Polaris Inc (PII) 2003 Q1 法說會逐字稿

Good morning. My name is Themia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Polaris Industry First Quarter 2003 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time simply press "*", then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "*" then the number "2" on your telephone keypad. As a reminder, today's conference is being recorded. Thank you, Mr. Edwards you may begin your conference.

Thank you, Themia and good morning to all and thank you for joining us for our First Quarter Conference Call. As before, Thomas Tiller, our President and Chief Executive Officer; and Michael Malone, our Chief Financial Officer will be participating in the call. I must remind you that during this presentation, we will 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 period, which should be considered forward-looking for the purposes of 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 number of important factors that could cause results to differ materially from those anticipated. Additional information concerning the number of these factors can be found in Polaris' 2002 Annual Report and in the 2002 Form 10-K, which are on file with the SEC. Now, we will turn it over to Tom. Tom.

Thanks Richard. Good morning everyone and thank you for your interest in Polaris. We are pleased to report increased sales and earnings per share for the 20th consecutive quarter. So the first quarter earnings were 55 cents per share, up 12% from last year and 5% sales growth. The quarter's results met our expectations and were driven by good performances in the ATV and parts, garments, and accessories division and strong international sales. We expected a sluggish start to the year as a result of the war, and that did materialize. Retail traffic and sales across the industry and all product lines were lower than a year ago, just as we saw during the Gulf War of 1991. We expect retail traffic to improve in the coming weeks, now that it looks like the war is coming to a conclusion, and consumer confidence is improving. Our expectations for the remainder of 2003 remain unchanged from 90 days ago. We expect, for the full year, earnings per share growth of 7-10% or $4.70 cents per share to $4.85 cents per share on modest revenue growth. While lots of uncertainty remains regarding the economy, ending the war relatively quickly is a positive development for Polaris. With that overview, let's turn to the individual business segments, starting with the ATV division.

Considering the political and economic environment, ATV, which represents more than 60% of Polaris' sales, had a pretty good start for the year. Wholesale sales were up 7% as we continued shipping strong new products like the Predators for ATV, and soon we will begin shipping the all-new Polaris, all-terrain pickup, the ATP. The Predator continues to pile up the awards, winning the "ATV of the Year" by three leading industry publications. Ranger sales have continued very strong, and the Polaris professional series continues to build strength. Our international sales of ATVs were very strong as well, up over 50%.

The ATV industry retail environment was fairly healthy during the quarter but competitive. For the first quarter, retail sales were just 4% lower than last year's record first quarter. Promotional spending for all competitors, including, Polaris was higher than the year ago. These promotional offers generally consist of low or no-interest retail finance programs for periods of approximately six months and may include a PG&A offer or a dealer rebate. Dealer inventory of Polaris ATV is lower than at the same time last year. Factory inventory of Polaris ATVs is somewhat higher and will probably remain a little higher than last year through the second quarter. For the full year, we expect to grow our ATV business in the mid to high single digits, and we expect the industry to grow as well. Based on both our current strong lineup and the new product introductions planned for the year, we feel that 2003 will bring continued strong results in our most important business. Snowmobiles -- the first quarter brought to a close a difficult season for the snowmobile division, which accounts for about 20% of our revenue. Unfortunately the road ahead looks like more the same. This year saw a substantial decline in both wholesale and retail sales. A very dry winter across the upper mid-west, which accounts for about half of the industry sales, was the primary driver, and strong new products from our competitors also hurt Polaris. From a more favorable perspective, there was very good snowfall in the east and mixed snow conditions in the west. In these areas, riding was good; particularly, in the East and retail sales of both snowmobiles and the associated parts, garments, and accessories items reflected that. The net result is a dealer channel with a high level of snowmobile inventory, particularly in the Midwest which must be reduced. Polaris, as has been previously announced, is assisting qualified dealers with inventory carrying cost. As expected, dealers have remained cautious about ordering new snowmobiles until snowfall and riding return to normal levels. For 2003, I would expect another rather sharp decline in snowmobile sales, similar in percentage terms for 2002. Of course, as we usually do, all the costs associated with assisting dealers in retailing field inventory have already been accrued. And just as a reminder, five out of the last six years have been relatively poor snowfall years; and Polaris has grown earnings in everyone of those years and we fully expect 2003 to be no different.

Personal watercraft -- PWCs had a slow start to the year. Fortunately the season really begins in the spring, so we expect things to improve. Retail sales across the industry were down about 10% from the first quarter of last year. You will know our first quarter wholesale shipments were down sharply from a year ago. This is a timing issue as we attempt to better match shipments closer to a retail selling season. You can expect to see a rather large increase in the second quarter wholesale shipments as we fill dealer and consumer demand for the new MSX personal watercraft and the new EX2100 Sport Boat. For 2003, I would expect PWC industry retail sales to be about flat to perhaps down single-digits. We again hope to grow slightly faster than the industry. The PWC business continues to improve, but it remains only about 4% of our total business. Victory motorcycles -- shipments of Victory motorcycles were up 17% for the quarter, driven by strong demand from dealers for the award-wining Victory Vegas. The Vegas is hot. It was recently named the cruiser motorcycle of the year by Cruising Rider magazine and we expect other awards to come. At every show, at every dealership there is a strong interest in this hot new model. Industry retail sales for all motorcycles were just 3% lower than last year's record-setting pace. We expect thing to pickup now as the weather is getting better and the war has ended. We expect to continue to build Victory's momentum in 2003. Interest in the category remains solid. Traffic at the winter motorcycles shows was excellent. Our dealer network and product lineup are stronger, and I am confident that 2003 should see continue rapid growth and margin expansion in Victory.

Parts, garments, and accessories -- the PG&A business had a good first quarter with 12% revenue growth. Both parts and accessory sales increased double digits. The snow, particularly, in the East slowed part sales. And ATV accessory sales also grew nicely. In fact PG&A sales increased across all of the product divisions. After a tough 2002, our execution in this important business appears to be back on track. For the full year, I would expect growth in the mid-to-high single digits or about double the velocity of the remaining business.

International -- our international team had a stellar first quarter with revenues up 85%. Some of that increase relates to the fact that we are now dealer direct in Scandinavia, but we also had terrific performances throughout our international network across all product lines. The weakening of the US dollar has been beneficial as well.

I want to talk to you for a minute about Bombardier. You may be aware that one of our largest competitors Bombardier recently announced their intention to sell their Recreational Products division. The division which is approximately the same size as Polaris, make Skidoo snowmobile, Sea-Doo personal watercraft, Bombardier ATVs, and Johnson and Evinrude outboard boat engine. Problems, as a result for the aerospace market declines following September 11th, were the primary reason for the sale. Bombardier also makes jet airplanes and trains, of course. We expect, based on their announcement that the sale process will take a few months. We are monitoring the situation closely. The preferred alternative appears to be a sale of the division back to the Bombardier. But that may change in the coming months. We would expect to see several bidders for the business.

In summary, before I turn it over to Mike, let me summarize our expectations for the remainder of 2003. As I mentioned, we are confirming our previous guidance. Revenue growth will be modest in the low-to-mid single-digits; with growth in ATVs, Victory, and parts, garments, and accessories offsetting a substantial decline in Snowmobiles. Earnings will grow 7-10% or in a range of $4.70-4.85 per share. I am confident with the plans we have in place, 2003 should be another record year, our fifteenth in a row. At this time I would like to turn it over to our Chief Financial Officer Mike Malone. Mike...

Thanks Tom. As announced this quarter marks our twentieth consecutive quarter of increasing sales and earnings during a period of uncertainty and low consumer confidence in the US economy. You've seen our press release issued earlier this morning describing our first quarter earnings results and Tom has given you some qualitative comments on our businesses. So as before, I will focus my comments this morning on our guidance for the second quarter and full year 2003. As Tom mentioned for the full year 2003, we are maintaining our previously issued guidance given in January; and continue to expect sale for the year to increase in the 3-5% range with EPS growing to $4.70-4.85 per share -- an increase of 7-10% over the $4.39 per share earned in 2002. Second quarter 2003 sales are expected to increase modestly in the 1-3% range with earnings per share finishing in the range of 89-93 cents per share; a 7-12% increase over the second quarter of last year. Additionally for the third and fourth quarters of this year, we expect to show modest sales growth in each quarter and earnings per share growth in each of the quarters growing at a faster pace than sales.

I'll now give you some qualitative comments about why we remain confident, we can deliver these full year 2003 results beginning with ATVs. Sales for ATVs in 2003 are expected to continue to grow driven by new products, growth in international markets, some share gain, and a modest rebound in growth in the overall ATV industry later in the year. I want to remind you that our reported ATV sales include our Ranger product line and our new Polaris Professional series line of products that are growing significantly faster than the industry and our base ATV business. Additionally the Predator 500 sport ATV, which began shipments in the fourth quarter of '02, will bring incremental sales to us throughout 2003 and beyond. Our new all terrain pickup ATP, has been received very well and shipments started in April. And there are no more new products to come later in the year. We continue to expect full year 2003 ATV sales to increase in the mid-to-upper single-digit range.

Although our watercraft sales were down in the first quarter due to the timing of shipments, we continue to expect for the full year 2003 to improve over last year as our new MFX continues to generate excitement and we ramp up the shipment of those models during the second quarter of this year. The improvement in watercraft sales will also be aided by a significant average per unit selling price increase during 2003 from a mix change to the higher price MSX models. The new EX2100 Jet boat, introduced about a month ago, will also add some sale to the 2003 year although the number of units sold this year will be limited. Victory motor cycle sales are expected to improve significantly over a very strong year in 2002. The new Vegas is expected to gain share in the custom cruiser segment, and our dealer network continues to expand and gain strength. The Vegas started to ship to dealers in the first quarter and will ramp up in the second quarter. For snowmobile, as Tom mentioned the lack of good riding snow this past season particularly in the Midwest has had a negative impact on the snowmobile industry as a whole, as well as our business.

As we explained in the January conference call, we stepped up our promotional and incentive programs to assist dealers in retailing the snowmobile inventory. In spite of these efforts, season endings snowmobile inventory for Polaris dealers is higher than normal and higher than levels a year ago. Dealer orders are coming in at levels we expected and as we do ever year, we match our snowmobile productions to the ordering levels. Although the dealer order process is not yet complete, we expect snowmobile shipments for 2003 to be down again, perhaps as much as last year on a percentage basis. The reduced level of dealer orders for snowmobiles was and continues to be factored into our overall guidance for the company for the 2003 year. PG&A sales are now forecasted to increase for the full year 2003 at a slightly faster pace than the overall company after getting some lift in our snowmobile related PG&A business in the first quarter of '03, compared to our weak first quarter in '02. In summary, we expect each of our product lines to grow sales for the full year 2003 with the exception of snowmobiles for the reason previously described.

Moving down the income statement, on a consolidated basis gross profit for the full year 2003 is expected to continue to show improvement over 2002 on a percentage of sales basis. Although, not as significantly as the 130 basis point improvement realized in the first quarter. Reasons for our optimism include the continued benefits from cost reduction efforts, quality and efficiency improvement initiatives, and a positive sales mix change from our new product introductions, higher PG&A sales, and improved international margins. Operating expenses are expected to increase slightly as a percentage of sale for the full year 2003, as we continue to invest in research and development for new products and technologies, as well as our dealer development initiatives in our new international subsidiaries cost; all while watching our other operating costs closely in a slow economy. We continue to expect income from financial services for the full year 2003 to grow at a faster pace than the overall company, assisted by the retail credit portfolio penetration rates, which continues to increase as we experienced in the first quarter. At the end of March 2003, the wholesale portfolio related to the floor plan financing for dealers in the United States was approximately $524m, up 5% from $500m at March of last year, due entirely to the higher snowmobile inventories at the dealers. Credit losses in this dealer portfolio remained very reasonable averaging well less than 1% of the portfolio.

The household retail credit portfolio balance at the end of March 2003 was approximately $375m, up significantly from a 168m at March of last year, and up 14% sequentially from the $329m at the end of December 2002. As we expect, this portfolio continues to grow rapidly as our penetration rate increases from better linkage with our promotional efforts particularly in ATVs. At the end of the first quarter 2003, we were financing approximately 34% of our products sold to the consumers, up from 14% in the first quarter a year ago. Receivable losses in the retail credit portfolio have remained relatively stable averaging about 3% of the portfolio in line with our expectations. I want to remind you again that we have established adequate reserves for both the wholesale and retail credit portfolio and together with our partners continue to pay close attention to loss reserve levels and monitor delinquency trends closely. In spite of the soft economy and higher personal bankruptcies across the country, we have not seen a deterioration of the delinquency or loss trends in either of the wholesale or retail credit portfolios over the past few quarters. Taking a look at some additional information from the first quarter. Leveraging off our strong balance sheet, we took advantage of the undervalued stock price and increased our level of repurchases to 690,000 shares at a cost of $34m for the first quarter of 2003. Dividend paid during the quarter totaled 6.8m and capital expenditures were $14.1m. We continue to expect full year 2003 capital expenditures to be in the $65-75m range, as we continue to invest in new product tooling, engine and technology projects and engineering capabilities.

A couple of select cash flow items for the first quarter are as follows; depreciation and amortization was 13.2m, other non-cash charges netted a negative $2m. Working capital items where a net use of cash flow of $92.6m, up from 41.9m in the first quarter a year ago. Couple of reasons for this, receivables increased $18.7m from March a year ago due principally to the new international operations and our higher PG&A sales. Inventories increased $48.1m or 27% compared to March a year ago, due again to the new international operations as well as higher inventories of new products recently introduced that were awaiting shipment to dealers at quarter-end. For instance the ATV product. Net cash flow used for operating activities was $69m at the end of the first quarter of '03 compared to $11.2m in the first quarter a year ago. Debt to total capital was a very reasonable 23% at the end of this year compared to 17% a year ago, and EBITDA was 32.2m for the first quarter, up 4% from a year ago. To recap our second quarter and full year 2003 guidance, sales for the full year are expected to increase in the 3-5 percent range, with EPS growing to 470 to 485, an increase of 7-10% over 2002. Again, this guidance is unchanged from our previously issued guidance in January. Second quarter 2003 sales are expected to increase 1-3%, with earnings per share expected to be 89-93 cents per share range, an increase of 7-12% over the second quarter of last year. At this time Themia we'd like to take any questions that the analysts may have.

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

Good morning. Congratulations. A nice quarter.

Thanks Bob.

Can you comment on the international operations and why the inventory levels are higher there? What's changed just to clarify?

I think, as you recall last fall we announced that we bought out our distributor operations in Scandinavia. Last summer, we did the same thing in Britain, and as a result we are doing business a little differently there rather than sell to a distributor and recognize that sale earlier, we are now, have a wholly-owned subsidiaries in those countries where we are selling directly to the dealers, and as a result we are holding that inventory a little longer as we ship it overseas and put it in the warehouse there to eventually sell to the dealers in those areas.

Okay. If we look at the increase in the inventory, how much of it is outside of the -- I guess, is the increase primarily snowmobile and international? Is that the right way to look at it?

I think it would be across all business lines. You know, if you look at the total inventory increase from March, a year ago, some of that is international, maybe close to half of it, as the other half is primarily ATV inventory -- factory ATV inventory, and higher raw material inventory.

I'd say roughly about and these numbers are reasonably close, about half for international and roughly the remaining halves split equally between finished goods ATV inventory and higher raw material inventory with the uncertainty with the war and everything else. We have had a little bit higher factory raw material inventory by plan; that was something we've planned to do as kind of a hedge against, you know, any kind of interruption in ports and that kind of thing which we have seen before. I will also mention -- you may recall the first quarter of 2002 was a relatively low inventory level. So, I think the comparables offer a fairly low number two.

Okay. And can you comment on what your thoughts are for the snowmobile industry in general? What do you think the industry will be down in '03?

Well, I think it's definitely going to be down. I am not sure I have a number for you yet. We haven't seen competitive sell through information and their snow checks and that kind of thing, but it will definitely be down for sure.

Okay, okay. And can you also comment as it relates to the ATV industries? The growth, you have clearly gained share in '02 and appear to be doing so again in the start of '03; how much of it, do you think is from new products and how much of it is from just, you know, traditional segments that you have had strength?

Well, I think, you know, the -- with regard to the ATV numbers, I know there are lot of people out there that follow the MIC reported data and I think it's important everybody understand the numbers, they understand there is a number of analysts that report that information, and in 99% of the cases the number that are floating around are US only, strictly defined ATV. So, that's the number when people say the ATV industry is up or down X% independent people; that's generally what they are referring to. In our business we also have some other parts of the business which happen to be growing quite a bit faster than the base US ATV industry; that includes our international business which is not reported, of course, in US sales and that was up over 50% in the first quarter. It includes products, which are not technically ATV's, RANGER, super-utility vehicle, for example, and also our Polaris Professional Series, which we consolidate under our ATV division for reporting and have sense to beginning that effort. So, there is a little bit of apples and oranges in those numbers. We do think that new products are very, very important, of course, in driving our success in the ATV division as well. So, there are a couple of different factors here, Bob.

Okay, final question. Since you brought up here in your opening comments the Bombardier situation, you care that you are leveraging more in terms of, you know, Polaris' interest in that situation?

No, I mean in terms of whether we are going to participate in that or not, there is nothing that we are prepared to announce this morning. But I did want to make sure that, particularly the investor -- they don't follow the industry, particularly closely -- are aware that that sale is in the process of beginning. I think, kind of that time line that we are hearing is -- really the serious sale process will start about the first of May or so and should take up few months. I think it will be a relatively quick process; Bombardier meets the proceeds from that sale to show up in their balance sheet. So, I would not anticipate a long process.

Okay. Thank you.

Your next question comes from Tim Conder of A.G. Edwards.

Congratulations on the solid quarter in a difficult environment.

Thank you.

Thanks Tim.

Couple of things here. Could you gentlemen breakout the military-related sales and then, is that reflected near international or domestic numbers on the ATV side? And then any additional color you can offer there as far as the size of that business or contract? And then, also Mike if you could just may be comment on the jump on the receivables also?

With regard to the military business it's not a material business yet. Just to remind people, kind of what happened, right after September 11th -- like September 12th literally, the military came to us looking for ATVs to use first in Afghanistan. We were very quick to accommodate them. They had several hundred - a few hundred units that we shipped over to Afghanistan at the Special Forces guys who were using for a patrol and different military uses in primarily Eastern Afghanistan. The machines performed very well; those initial machines were completely stock units. We -- as they got experience with the vehicles, of course they wanted some changes. We have developed and announced during the first quarter a product called the Sportsman MV; the MV stands for military version; it's essentially Sportsman 700 with a number of military-only accessories things like infrared light so they can use in the midnight with their night vision goggles and tires that you can shoot out and they will continue to run flat, and special racks that will carry things like stretchers, but the guts of that are just -- they are Sportsman 700, which is very, very reliable product and works great in that kind of environment. I think, last year, the sales were - you have got to help me a little bit Mike, but around $3m, not a big number. This year I would expect, may be something on the order of $10m.

There are about five different branches of the military that are evaluating this Sportsman MV in a series of field tests and so forth. Our understanding is that there are some units that are over in Iraq, that were used there, a handful of units. Based on how that testing goes we may see further more production-oriented orders. Again, I don't see it to be a huge number for us. It would be -- if the production order is received, my guess it would be in the tens of millions, not the hundreds of millions a dollars and that's kind of where that fits right now. Being an American company, this is something that's very important to our company to support our government in anyway that we can, and I am pleased, I feel extremely proud to be a part of the whole effort here, so that's kind of where that stands.

And that is reflected in the domestic sales term?

Yes. Couple of the comments and that be to answer your questions, Tim that those are being sold in U.S. -- government US customers, so they are in domestic sales. There are also -- those receivables are not -- they are little different so they are not funded through our joint venture, so those receivables are on our books and that's a part of the reason that the receivables are up a little bit. A bigger reason that the receivables are up is the international operations again. About half of the increase in receivables over a March, a year ago, are due to the-- again the international operations. The receivables to our dealers in those countries are timed differently, obviously, than the receivables to the distributors in the past. Another piece of the increase in receivables is the higher PG&A sales. The terms of those receivables are a bit longer than our whole goods receivables and the PG&A sales being up, so receivables are up a little bit.

Those PG&A sales were -- were they fairly equal over the quarter or were they skewed one way or the other during the quarter?

Well, they were -- strong compared to a year while we would say that they were stronger later in the quarter, we had some late snow, particularly, in the Eastern regions and we got some spike in our sledge business over a pretty week first quarter a year ago.

Okay. And couple other questions. Back to the Bombardier issue, looks quite hypothetical here. Would you envision if you would make a bid, would you envision any FTC issues on Snowmobile or watercraft side in both of those markets are combined, you would deal over 50%? And then also, the outboard part of their business would not seem to fit at all with your business, and hypothetically, I guess, if you would acquire that would that be divested very quickly?

I guess, I am not ready to answer those questions, Tim.

Okay. Finally, question relates to currency. You had about a $2.5m gain, anything unusual there? You know, you said obviously, the weakness in the dollar benefited the company greatly but -- Mike maybe if you can just walk through that and then maybe just comment also on where you stand on hedging relative to the Yen and to the Canadian Dollar?

Certainly. I don't know if there is anything unusual going on in the currencies. There are few things that are different for us as we have expanded our international operations and our sales are greater. We are seeing more impacts of the currency on our business. Particularly, with the EURO, as we have gone more dealer direct, and we got more volumes in EURO, we are seeing more impact of currency movement. It happened to be positive for us in the first quarter and it -- who knows what it will be for the balance of the year depending on where the currencies move. But we -- over the last couple of years, we have become more EURO based in our currency exposures. As a result, we have started to hedge that EURO currency where we have not in the past. So, we are starting to do a little bit of that and the hedge activity that we do have on the EURO would be favorable for the balance of the year. Our Canadian dollar exposure is hedged for the balance of the year 2003 at levels that are somewhat positive to where they were a year ago. And the Yen is currently hedged for the next six months through the end of the third quarter at rates that are roughly comparable to where they were a year ago.

Thank you.

I'd add Tim, the unusual thing I think with currency is that, in this particular quarter we have been fortunate that all three principle currency movements, which affect the company where favorable. Canadian dollar, Japanese Yen and EURO all moved in the right direction for company. And while, there is a lot of things that we don't control that influence the company that moved unfavorably, things like the war, things like lack of snowfall across the upper Mid-West. We did see very favorable movements in currencies and we certainly -- and that's been beneficial to us.

Okay. Thank you gentlemen.

Our next question from Brian Knoepp of Midwest Research.

Hi guys, how is it going?

Thank you, Brian.

Couple of questions, mostly just sort of detail ones. Could you give us the holdback and the promotion balance in accrued expenses at the end of the quarter; if you have got that handy?

Yeah. Holdback decreased significantly from year-end. Year-end it was little over $70m. We -- as you recall, we pay out -- we reimburse the dealers, the holdback twice a year. We did that in February. And our holdback reserve is around $47m at the end of first quarter compared to a number very similar to that a year ago in March. Our other sales promotions, which is everything else, the sales promotion programs for ATVs and Snowmobile, etcetera, is actually little bit higher right now than it was at the end of December. It was around 40m or so at the end of December. It's about 46m at the end of this quarter.

Was there an increase in ATVs? Is that sort of imputed in the first quarter then?

Yeah, we have, as Tom mentioned, the ATV promotional environment is heavier now than it has been. So, we are continuing to remain competitive there and have -- our current level of promotions is heavier than it has been and we are expecting it to continue and therefore we have got a reserve build for that.

Okay. Another one for you Mike -- the minus 2m non-cash, is that all the non-cash from financials or is there something else that's in there?

Deferred taxes is also in that number as well.

Could be wanting to break those two out?

No. We combine them for disclosures.

Okay. That's all I had. Actually, you know, I have got another one. Could -- have you guys done any work on looking at how your base ATV business is done, if you sort of stripped out the benefit of Ranger and Professional Series and the Predator? And have you any idea, sort of, how you have done, you said that the market itself retail sales were down maybe 4% or something like that? Any idea how you, kind of drive what the industry wants to strip out of the market share gains which are good?

I think we have reported what we were willing to disclose in the call.

All right. Thanks gentlemen.

Thank you. Have a good day.

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

Good morning. Couple of quick questions for the ATV business, could you characterize the dual response to the new ATP? And then, can you also talk about level of promotional activities that you are currently experiencing and how that compares to your competitors? And then I had a quick follow-up question after that?

Yeah. I would say that the reaction to the new ATP has been very good. We are pleased with both the qualitative reaction and dealer orders. Again for people that might not be familiar with the product, ATP stands for All-Terrain Pickup. And what the vehicle is basically like a little pickup truck in an ATV chassis. The concept is similar to the crossover vehicles you see in trucks and SUVs, so if you are familiar with products like the Chevy Avalanche, which is kind of half a SUV and half a pickup truck, and it gives the user a lot of flexibility. We think that there are buyers out there that want to be able to have more flexibility in their vehicles. So this is kind of a new segment for us. It's born after that kind of traditional Rec utility buyer, but it is in a little bit different way for a couple different models, the drive system is very innovative. It allows the customer to select whether they want a turf friendly mode, in order words you can drive it across your lawn and not tear up the lawn at all or two wheel drive or four wheel drive. I mean there is wide variety of accessories that allow you to do more, more easily. That's kind of the tagline with the ATP. So, I think that's been, you know, very well received. We will see how consumers react to it as Mike said, we are just in the profits to starting to ship back literally right now. In terms of promotions, promotional environment is higher than it was a year ago. I would say that Polaris is being competitive. We are not at the head of the list in terms of our promotional spending, moreover we trailing the pack that put us kind of mid-pack.

Okay great. And could you also give us a sense of, you know, giving your full year guidance for ATVs, the mid-to-high single-digit, more specifically, you know, what industry growth is implied by that?

I think so, what we said was for our business, we expect the ATV sales for calendar year 2003 to be up mid-to-high single-digits. I would expect the ATV industry to grow a little bit. That's probably low-single-digits. Again, from our record year, and we do have a war out there at least in the first quarter. You know, I am pretty pleased frankly that the industry was only down 4% in the first quarter given, you know, everything else that you are seeing out there and, you know consumers -- you'd pick up the newspaper, you think the world is coming to an end, but out from the record levels of the industry with that last year, 4% down in the first quarter is not so bad. And again, I think things are going to improve relatively now as the worst behind us and looks like consumer confidence is improving a little bit. So, I would guess low-single digits would be my best guess for that.

Okay. Thanks.

Your next question comes from Joe Hovorka of Raymond James.

Hi, thanks. I have got a couple of quick questions. First, did you say that your retail sales for ATVs were down 4% or is that the industry?

That's the industry, Joe.

Okay. Did you give your number?

No, we didn't.

Okay, also the acquisitions of your distributors in Scandinavia and Britain, those occurred last year? Correct?

Right.

Why we haven't seen an increase in receivables and inventories for the first quarter when those were acquired as opposed to seeing those now. Is there a reason that is like between those two?

While the business ramps up for one; the Scandinavia businesses were acquired, I think, in November. That's primarily snowmobile volume in that part of the world and we are ramping up our operations. So that happens gradually.

Right. The operations you acquired did not have the receivables and the inventories at that time, is what you are saying, you did not acquire inventories?

We acquired some inventories, but again what we did was ship volumes of snowmobile in seasons to the operations over there, which then were sold into that dealer network for snowmobile, and we also have a lot of ATVs that are being sold over there in Britain and in Scandinavia that are in process of being sold to the channel.

Okay, and Britain was acquired when?

It was in June last summer.

And that's the same issue there, there was a ramp up as opposed to not seeing something in, say, the June, September, December quarters?

Again, remember we are comparing inventories from March of a year ago to today. So those inventories are higher today than they were a year ago because they weren't there a year ago.

Right, well what I am saying is that would you have had inventories in the September and the December quarters, say from the Britain acquisition and why we have not seen the increase at that point? Is that just the timing? I just don't understand the reason in why we are seeing it now as opposed to seeing it two quarters ago?

The primary issue, Joe, is in Scandinavia, not Britain. Scandinavia has a much larger business. At the end of March, last year, there were a few 1000 snowmobiles in our distributor's inventory. I think we can't tell exactly how many snowmobiles are over there this year that are in our inventory instead of in the distributor's inventory. But that's the difference -- that's the primary difference. And the reason we don't see it in falls because of snowmobiles.

Right, so you are saying that the December quarter there would not have been any snowmobiles?

There would have been a few, but not as many as they are now.

Okay.

So about half the inventory increases is international, about a quarter of it is increase ATV factory inventory, which is primarily ATPs, which were sitting on the dock waiting to ship early in the second quarter and then about the remaining quarters finished goods inventory, which we increased because we didn't know there was going to be a port strike or, you know, some of the other problems that we've been through

Right, alright, okay. And then also in those acquisition did you acquire receivables too or no? Those are --?

No.

No, okay. You say ATV dealer inventory is down? If your wholesales shipments were up 7%, I can then refer that your retail sales were up greater than that?

Say that again, Joe.

You said your dealer inventory for ATVs were down?

That's right.

And that your wholesale shipments in the quarter were up 7%?

Right. Again, not all of our wholesale shipmentsgo to U.S. dealers, Joe.

Right, right.

We also shipped Ranger, we shipped internationally, we shipped Polaris Professional Series. So, I think it is fair to say that Rangers international PPS are growing faster than our base ATV business. Those are the parts of business that frankly are growing very quickly right now.

Right okay.

The other thing that I'd like to point out that we've talked about before, that I think is relevant again here is that when we reported ATV sales up 7%, that's dollars.

Right.

And when we talk about inventories, so they are units. So there is -- to the extent that there is a mix change of higher sales dollar PPS and Rangers, that has some impact as well.

Okay, right sure and...

I think, the key point that we wanted to make is so that everybody understands, is that we are monitoring ATV field inventory very closely. We are well aware that the economy is slow. We are well aware that there is a war going on. And so we are watching ATV field inventory very closely. And on a year-over-year basis, it is lower then it was a year ago.

And how much...

Your inventory.

How much of your ATV sales are international, what percent?

Oh. On the order of 8%. Overall company, -- the total company at 6%. But of our ATV division, it's roughly 8% -- 7-8% in that range, Joe.

Ok. And...

Of course that was up more than 50%.

Right, so last year we would've been looking at maybe a 6% or something like that?

Somewhere in that range.

Right, okay. Did you give motorcycle industry retail you said was down 3%?

Down 3% right.

Is that for just your category that you are competing in, or is that all of motorcycles?

Happens to be both, both heavyweight cruisers and all motorcycles.

Okay, and that's a U.S. number correct?

That's a U.S. number.

Okay.

And, of course, our motorcycle sales outside the US are not meaningful.

Right. And, let's see. One other question on your guidance going forward, you mentioned a little bit about the, you know, other expense or the other income rather that has the currency fluctuations in it. How much, if any of the 4.70-4.85 would be coming from that other income line? Is there any of that built into there or no?

Well, what's there for the first quarter I think it's safe to say it's going to say there. We are not, you know, we don't forecast currency movements in our guidance. So, we are expecting the other income components for the upcoming quarters to be modest. Based on our currency, hedges that we got it'll be slightly positive, but not nearly. We are not forecasting it to be as it was in the first quarter, but that all depends on where the currencies move.

But if we are modeling that, should we be expecting a small contribution to income then for the second through fourth quarters?

Modest, very small.

And can you explain the accounting entries behind that? Is that a translation number or is that-- what is that number?

It's a translation of cash flow impact when we actually move our cash out of our international operations, so our Canadian subsidiaries and now the European subsidiaries have to regenerate receivable and in Australia too.

Right.

As we generate receivables in those currencies and we translate that, exchange that into the U.S. dollars, those are gains on those translations.

So this is just money that's remitted back to United States from this other. This is not a translation of all the assets that are over there?

Correct.

So it is a cash. It's a real cash flow number, not a non-cash number correct?

Correct.

Okay. Great, thanks. Good quarter.

Thank you.

Your next question comes from Joe Norman of Bear Stearns.

Hey guys.

Hi Joe.

Thanks for getting me under the wire here. I am going to up first the Bombardier situation, maybe a little bit different management instead of asking you had to appoint investment banker. Tom, can you talk about kind of, the opportunities to Polaris in the respective businesses given the influx situation at Bombardier?

Well, Bombardier is, of course, one of our principal competitors, and at this point, we haven't seen any big change in terms of how their business has been operated on a day-today basis. You know, they are still shipping products and they are still servicing warrantee and all that kind of stuff. It is pretty much business as usual up there. I think that sale creates the potential for some competitive advantage. Bombardier is a very large company, 20b Canadian I think, on that order with some phenomenal technology coming out of their aerospace business, and a very strong technical capability. Depending on where they wind up, they may not have that. That's one potential. Depending on where they go, they could have to divest certain divisions. There is also potential competitive threat if that business were combined with another business that made them stronger. We would watch that situation very closely, particularly from an anti-trust point of view. So, it's probably too early to know, for sure Joe, whether that situation is going to help us or hurt us. I don't see anything in the short-term that's going to cause that. Certainly, depending on where it winds up, they could have key employees that might leave or dealer or that kind of thing. But, we haven't seen that at this point and I am sure they are going to do everything in their power to try to minimize that as good business would.

Right.

Bombardier has been a fine competitor, a strong competitor for many, many years. I think generally, it competes fairly and hard and they have certainly given us our run for our money in - for many, many years and we would expect that situation probably not to change. I mean, the core part of the business is going to stay together I think -- I'd be surprised if they sold it in parts.

Okay, you just answered my question. I mean, if you had to prognosticate, you don't see this getting sold on a one-all basis?

Well, I think the CEO, Mr. Tellier, said his preference would be to sell it as one piece. I don't know what offers are going to come in there, but from what I know of the business, it maybe relatively difficult to split apart. They have for, example, a common engine supplier in Austria, which provides engines for snowmobiles, ATVs, and watercrafts.

Correct.

If you sold that, it could get kind of ugly and just like we do, they have shared resources that move across divisions. So I think, it would be pretty difficult. May be the on piece that would be a little easier to get rid of if they did want to break it up would be the outboard...

The engine...

Former OMC business, the Johnson and Evinrude business, which to my understanding is relatively still separate from the base traditional recreational products division.

Tom, to the extent that you are willing to articulate, I mean, are you guys in the field -- are they going to Bombardier dealers right now and kind of try to make the case that, you know, kind of why hang around with this influx situation, you know, go with something more stable? Or came to the way that, you know, the Brunswick field guys, you know, they didn't -- in the OMC bankruptcy?

That's not really something I care to comment on, Joe.

Okay.

That's kind of competitive in nature.

That's fair. Thank you very much.

Thank you. Themia, we have time for one more question.

You do have a follow-up question from Tim Conder of A.G. Edwards.

Thanks operator. Tom, last year at the analyst meeting, you commented and based on the industry data that there were about 40% of first-time buyers in the ATV market. Do you have an updated number on that -- industry number on the first-time buyers in ATV?

Yes, I do Tim. Our most recent data and that 40% has been a number that's been fairly consistent, you know, fluctuates a few points one year to the next. Our most recent data which is about 3 months old, we measure that in every few quarters. It was actually 37.5%. So, it has dipped a little, bit but I think again, a pretty strong number, again for the people who don't follow that, that's a leading indicator, we think, of kind of structural shifts in markets. It is the percentage of people who buy ATVs, they are buying it for the first time. And in ATVs where roughly 40% or so, the people are buying for the first time, that indicates there is a lot of new interest in the category of the people that are coming into this sport and growing this sport. That's a pretty healthy number. If you look at a more matured business like a snowmobile business, that number would be in the 10-15% range, which is -- it means the business is largely a replacement business which is what the snowmobile business is. So, 37.5% is our most recent data and again, that's as recent as 3 months ago. So, that's a good number.

And then, looking at the ATV market, it's obvious that you guys are gaining share. Who would you say at this point -- maybe at the end of 2002 or year-to-date here, where do you think the substantial share is coming from and anybody else gaining share?

I really don't like to comment on other companies' performance. Glad to comment on Polaris's, but really would rather not comment on another company.

Okay.

Okay. Thank you. We want to thank everyone for participating in today's call. Please remember that our presentation and responses to your questions contain 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 good bye.

This concludes today's Polaris Industries First Quarter 2003 Earnings Conference Call. You may now disconnect.