Polaris Inc (PII) 2002 Q4 法說會逐字稿

Good morning is Stephanie, and I will be your conference facilitator today. At this time, I would like to welcome to the Polaris Fourth Quarter and year-end Earnings Conference Call. As I remainder, this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. Thank you. Mr. Edwards, you may begin your conference.

Thank you, Stephanie, and good morning everyone, and thank you for joining us for our fourth quarter and year-end earnings conference call. Today, Mike Malone, our Chief Financial Officer, and Tom Tiller, our President and Chief executive Officer will be participating in the call. Let me remind you that during this presentation, we will be discussing certain topics including product, demand, and shipments, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for 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, involve 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, I'll turn it over to Tom. Tom.

Thanks Richard. Good morning, everyone. Thank you for your interest in Polaris. We are pleased to report increased sales and earnings per share for the 19th consecutive quarter. For the fourth quarter, earnings were $1.51 per share, up 12% from last year on 3% sales growth. For the full year, earnings per share were $4.39 per share, up 13% on 2% sales growth. This was the 14 consecutive years that earnings per share have increased at Polaris. The quarter and full year results met our expectations, and were driven by a strong performance in the ATV division and improved margins. 2002 was a good year for the company. We faced three main challenges. The slow economy, poor snowfall, and a major flood at our largest location. But we successfully overcame these hurdles, and our business has remained solid throughout 2002. We demonstrated that we could grow through a recession while delivering operating leverage and generating strong cash flow. In the third quarter, we introduced our largest wave of new products ever and these models have all successfully entered production. We expect 2003 will bring more of the same as we saw in 2002. With a potential of war in Iraq, we are expecting a continued sluggish economy and moderate top-line growth. We expect to deliver 7-10% earnings growth by leveraging our hot new products, and paying close attention to lowering cost and continuing to improve quality. With that overview, let's turn to the individual business segments starting with ATVs.

The ATV division, representing over 60% of the revenue with the company, had a strong fourth quarter to cap a strong year. Shipments for the quarter were up 12%. Field inventories of ATVs were reduced substantially during 2002. Dealers have continued to report good retail activity, particularly around products such as the new Predator sport ATV, the RANGER line of super utility vehicles, and the Sportsmen line. The introduction of the new Polaris professional series continues to go well. Our margins expanded nicely this year in the ATV business, driven by cost reduction and quality improvement, and we gained modest market share. Although the rate of industry growth continues to moderate with the weaker economy, Polaris continues to outperform the industry. Based on both our strong lineup and the strong new product introductions planned for the coming year, we feel that 2003 will bring continued strong results in our most important business. Snowmobiles. The Snowmobiles Division, which account for about 20% of our revenue, had a difficult year in 2002, and unfortunately, the road ahead looks like more the same.

You would recall that last winter was a much warmer than normal winter, and as a result, our shipments to dealers in 2002 were down 21%, as we had discussed in earlier calls. This winter, we've also seen unfavorable weather conditions. The largest market for snowmobiles, the mid-western United States, has seen many areas with either no snow or very little snow. As a result, retails sale are down, dealer inventory is very high, and snowmobile-related parts, garments, and accessories sales are slow. Minnesota, Wisconsin, and Michigan, which together account for about half of the snowmobile business, have been particularly hard hit. Despite the difficulty, we remain number one in both market share and quality in snowmobiles. We except the dealer will remain cautious of our ordering new snowmobiles, until snowfall and riding return to normal levels. For 2003, I would expect another weather sharp decline in snowmobile sales. Of course, as we usually do, all costs associated with existing dealers in retailing field inventory have already been included in these fourth quarter 2002 financial results. In the next quarterly conference call, following the end of the riding season and our annual dealer meeting, we may be more specific about our future guidance, but for sure, snowmobiles represent our largest financial challenge. Despite the difficulty in snowmobile though, it should be noted that Polaris has demonstrated the ability to deliver our financial commitments in a wide variety of weather conditions. Five out of the last six years have been relatively poor snowfall years, and Polaris has grown earnings in every one of those years. And we expect 2003, to be no different.

Personal watercraft. Last year, the personal watercraft industry was down about 2% in retail sales, Polaris had a slight increase in retail sales and for the fourth consecutive year, gained modest market shares. All consumers remain cautious, early season boat shows traffic has been good, and dealers report good interest and deposits on our new MSX model watercraft. We also announced during the last couple of week, the introduction of the [Sourced] jet boat to compliment our personal watercraft line, this new 21-foot boat was designed by Polaris, is being manufactured by Brunswick, and will be marketed and sold by some of our best personal watercraft dealers. And it will help us to track strong marine dealers in key open market areas. This new product allows us to compete more effectively with our largest personal watercraft competitor, Yamaha, and Bombardier, both of whom offer jet boats. For 2003, I would expect more the same an industry that's about flat. We again hope to grow slightly faster than the industry. Our personal watercraft business continues to improve, but it remains about 4% of our total business.

Victory motorcycles. A strong fourth quarter close what was the best year yet for the Victory motorcycles division. We improved our cost and quality and introduced the hot new model, the Victory Vegas, and dramatically accelerated both retail and wholesale sales while reducing field inventory. We benefited from a good market, the motorcycle industry continues to grow. And in particular, the segment of the business in which we compete, big cruiser, was up 18% for 2002. And Victory was the fastest growing brand of the motorcycles in North America with retail sales up nearly 50% over last year. We expect to build on this momentum in 2003, interest in the category remained strong. Traffic at the winter motorcycle shows has been excellent. Our dealer network and product lineup are stronger, and I am confident that 2003 should see continued rapid growth and margin expansion in Victory, similar to what we saw in 2002.

Parts, Garments, and Accessories. We were disappointed to see the PG&A business declined a little bit in 2001, driven by a significant in snowmobile-related parts, clothing, and accessories. It should be noted though that we generated a double-digit growth across the remaining PG&A line. So we believe PG&A continues to represent a growth vehicle for Polaris. We expect, in 2003, for the PG&A business to continue to be challenged by the weather, but we should see some sales growth and margin expansion, particularly driven by items related to our new products like the Predator, the Victory Vegas, and RANGERS. This is an important business for us, representing about 14% of sales, but even more profit. So a return to even modest revenue growth will be beneficial to the bottom line. And closing before I turn it over to Mike, let me summarize our expectations for 2003. '03 will be similar to '02. Revenue growth will be modest in the load of mid single-digit range with growth in ATVs, Victory, and PG&A offsetting a substantial decline in snowmobiles. Earnings will grow 7-10% on a range of $4.70 per share to $4.85 per share. I am confident that with the plans we have in place, 2003 should be another record year, 15th in a row. At this time, I will turn it over to our Chief Financial Officer, Michael W. Malone.

Thanks Tom. As Tom stated we're very proud of our 19th consecutive quarter of increasing sales and earnings given the uncertainty in the economy and the negative impact on consumer confidence of role affairs. You have seen our press release issued earlier this morning describing our fourth quarter and full year 2002 earnings result. And Tom has given you some qualitative comments on our businesses. So I will focus my comments this morning on our guidance for 2003. For the full year 2003, we're expecting sales for the year to increase in the 3-5% range with EPS growing to 470-485, an increase of 7-10% over the $4.39 per share earned in 2002. First quarter 2003 sales are expected to increase 5-8% with earnings per share finishing in the range of 53 cents to 55 cents per share, an 8-12% over the first quarter of 2002. For each of the other quarters of 2003, we expect to show modest sales growth in each quarter and earnings per share growth in each quarter at a faster pace than sale. I will now give you some qualitative comments about why we believe we can deliver this full year 2003 results beginning with ATVs.

Sales for ATVs in 2003 are expected to continue to grow driven by new products, continued share gain, and ongoing growth in the overall ATV industry. Keep in mind that our ATV reported sales includes a range of product line and our new Polaris Professional Series line of products that are growing significantly faster than the industry and our base ATV business. We expect full year 2003 ATV sales to increase in the mid-to- upper single-digit range. Personal watercraft sales for the full year 2003 are expected to increase as our new MSX Personal watercraft continues to generate excitement in the industry. The improvement in watercraft sales dollars will be aided by a significant average sales price per unit increase in 2003 as a result of the mixed change to the higher priced MSX two stroke and four-stroke model. Victory motorcycles are expected to grow significantly and have another strong year as the [New Vagus] gained share in the custom cruiser segment and our dealer network continues to expand and gain strength. For Snowmobile, the lack of snow so far, this riding season, particularly in the mid west continues to have a negative impact on the Snowmobile industry as well as our business. As a result, we have stepped up our promotional and center program to assist dealers in retailing the Snowmobiles inventory before the end of this riding season. The total incremental cost of this assistance totaled $3.5m and is being recorded in the fourth quarter operating results.

At this point, it is too early to tell how successful these programs will be and to - only to tell what the dealer orders will look like. But we are preparing for another down year production for sleds in 2003. As we have demonstrated in the past in these types of situations, we will cut productions and increase promotions and advertising to help our dealers clean out the pipeline appearing over Snowmobile. Parts garments, and accessory sales, are forecasted to increase at a similar pace of the overall company in 2003. As the ATV ranger and motorcycle segments continue to grow offsetting the expected continued decline in the Snowmobiles related PG&A products. In summary, we expect each of our product lines to grow sales in 2003 with the exception of Snowmobiles. Moving down the income statement -- on a consolidated basis, gross profit for the full year 2003, is expected to continue to show improvement on a percentage of sales basis. As we continue to benefit from cost reductions and efficiency improvements. Currently in place an additional projects and initiatives that will be implemented in the coming months.

Operating expenses are expected remain approximately flat as a percentage of sales for the full year 2003. As we begin to gain leverage from past research and developments and dealer developments investments. Income from financial services for the full year 2003 is expected to grow at a pace faster than the overall company as the retail credit portfolio penetration rate continues to increase. At year-end 2002 the wholesale portfolio related to [floor] plan financing for dealers in the United States was approximately $585m, up 7% from 547m at the end of last year. That increase is primarily due to higher Snowmobile inventories at the dealers. Credit losses in the dealer portfolio continue to be very reasonable averaging well less than 1% of the portfolio over the 60-year life of the partnership. The household retail credit portfolio balance at the end of the year was approximately $329m, up from a 160m at this time a year ago and up sequentially from $226m at the end of the third quarter 2002. As expected this portfolio continues to grow rapidly as our penetration rate increase from better linkage with our promotional efforts. Currently, we are financing approximately 23% of our products sold to the consumers up from about a 17% a year ago. Receivable losses for this retail credit portfolio have remained relatively stable averaging about 3% of the portfolio inline with the expectations. We have established adequate reserves for the both the wholesale and the retail credit portfolios and together with our partners continue to pay close attention to loss reserve level and monitor delinquency trends closely.

In spite of the soft economy we have not seen a deterioration of the delinquency or loss trends in either of the wholesale or retail credit portfolios. Continued on the income statement the income tax provision is expected to remain at the current rate of 32.5% of pre-tax income for the full year 2003 benefiting from continued tax planning initiatives. Taking a look at the some additional information for 2002, we ended the year with $81.2m of cash in the balance sheet, up from $40m a year ago. We were able to generate this level of cash after returning a significant portion of the profits to the shareholders through share repurchases of 1.2m shares at a cost of $76m in 2002 and paying cash dividends of $25.3m during the year. In addition to making appropriate investments in capital expenditures are $56.6m during 2002. For the full year 2002 select cash flow items are as follows: depreciation was 57.5m, other non-cash charges netted a positive $14.2m and working capital items were net source of cash flow of $17.4m. This results in net cash flow provided by operations of $192.8m for the year ended 2002, up from the $188m in the prior year. For the year 2003, capital expenditures are expected to be in the $65m-$75m range as we continue to invest in new product tooling, engine and technology projects and engineering capabilities.

With depreciation in 2003 expected to be in the range of $60m-$65m. At the end of 2002 receivables on the balance sheet were $51m a just 3% of sale, down 9% from a year ago. Inventories at the end of 2002 were 155.9m an increase of about 2%. Inventories were up slightly as we purchased the remaining inventory of our Scandinavian distributor late in the year to allow us to sell direct to the dealers in both Sweden and Norway. Debt-to-total capital was just 6% at the end of the year compared to 7% at this time a year ago. EBITDA was $214m for 2002, up 7% from a year ago and we would expect EBITDA to grow again in 2003. Free cash flow before funding capital expenditures, share repurchases, and dividends was $189m for the full year 2002, up 18% from last year. So the recap full year 2003 guidance, sales for the year are expect to increase in the 3-5% range with EPS growing to $4.70-$4.85, an increase of 7-10% from 2002. First quarter 2003 sales are expected to increase 5-8% with earnings per share expected to be in the 53-55 cents per share range. At this time, Stephanie, we would like take any questions that the analyst may have.

At this time, I would like to remind everyone in order to ask a question please press star then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Bob Evans.

Good morning. A question for you on the free cash flow, any thought of devoting significantly more free cash flow dollars to a dividend and less dollars to the buyback program or kind of what -- give us your thoughts on what you are getting now that you are generating significant free cash flow and have virtually no debt? What are your thoughts?

Bob this is Tom. I guess, you know, that's really a matter for the board to decide. You probably saw last week we raised our dividend from 28-31 cents a quarter. We are obviously watching the situation down on Washington, you know, I don't know where that the tax situation will shake out. So, at this point I think you can expect us to keep doing what we have been doing, which is kind of the priority is, first is to fund new products and other capital needs within the business. You can see that's going up a little bit this year $65-75m. We do have a very strong pipeline as new products coming in and that's obviously the single most important determiner of our future success, I believe. Then we, you know, the dividend we kind of continue to increase it every year. We are looking, as I said, in terms of -- there is major change in the tax situation that could cause us do something different, but we will wait and see if that happens. And then finally continuing to buyback the stock and certainly at these levels, you know, we continue to be pretty active in that. And so, I wouldn't anticipate a major change in how we are allocating capital, the obvious exceptions to that being if the tax law changes or if, you know, the acquisition opportunity comes up that could cause a change.

Okay. And two other questions. Could you comment on the inventory levels for the ATV? What were the current inventory levels that are sitting for ATVs at the dealers and then also Mike if you had prepaid expense number I missed that?

Inventory levels at ATVs, I think I mentioned dollar lower than they were a year ago. I would describe them as a very much in balance. We continuously balance you have over supplier. You have a shortage of product. If you look at it in total, I say would right exactly where we want to be, where the dealers want us to be in terms of in total. Our specific models that we are short of and then I would expect we will continue to be short of particularly the newer products, the [inaudible], RANGERS. We chased demand on RANGERS for the last; I think 15 months. So, we have got a couple models that are may be in little bit short supply, but in total I am very comfortable with where ATV field inventory is.

And Mike do you have the prepaid expense, I am sorry, the accrued expense number?

Accrued expenses on the balance sheet in total; let me accumulate it here for you Bob.

Okay. I will always ask questions. Thank you and congratulations on another record year.

Thanks Bob. We'll get you the accrued number here in a minute.

Next question, Stephanie.

Your next question comes from Joe Horvorka.

Thanks actually, I think Bob had a couple of my questions answered. But on the accrued expenses actually if you get the line items, that would be great instead of just the total. And then also the other income line, what is in that number?

The other income as it has been for other prior period is primarily the currency, the foreign exchange currency fluctuations and the impact on the P&L of the translations of our foreign subsidiaries.

Okay.

That's somewhat unpredictable obviously as the currency rates fluctuate.

Right. And that's it, thank you.

At this time there are no further questions.

We'll hold on just a minute, we'll get the accrued expenses number for the two analysts that were asking for it. The accrued expenses for warranties a year ago were approximately $33m and this year is approximately $28m -- I am sorry -- $31m. The sales promotions and incentives a year ago were a total of $95m, of which $70m related to our dealer holdback account. This year our dealer holdback is about $74m and the remaining sales promotions and incentives are approximately $40m. Those are the significant accruals on the balance sheet. Are there any other questions Stephanie.

Yes sir, you do have a follow-up question from Bob Evans.

As Joe [inaudible] asked, but can you comment on your currency situation, how you are hedged and may be how it trends against last year?

Yeah. For 2002, the currency impacts were favorable for the Japanese Yen in our gross margins and unfavorable for the Canadian dollar. They roughly offset each other in the margins. For 2003, currently we are hedged approximately for the first half of the year for each of the major currencies. Generally, we are hedged at rates that are slightly favorable to 2002 levels.

Okay, so slightly favorable versus 2002. And then the $40m of sales promotion that was not for dealer holdback. I would assume that's primary Snowmobile to be expected given the current snow environment. Is there a statement?

Yeah, there is, that's both the total of our products. Actually the ATV number is pretty significant. You know we have retail promotions going on for ATVs and than there is obviously the snowmobile number which is higher this year than it was last year.

Okay. Great. Thank you.

Any other question Stephanie.

You have another follow-up question from Joe Horvorka.

Hi. Actually couple of quick questions on the cash flow, or the operating cash numbers that you gave. The other line which is the positive 14.2, what is comprised in that. What is that number?

The 14.2 and other is, that's the other non-cash. [inaudible] what they are referring to?

Yeah. I guess last year what it was the non-cash compensation plus the offset of the income for financial services.

Right.

Did you keep more income from financial services this year or no? I guess, I am trying to get -- I am surprised -- not surprised but it looks I can awfully get the number, the operating cash flow. You had a big benefit last year from the change in your dealer holdback, correct?

Correct.

And you are obviously would not have that one time gain this year.

Yes.

And we are seeing a number that is higher than last year for the total.

Right. Deferred income taxes had a significant favorability this year and that is the primary difference.

[inaudible]

Yes.

Okay. You also have -- you have been holding a little bit more cash on the balance sheet in the last two years than you historically have? Is there a reason for that or is that just being cautious given the economic environment?

Well, you know we are generating a lot of cash and I guess as I talked with Bob, you know, that is kind of the priority that we have first, the course is to take care of their new products. And I think we are funding all the ideas that we think will be successful in the market place and generate the kinds of returns that we generate. You know, it is not easy coming up with ideas that return 40% on equity, but we have some terrific ideas I believe and we are fully funding those. But, we are not wasting any money and so we do have, you know, $80m of cash at the end of the year. I would say, given the fact that the country may very well be going into a war, it is not the worse situation to be -- to be with a kind of fortress balance sheet right now.

Sure.

So, and were a little bit unusual there. But, I think, you know, the inputs in Bob's question, what you are going to do with the cash is a discussion that we are having at the Board level and for the short-term I don't see any, you know, problem with doing that. Obviously, we have to figure out going forward what is going to happen with the dividend situation and we are continuing to pursue acquisition ideas that may or may not happen, we will see. But, in the meantime given the uncertainty that's in the world right now, I think that is a significant net positive job of having a balance sheet like we have right now.

Sure. I would agree with you.

[inaudible] at my point out is that our cash balance is peak at the end of the year. We do have working capital needs throughout the year, so that -- that balance does fluctuate and in fact we are a net borrower at certain points throughout the year.

Okay. And is there a thought, point in time where you will get a better look on upcoming ATV orders for the rest of the year? Is there another dealer meeting coming up soon?

Yes. We have a dealer meeting in February, our winter dealer meeting where we will present next years Snowmobiling and actually some other products as well coming up in February and we are in the processes as we normally do, we take ATV orders every six months and work. Just in the process of beginning that right now and that will go through end of February, first part of March.

Okay and when they place those orders in February what timeframe will that -- will they be placing orders for?

It will be first six-month period, so, February to August.

Okay.

And that's the normal cycle.

Okay, great. Thank you.

Thank you Joe. Any other questions Stephanie.

Your next question comes from Dolphie Arkit.

Good morning. I had a question about the professional series. It seems to me that you said that last year you were doing about $30m in sales and I wondered what the outlook is for 2003 please?

Yes, I think we said $20-25m of sales. The actual number I think was $16m or $17m so we were a little bit short of what we had and hope to do, but in general not too bad. I think we windup with about 175 dealer locations, we were shooting for 200. So, a decent start, not a perfect start. I think that the business continues to come along quite well. We haven't issued, you know, specific numerical guidance for that for '03, but I would expect the business to continue to grow very rapidly, you know, above 50% certainly. The product assumed to be very well received. It has taken us a little longer to sign the dealers than what we thought, simply because it is a little bit different business, it is more of a bid business rather than a walk-in business -- a consumer part of the business which is 99% of our business and people go and buy the vehicle. The commercial business is typically, you know, town or municipality or a business actually put in something asset base. So that is little bit slower than our consumer business, but I think it's all in -- going quite well, products coming along well. Financially, it is just about a breakeven business for us in the first year, as I said - I think $16m or $17m of revenue.

Thank you.

Next question.

At this time there are no further questions.

Okay. Well, we want to thank everyone for participating in today's call. Please remember that our presentation and responses to your questions contains certain statements that could be considered forward-looking for purposes of the Private Securities Reform Act of 1995 and that actual results could differ materially from those projected in any forward-looking statements. Thank you again for listening and we will talk to you next quarter.