. Consumer demand is strong for this product, and it's expected to remain so for some time. Another strong contributor to the ATV success is the new Ranger super utility vehicle line. Rangers continue to sell very well and this quarter we began shipments of a new 6x6 model.

The entire ATV industry continues to grow, despite the slow economy. Industry retails sales increased 9 percent in the first quarter and Polaris retail sales increased more than 25 percent, off a pretty weak first quarter last year. Wholesale shipments were up 14 percent. I would describe the competitive environment in ATVs as unchanged from 90 days ago with all competitors aggressively introducing new models and having compelling promotional programs.

Another reason for our growth is more spending. Following a tough first quarter last year in the ATV business, we stepped up our promotional efforts, and it's resulted in both higher volumes and higher promotional expenses. We have more than offset these promotional expenses with product cost reductions. Also, we have reduced factory inventory of ATVs by about $40 million from one year ago. Given the strength of retail sales in the first quarter, and the potential for an improving economy, both factory and dealer inventory are in good shape.

During the first quarter as expected, we begin shipments of the exciting new Polaris Professional Series. These commercial vehicles are designed for the professional user -- contractors, builders, landscapers, and the like -- and have been well received so far. We continue to expect about $25 million of growth this year from PPS, and it should break even in its first year. We have signed 58 Polaris Professional Series dealers so far, and expect to end the year at about 200. PPS will be an important growth initiative for the company in coming years.

For the full year, I would expect the ATV industry to continue to grow at about its current rate, and Polaris ATV growth to at least keep pace with the industry. We continue to expect improving margin rates for ATVs as well.

International -- our international business had another solid quarter and delivered 20 percent growth. We would expect the full-year performance to be in the high single digits driven, again, by ATVs.

Parts, Garments, and Accessories -- we had a difficult quarter in PG&A, primarily because of the lack of snowfall. About 40 percent of our parts, garments, and accessories business is tied to the more than one million snowmobiles in the installed base. Because consumers were not able to ride much this year, the sales of spare parts were way down. First quarter sales for the PG&A Division were down, in total, 14 percent.

We remain confident in the future of PG&A, despite the tough start. For the full year we continue to expect the division to grow more quickly than the rest of the business and to continue to have margins that are significantly higher than the rest of the company. For the full year we expect growth in the high single-digit range, down from the 10 percent to 15 percent we saw 90 days ago.

Some other developments -- during the first quarter we substantially completed the factory expansion project in Roseau. The result of this major project will be lower costs, higher quality, and more capacity.

I continue to be very excited about margins. We are seeing lots of ideas and projects, which lead me to believe that we can expect 60 to 80 basis-point improvements in gross margins for the full year and continued improvement at about that rate for the next couple of years. Margin drivers include the factory improvements in Roseau, product cost reductions in every product line, common platforms, producing more engines ourselves, favorable yen rates for purchased engines, and growth in the PG&A Division.

Additionally, I'm excited about the new products that we have in development. Our development pipeline across the company is probably stronger now than it's been in recent memory, given that new products are the lifeblood of our company that should bode well for the future.

Finally, as we discussed in our proxy, we expect that at the annual shareholder meeting in May, there will be a number of changes on our board of directors. Hall Wendel is expected to retire as chairman. This development, which has been planned for some time, represents the next logical step in succession planning, which began four years ago. Bob Moe, also a long-time director, is also expected to retire. Greg Palen, a director for eight years, is expected to become the non-executive chairman of the board. George Buckley, CEO of Brunswick, is expected to replace Hall on the board of directors. We thank Hall and Bob for their tremendous contribution to the company for many years, congratulate Greg, and welcome George to the board.

Expectations for the remainder of 2002 -- in summary, the first quarter was a good one for Polaris. Despite a warm winter, which will adversely affect our snowmobile business, the company remains in good shape. Our ATV and Victory divisions had strong starts, and the fundamentals of cost, quality, and product development are all in good shape. As the economy recovers, we should benefit, as the company has before, coming out of a recession. We continue to expect earnings per share in the range of 10 to 13 percent, or $4.25 to $4.40 per share on single-digit revenue growth, which would be our 21st consecutive year of earnings growth.

With that, I'll turn it over to Mike Malone.

Thanks, Tom. Our first quarter 2002 earnings released earlier this morning exceeded our guidance by 1 cent per share and exceeded Wall Street's consensus estimate by 2 cents per share. Once again, this quarter highlights the benefits a diverse product line provides in delivering consistently improving returns to our shareholders, as our Parts, Garments, and Accessories business did not perform as well as expected but was more than offset by improving results in ATVs.

As you may have noticed in the press release, during the first quarter we implemented two new accounting rules related to the classification of cooperative advertising expenses and floor plan financing expenses but has changed the prior year's first quarter sales, cost of sales, and selling and marketing expense numbers. These changes had no impact on previously recorded net income. All the numbers referenced in my comments here today have been adjusted for these new accounting rules. In order to assist you in restating your models, we have developed a reclassification by quarter by product line for the last two years. In order to obtain a copy, please call my assistant, , at phone number 763-542-0502, and she can get you a copy of those.

The ATV Division sales increased 14 percent for the first quarter, which exceeded our expectations. This increase reflects continued strong ATV industry growth as well as market-share expansion for Polaris from the first quarter of a year ago. This success is the result of the continued benefit of incremental promotional program as well as the market acceptance of our new model introductions. The Polaris Professional Series line also began to contribute in the first quarter, generating sales of $1.6 million, which is included within the ATV sales numbers.

As Tom mentioned, retail sales were strong for the ATV industry during the first quarter and even stronger for Polaris, which is encouraging. For the full year 2002, we expect ATV wholesales growth rates to be in the range of 9 to 12 percent, which is an increase over our previous guidance. Second quarter sales of ATVs are anticipated to be in the range of 4 to 6 percent ahead of last year's second quarter as we prepare for the model year changeover.

Snowmobile sales for the first quarter 2002 decreased $13.8 million, as expected, mainly due to the timing of shipments in the first quarter this year compared to last. The 2002 first quarter is much more normal from a historical standpoint. You will recall that in the first quarter a year ago, we shipped several models of our new Snow Check Select custom-order snowmobiles to dealers earlier than normal to support the introduction of the brand-new custom order option program.

As Tom mentioned, the dealers took a more conservative ordering position at our dealer meeting than we expected and, accordingly, we have adjusted our anticipated calendar year 2002 snowmobile bill downward. We now expect full-year 2002 snowmobile sales to decline in the 18 percent to 20 percent range with a second quarter decline being more modest in the mid-to-upper-single-digit range decline.

Watercraft sales for the first quarter, as expected, were down 11 percent due to the continued soft economy and its effect on the overall watercraft market. We continue to remain cautious in our planning for watercraft for the full year 2002 and maintain our previous full-year guidance of a decrease in sales in the mid-single-digit range for the year. We expect second quarter 2002 sales will show improvement over the comparatively weak 2001 second quarter, likely in the range of a 20 percent to 25 percent increase.

Shipments of Victory motorcycles totaled $12.7 million in the first quarter, which was an increase of 132 percent from a comparatively low base in the first quarter a year ago. As Tom mentioned, retail sales activity for Victory in the first quarter was very encouraging, driven by the positive impact of additional promotional activity and the success of the new touring cruiser model. We expect full-year 2002 sales growth for Victory in excess of 35 percent with second quarter 2002 sales expected to be modestly lower than the second quarter a year ago, given the strong first quarter 2002 shipments.

PG&A sales decreased 14 percent during the first quarter and significantly missed our sales expectation as the poor snowmobile riding conditions had a negative impact on all snow-related PG&A products. However, as Tom pointed out, the PG&A Division is a solid business that will return to growth in the second quarter. We expect sales of PG&A to grow somewhere in the 5 percent to 10 percent range for both the full year as well as the second quarter of 2002.

In summary, our full year 2002 total company sales guidance is slightly less than the previous guidance with weaker sled and PG&A sales somewhat offset with better ATV sales. We expect full year 2002 total company sales to increase two percent to five percent with total company second quarter sales increase in the one percent to four percent

Now let's take a look at gross profit. The gross profit for the first quarter of 2002 decreased 2 percent to $57.8 million, or 19.3 percent of sales compared to 20.4 percent for the first quarter last year. This decrease in the gross margin percentage in the first quarter is primarily the result of two events.

First, we continued our aggressive ATV promotional spending in the first quarter, increasing our ATV promotional spending by an incremental $7.3 million from the first quarter a year ago. This increased spending is showing a good return on investment, as evidenced by our strong ATV retail sales growth in the first quarter. Remember, we really didn't ramp up our ATV promotional spending until the second quarter last year.

Secondly, our gross margin percent was negatively impacted by a sales mix change from the decline in PG&A sales during the first quarter, since PG&A margins are nearly twice the overall company average. These declines were partially offset by improved margins generated from the new model introductions, like the Sportsman 700 ATV and, to a lesser extent, efficiency benefits from the Roseau production facility redesign and other cost-reduction efforts.

As Tom pointed out, we had a number of reasons to give us optimism for gross margin expansion for the balance of the year, many of which he mentioned. Another one I would add is that the ATV promotional spending expenses have easier comparisons in the coming quarters of the year. Therefore, we expect the gross-profit percentage will improve for the full year 2002, somewhere in the range of our previous guidance of 60 to 80 basis points. The second quarter 2002 gross profit as a percent of sales are expected to improve approximately 100 basis points, a significant improvement over last year's 17.9 percent for all the reasons previously stated.

Moving down to operating expenses, the first quarter 2002 expense of $43.5 million is 1 percent lower than the $43.8 million in the year-ago quarter. The first quarter of 2002 operating expenses expressed as a percentage of sales improved to 14.5 percent compared to 15.1 percent in the year-ago quarter. The decrease in operating expenses as a percentage of sales is primarily the result of our ongoing overall cost-reduction efforts across the company. We continue to invest in new product development and new technologies, however, as evidenced by the 12 percent increase in research and development costs in the first quarter.

Looking forward, we expect operating expenses, as a percentage of sales in the second quarter 2002, to increase slightly, as engineering and research and development costs continue to ramp up, related to new product development and new technologies. For the full year 2002, we continue to expect that operating expenses as a percentage of sales to be about flat, to perhaps a slight improvement compared with last year.

Income from financial services in the first quarter was down slightly, as expected, to $3.2 million compared to 3.5 million in the first quarter last year. Although interest rates for the first quarter remain lower than the prior year, which has impacted the profitability generated from wholesale financing to our dealers, we continue to experience growth in the profitability of our retail credit portfolio with Household and income generated from extended-service contracts.

For the full year 2002, we continue to expect the income from financial services to decrease around 10 percent compared to 2001, as the higher income from retail financing will be offset by the anticipated lower field inventories of our product lines and continued lower interest rates, which will generate less wholesale finance income.

At the end of the quarter, the wholesale portfolio for dealers in the United States financed through Polaris acceptance was approximately $500 million, down from $547 million at year-end and an increase of 18 percent from this time a year ago. You'll recall that this portfolio is managed as an equal partnership with TransAmerica. Approximately 92 percent of the receivables in the portfolio are secured by the whole-good units, and Polaris shares 50 percent of the income generated by the portfolio. Polaris does not guarantee the outstanding indebtedness of the wholesale portfolio.

Our liability is limited to our investment in the Polaris acceptance partnership and a repurchase obligation. Credit losses in this portfolio have been very reasonable, averaging less than three-tenths of 1 percent of the portfolio over the six-year life of the partnership.

The retail credit portfolio is also managed jointly with a well-known retail lender, Household International. The Household retail credit portfolio balance at the end of the quarter was approximately $168 million, up from $160 million at year-end. Polaris shares 50 percent of the income or losses generated by this retail portfolio. Polaris's liability is limited to our investment of approximately $12 million at the end of the quarter, plus an aggregate amount of not more than $15 million, and either party has the right to terminate the agreement if profitability falls below certain minimum levels.

Receivable losses have averaged about 3 percent in the two-year life of this portfolio, in line with industry norms. We have established the appropriate reserves for both the Polaris acceptance wholesale and Household International retail portfolios and continue to pay close attention to lost reserve levels and monitor delinquency trends.

Interest expense decreased significantly during the first quarter of 2002 due to both lower debt levels generated by improved cash flow during the quarter and lower interest rates on the borrowings. For the full year 2002, we expect interest expense to finish down $2 million to $2.5 million from last year, a result of the lower interest rates and lower debt levels.

The provision for income taxes has been recorded at a rate of 33.5 percent of pretax income for the first quarter, a reduction from 34.5 percent in the prior year's first quarter. This decrease is the result of continual favorable tax benefits generated from tax-finding strategies. It is anticipated that the tax rate of 33.5 percent is sustainable for the foreseeable future.

The balance sheet for the first quarter 2002 was very strong and significantly improved from a year ago. At the end of March our cash position is at $41.8 million compared to $1.9 million at this time last year. Receivables are at 37.7 million, a decrease of 49 percent from the first quarter a year ago when receivables were unusually high. Inventories at the end of the quarter are 179.3 million, down 15 percent from the first quarter a year ago resulting from lower ATV factory inventory levels.

Debt borrowings at the end of this quarter were $51 million compared to $109.6 million at this time last year, as our strong cash flow was used to pay down our debt levels. As a result of the low debt, the debt-to-total-capital ratio is a very comfortable 17 percent at the end of March this year, a significant improvement over the 35 percent debt-to-total-cap ratio at this time a year ago.

In terms of cash flow for the first quarter, we generated income of $11.6 million and can add back depreciation of 12.8 million and other non-cash charges, which net to a positive $6.3 million. Working capital items were a net use of cash flow of $41.9 million, primarily due to the timing of payment of a retail sales incentive collected from the dealers associated with our dealer development strategy. This results in net cash used for operations of $11.2 million for the first quarter this year, considerably improved from the prior year's first quarter operating cash usage of $45.4 million.

Property, equipment, and tooling purchases total $14.1 million for the first quarter 2002. At this point in time, we continue to expect full year 2002 capital expenditures to be in the range of $65 million to $75 million as we continue to invest in new product tooling and technology projects.

EBITDA for the first quarter of 2002 was $31.0 million, an increase of 5 percent over the same period a year ago. During the first quarter we used cash of $12.3 million to repurchase and retire approximately 205,000 shares of Polaris stock. That brings our cumulative repurchases since 1996 to approximately 7.1 million shares. Even though the stock price has increased about 25 percent, so far, during 2002, we expect to continue the consistent nature of our buyback program.

Summarizing our outlook for the remainder of 2002, we are confident that we will achieve another record year of sales and our 21st consecutive year of record earnings. Our plan continue to be built on modest expectations for sales goals while delivery double-digit EPS growth generated from gross margin expansion and continued cost reduction. Our plan anticipated that the economy would not recover much in 2002. If we begin to see more evidence of a sustainable recovery, we will adjust our production and guidance accordingly.

As I mentioned before, sales for the second quarter 2002 are expected to increase 1 percent to 4 percent and EPS is expected to be in the 79-cent to 83-cent range, an increase of 10 percent to 15 percent over the 72 cents earned in the second quarter of a year ago. We expect full year 2002 sales to increase in the 2 percent to 5 percent range, and we are reconfirming our full year 2002 EPS growth guidance of 10 percent to 13 percent, or $4.25 to $4.40 per share.

At this time we would like to take any questions that you may have. , would you please open it up for questions?

Thank you. To ask a question, please press the one followed by the four on your touch-tone phone.

Our first question comes from Mr. Bob . Go ahead, sir.

Good morning and congratulations on a nice quarter.

Thank you, Bob.

First, can you give a little bit more color, Tom, on the Victory, you know, what you're seeing in the market, why the increase in retail sales now, and also if you're doing-- you know-- what you're kind of doing on the dealer front in terms of maybe changing the mix there?

We're pretty excited about Victory. As you know, we see Victory as one of the substantial parts of our company. We're trying to build a $300 million to $500-million motorcycle business, and this represents, really, the fourth new product that we've gone into. Of course, originally, the snowmobiles and ATVS, then watercraft, and now motorcycles, and the first couple of years have been a little harder than we thought it was going to be, frankly, but about 18 months ago we kind of reloaded, I guess. We've got a new team of people, and what we're seeing is a lot of their ideas and results that are showing up in the marketplace.

Specifically, the 2002 product line, which we introduced last fall expanded our offering out of just pure cruisers into the touring cruiser segment, which is a large segment as well, and that's been very, very well received, and also our new engine, which is kind of the heart of the motorcycle -- a very important component to the motorcycle -- has been substantially improved with about 25 percent more power and 10 percent better fuel economy, and it's really built, I think, for the future. It has the ability to grow.

We introduced a big bore kit down in Daytona here a couple of weeks ago, and that was very well received. So I think the buzz is that Victory is on the move, and I'm really excited, not just about the products we have now, but some of the future products that we have in development, which we'll introduce later this year. I think we finally have gotten some real momentum on the product side.

I also think that the dealers are starting to learn and understand how to sell motorcycles. About half of our 300 Victory dealers were Polaris dealers, who really never had any experience, and just like when we introduced ATVs in 1985, the first couple or three years were pretty tough. They were snowmobile dealers, and they really didn't know how to sell an ATV. It took them awhile.

We saw the same thing in motorcycles. The first couple of years many of those dealers struggled, and while we're certainly not completely out of the woods yet, it is very encouraging what we're seeing from dealers across the board -- a much higher confidence level in their ability to sell the product, and the results look real good.

It is, you know, just a quarter of the way through the year. We've got a long way left to go, but certainly the momentum feels really good.

If you were going to pinpoint it, is there any one reason that you just gave in terms of this is the biggest driver of the growth, or is it just a combination?

It's better product, it's dealers that are more comfortable selling the product. The brand is starting to become more well-known as a result of four years' worth of advertising, people-- customers that have the motorcycle are pleased with them. They're referring their customers. So I think it's a combination of we're finally starting to get some traction as a result of better products, better distribution, a little bit stronger advertising -- it's a combination of factors, not one thing.

OK, and then a question on a different segment -- on the snowmobile side -- can you give us a sense of where the inventories are from an industry standpoint? Or maybe asked that different -- what the sell-through was for the industry, and maybe a ballpark in terms of what sell-through was for Polaris?

The industry inventory would be similar to Polaris's inventory. Again, higher than it was a year ago, but not as high as it was two years ago and three years ago, as you're certainly well aware of, Bob, you know, four out of the last five years have been tough years for snowfall, so this is not an issue that we haven't managed our way through successfully several times before. In the 48 years that we've been in the snowmobile business, I don't know, I suppose 20 of those years we've had poor snowfall conditions. So this is something that we're, I think, pretty used to and pretty comfortable in managing.

In terms of the industry sell-through, those numbers -- I just don't have them off the top of my head, Bob, I'll have to get those to you.

OK, thank you.

Our next question comes from Mr. . Go ahead, sir.

Thank you. A couple of questions here, guys. I wanted to ask first about the ATVs. Tom, maybe you could comment on-- you know, there's such a huge improvement versus last year, and I was wondering if maybe you could break that down between how much of that contribution was really related to new product versus any issues you had with the ATV replenishment system last year? Then number two, ask about the gross margin -- I think both of you had mentioned the improvement at Roseau.

Could you talk about exactly what is happening there? Are we simply swapping out robotics or putting in more machinery and having less personnel and salaries? Then, similarly related to that question, can you talk about-- you had mentioned combining or reducing platforms, and I don't know if you were talking about snowmobiles or ATVs or both, but could you tell us how many SKUs you've got in those product lines versus how many platforms you now have? Thanks.

ATVs, Roseau, and then the platforms, OK? Several questions -- let me see if I can take them one at a time. Why are we seeing ATV growth? You know, I mentioned retail sales were up more than 25 percent in the first quarter, which is pretty nice growth. I'd say it's really three things. First of all, the comparisons in the first quarter last year were relatively easy. We did not have a good first quarter, one. Remember, a year ago we were describing a much more competitive environment than what we had expected to see. So the comparisons were relatively easy.

That being said, we still had a hell of a first quarter -- up more than 25 percent when the industry is growing 9 is nothing to sneeze at. I'd say it's really two primary factors. One is new product, in particular, the Sportsman 700. When we introduced that product, you know, I described it as one of the single most important new products that we've ever done.

The reason is that it comes on the heels of our Sportsman 500, which was probably-- certainly for us-- the most successful ATV we've ever built, by far. It was the largest-selling automatic ATV for many, many years. It's at the top end of the price ladder, it's a very profitable product for us, it's really what our ATV franchise was built around, and as competitors over the last 18 months or so have introduced products in that large, big-bore, automatic ATV segment, where they've really come after our Sportsman 500, we kind of raised the bar and introduced the Sportsman 700, the most powerful engine, best suspension in the industry, and customers have really responded to that. That's been very successful.

So I'd say easy comparisons, new product, and, third, promotional spending, particularly on the more value end of our line. Last year we saw competitors being much more aggressive in terms of advertising and promotional spending, especially starting in the first quarter of last year. We responded starting in the second quarter of last year, and we've really kind of continued that. So I think those are really the three factors that have driven the ATV success that we've seen to date.

In terms of what's happening up in Roseau, it's the largest plant project we've ever done. It's about an 18-month project, where we substantially changed how we manufacture both ATVs and snowmobiles. It gave us more capacity, it gave us substantially higher quality, and it also gave us some strategic benefits that we'll see in the coming years. We will be more efficient, primarily not so much by robotics, , but more by a much more logical material flow in the plant. There's significantly fewer non-value-added jobs where we transferred material from one side of the plant to the other side of the plant. When we did this rearrangement of a much cleaner, much smoother material flow, and we also have more productive equipment that's there.

We certainly don't expect to see a loss in employment. As you may know, in Roseau County, we are the primarily employer, and we're pretty much at full employment there. So we feel real good about the whole project. It was a big project that was executed very well.

By platforms I mean common platforms, and we've talked about this several times in the past. Essentially, if you went back two or three years ago, we make, you know, roughly 25 models of ATVs and roughly 25 models of snowmobiles, and traditionally we made those-- each one was unique.

Starting a few years ago with both ATVs and sleds, we've gone to kind of a modular chassis, where we have, in the case of floods, basically one chassis, the edge chassis, that we can plug-and-play different drive train and suspension components, which gives us an awful lot of flexibility in terms of delivering a wide variety of new models, at the same time lowering our costs and improving our quality, and we've done that in both sleds and ATVs, and that's really led to, you know, a lot of the improvement that we've seen in the company, both operationally but also from a strategic point of view. For example, our Snow Check Select program would have been almost impossible to execute from our old chassis.

So those are really the things that we're doing with the platforms, and we want to continue to move in that same basic direction. Hopefully, that answers those three questions.

It does, thank you.

Once again, to ask a question, please press one followed by a four on your touch-tone phone.

We have another question from Mr. Bob . Go ahead, sir.

Hello, again. Can you comment on the Polaris Professional Series? I think you gave expectations of roughly 25 million in revenue, and I think 200 dealers by the end of the year. Where do you-- I mean-- I know it's early yet, but how do you see that going out in '03? What type of-- what's a logical revenue range for that business?

We haven't issued any specific '03 guidance for the company or for any of the segments of the company, but Polaris Professional Series is something I'm really, really excited about, Bob. It's kind of a new deal for the company. If you think, you know, traditionally, the way the company has grown has been buy more products through the same channel. So we started in the snowmobiles, and then we added ATVs, largely through the same dealer network, and then watercraft and motorcycles and parts, garments, and accessories, and financial services, but essentially delivering almost all those products and services through the same distribution channel.

PPS represents a new idea, which is, rather than develop a new product to go through an existing distribution channel, how about doing the reverse? Take a derivative of a product and establish a new distribution channel, and the economics of that are pretty compelling. You know, to do a new product platform, probably all in is, I don't know, anywhere from $20 million to $100 million to start a new product family. To do this new contribution channel is about a million bucks. So from a capital-intensity point of view, it's very, very attractive.

We think in the three-year to four-year kind of time-frame, if we can be successful with PPS, we're looking at a couple hundred million dollars of incremental growth with very modest investments -- again, about a million dollars this year in terms of investment, and it should break even in its first year, which is a pretty exciting thing.

The dealer response that we've had up to this point has been very, very strong. We have about 1,000 dealer inquiries to carry the line. So the brand is clearly playing in that kind of outdoor power equipment channel, and if we can establish the brand and establish the dealer network, I'm pretty confident that we can develop new products. We've been able to do that pretty successfully. So I'm really excited about it. It's early, you know, it's only a million-six. It's the first quarter that we've shipped, but so far it's off to a great start.

OK, and one other detail question -- your other income for this quarter, Mike, what was that?

What it says down in other income is generally the impact of the currency rate fluctuations and the translation of the balance sheets of our foreign subsidiary. So what happened this quarter was that it was slightly positive, and in the year-ago quarter, it was slightly negative, and what that means is that the currency rate fluctuations in Canada and in Australia, primarily, were slightly positive this year during the quarter and were somewhat negative during the first quarter of last year.

And how do you sit now in terms of currency hedges? How far out are you hedged?

The Japanese yen exposure is hedged for the balance of calendar '02, and we would expect that would have a positive impact on our gross margins for the balance of the year. The Canadian dollar currency is currently not hedged, and at the current Canadian dollar rate, we would anticipate-- if it stays there for the balance of year in an un-hedged position, that would have negative impact on gross margins for the balance of the year.

During the first quarter the two more or less offset each other. For the balance of the year, we would expect that the benefit of the Japanese yen will be more than the negative impact of the Canadian dollar.

OK, all right, thank you.

The next question comes from Mr. . Go ahead, sir.

Hi, a couple more questions -- on the accounts receivable, AR is down significantly. I think, by our calculations, DSOs are 11 or 12 days. Can you tell us how you got them down so far and whether that level, or anything close to it, is sustainable? And then, two, on the PG&A side, you had mentioned, I think, that roughly 40 percent of the PG&A business was coming from ATVs-- or--excuse me-- coming from snowmobiles. I was wondering if the remainder, by and large, comes from ATVs, and how that product is holding up, since your ATV holding sales are doing so well?

OK, first on the receivables, you're right, , it is real low, and significantly less than it was a year ago. We anticipate that we will be able to maintain our receivables at a lower rate than it was a year ago. A year ago we had some unusual things going on. This year we had the benefit of the calendar working to our benefit right at the end of the quarter, and, as you know, our shipments of whole goods are paid within a couple of days of shipment, and the calendar actually helped us this year so that we had very minimal whole-good receivables at the end of the quarter, whereas we had significant balances a year ago.

The other thing that's more favorable now is our-- a year ago we had a fair amount of international receivables that were in receivables at the end of the quarter. This year we've been able to get those paid up a little bit more current. The snow was better in Scandinavia this past season than it was a year ago, and those international receivables are lower as well. So I would anticipate that we would be able to maintain better comparisons of receivables year-over-year.

The PG&A question, , if you look at it by product line, about 40 percent of the PG&A sales is related to snowmobiles, and about 45 percent of it is related to ATVs, and if you broke out the first quarter for PG&A, what you'd find is that the sled-related PG&A was way down-- substantially down, you know, largely as a result of parts, and you would find that the non-sled part of PG&A was actually up pretty well, and that's the reason that we have confidence that the PG&A Division will continue to grow ahead of the whole-good rate for the full year. As we move into the second, third, and fourth quarter, PG&A does not depend, obviously, on riding snowmobiles in the summer, but ATVs, watercraft, and motorcycles. So it's about 40 percent sleds, about 45 percent ATVs, and it's largely an installed-base business, as we've talked about many times.

OK, and just one last question -- with the new relationship with Household, Mike, maybe you can remind us -- I believe you own half of the Polaris acceptance, which is based through the wholesale financing unit, and then what is your exposure, what is your ownership structure, on the Household side-- on the retail side? Thanks.

The retail relationship with Household is not contractually a partnership. We have structured the agreement to more or less emulate what we have on the wholesale side, though, which means that we will share the profitability of the retail credit portfolio 50-50. So any income or losses that are generated by that Household retail credit portfolio are shared equally between the two partners.

Thanks, guys.

Our next question comes from Mr. Joe . Go ahead, sir.

Thanks, I have a couple of questions, actually. I wondered, on the snowmobiles, are all your orders in for the Snow Check Select program now, or are there still some that have to come in?

There that come in. The period is March 1st to April 15th, but I'm sure there are a few stragglers. We don't yet have those final numbers, Joe. I would expect them to be down, you know, pretty substantially, but I don't know. I can't quantify that for you, as we, certainly, in the second quarter call will talk more about where Snow Checks ended up, but I am pretty confident in the down 20-ish. I think Mike said 18 to 20 for the full year for sleds.

Right, OK. So we would expect the Snow Check numbers to be down a similar amount, I guess?

They might be down even a little more. I just don't know, Joe. You tend to get-- in the Snow Check buyer-- you tend to get that real enthusiast, you know, the person that will ride 1,500, 2,000, 2,500 miles a year, and that person is not going to chance, generally speaking, to ride that much this year -- so my guess is they probably won't trade a sled with a few hundred miles on it. So we'll see what the numbers will end up being, but I would not be surprised for them to be pretty substantially down.

OK, and on the Victory -- what are the margin trends there, you know, particularly with the new engine? Is the engine less expensive for you to manufacture? Just kind of talk, I guess, the profitability trends there.

The margin trend is improving in Victory, as a result of improvements. The new engine is substantially less expensive to manufacture than the old engine and, at the same time, delivers 25 percent more power and 10 percent better fuel economy. It's better looking, it's more reliable, so it's really a substantially improved product, and we expect that Victory margins are going to continue to expand, as we gain critical mass in terms of volumes, and we continue to develop the product. It's still a kind of a baby in terms of its evolution, but it is improving, and I think maybe even more importantly from an overall perspective, we're seeing improving margin trends in all of our product lines, and that's pretty darn exciting.

At what point does Victory become-- is there a sales level that you can kind of indicate where it's going to be a break-even or turn profitable?

We really don't talk about segment profitability, Joe, in any of our product lines. So that's a question I really can't answer for competitive reasons.

I guess I knew that answer. On the Polaris Professional Series, two questions, actually. I think you were looking for a rental customer-- a rental fleet to sell into?

We may wind up with a substantial number of the dealers that are carrying the line-- actually renting the equipment. The end-use consumer for these are builders and contractors and that kind of thing, and it won't surprise us at all to see a substantial fraction of these being rented or leased as opposed to sold, as is common in that industry.

Right now we don't-- at least initially-- expect any kind of large, significant national rental chain. There's both advantages and disadvantages in that form of distribution. It can be a real kind of feed/start, feed/start sort of deal in terms of volume and pricing and all that sort of stuff. We may have some more targeted things on kind of a regional basis, but, generally speaking, we want to establish a network of large, substantial, independent dealers that may have, you know, two, three, four store locations but probably we're going to stay away from the very large nationwide rental chains that tend to really swing the market in terms of when you go through the various cycles.

OK, and you've talked about a new product pipeline for Polaris as a whole. Is there anything new coming in the Polaris Professional Series maybe in '03? I know you've talked about the potential of this being a couple of hundred million dollar business a couple of years out. I'm assuming that's with new products?

We will announce more new products yet this year in the Polaris Professional Series. I think the big deal this year is to establish the brand and to establish the channel. If we can sign a couple hundred really high-quality dealers, and these are, you know, $5 million, $10 million, $15 million dealerships, much bigger than our traditional recreational vehicle dealers, then I'm pretty confident, if we can establish the brand, good quality, good service, good dealer network, then we can pretty rapidly add to products as we go down the road, both in terms of our own manufactured products and source products, and we have, I think, a pretty exciting plan to do that, but we've got to kind of walk before we run, I guess, and that means really establishing the dealer network, particularly this year, and we're off to a great start in doing that. I'm really, really happy with the way that's going.

In terms of the product pipeline, you know, yet this year, we will have some very exciting news. Again, I can't get into the specifics of it, obviously -- some very exciting news this summer, really kind of across the business. I think it's probably the largest unveiling of new products that we've had, certainly, since I've been here.

OK, and a last question, I guess, for Mike. Can you give me the accrued expense number from the balance sheet, and particularly the sales promotion number?

Yes. Let me find it here. The accrued liabilities in total is 116.5 million at the end of March.

OK, and do you have the sales promotion line?

I do not.

OK, thanks.

Our next question comes from Mr. . Go ahead, sir.

Good morning, guys. The first question is in ATVs, what would you anticipate would be the competitive response that you'll see this year to the Sportsman 700?

Well, a lot of it we've seen already. You know, a year and a half ago I said we're going to see some pretty aggressive new products, and Yamaha introduced a product called the Grizzly, which has been pretty successful. Kawasaki introduced a product called the Prairie. Honda had a product called the Rubicon. So, really, all of those were significant new entries in the large, big-bore, class. I would expect those to stay in production for some time, anyway.

I think the only substantial thing that we see is Honda has got a product called the Rincon, which, again, is a large displacement, independent rear suspension. I guess it's kind of flattering, I guess, that everybody is basically gravitating to the Polaris-designed product. Many of them are introducing their first automatic ATV. We've just passed our millionth unit of production, so I feel like we've had some experience in doing this, but I would expect that will be a significant new product coming from Honda, which we are obviously preparing for, and we're well aware of.

The Sportsman 700, I think, will be a very competitive product for quite some time.

This is Mike Malone. I've got a correction on the number that I gave Joe earlier. He asked what the total accrued liability number was, and I picked up the wrong number. I apologize for that. The correct number for accrued liabilities at the end of March is 145.7 million.

OK, and then, if I may, just a second question. Is it fair to assume that the 7.3 million type of increased promotional expenditures on ATV is a good run rate by quarter for the balance of the year?

Well, that's incremental spending over the first quarter a year ago, and we started ramping up our promotional activity in the second quarter a year ago. So the incremental spending is just about done. Now, we will continue to spend at a high rate, but the vast increase quarter-over-quarter is pretty much behind us.

OK, and then just a last question -- have you seen any indications that any of your direct competitors in ATV are getting into the Polaris Professional Series type of product, like in the more commercial applications? Have you seen any indications yet of that?

No, I haven't. Kawasaki has traditionally had a product similar to our Ranger called the Kawasaki Mule, which plays both at the consumer level and also in the commercial side of things, but that's been out there for many years, but we don't really see a real push by any of the other competitors to get there.

It's really a different set of competitors in the commercial side, . John Deere has a pretty substantial franchise there, you know, with products like their Gator, for example. Toro has a pretty substantial product offering there. Again, primarily more targeted at the landscaper and golf course type customer. There are some others, and a number of really, frankly, smaller companies, you know, $50 million to $100 million companies that we feel like we should compete pretty successfully against if we're able to, again, establish a really top-notch dealer network and really support that dealer network through parts and service and financing and those kinds of things that perhaps a much smaller company can't do.

OK, thanks a lot.

, we have time for maybe one more question, if there is one.

It appears there are no further questions at this time, sir.

OK. I want to thank everyone for participating in today's first quarter conference call. Please remember that our presentation and responses to your questions did contain certain statements that could be considered forward-looking for the purposes of the Private Securities Reform Act of 1995.

Again, thank you for participating. Goodbye.

Thank you. This concludes today's conference call.