Polaris Inc (PII) 2003 Q2 法說會逐字稿

Good morning. My name is Tamyra, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Polaris Industries 2nd 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 star, then the number one on your telephone keypad. If you would like to withdraw, press star, then number 2 on your keypad. Just a reminder, today's call is being recorded. Thank you. Mr. Edwards, you may begin your conference.

Thank you. Good morning, everyone. Thank you for joining us for our second quarter conference call. As before, Tom Tiller, our president and chief executive officer and Mike Malone, our chief financial officer will be participating in this call. During this presentation, we will be discussing certain topics including product demand and shipments, margin demands, income and profitability and other matters including more specific guidance for expectations on 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 risk and uncertainty. 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 2002 annual report and in the 2002 form 10-K, which are on file with the SEC. Now, I turn it over to Tom.

Thank you, Richard. Good morning. Thank you for your interest in Polaris. We're pleased to report increased sales and earnings per share for the 21st consecutive quarter. For the second quarter earnings were 94 cents per share, up 13% from last year on 4% sales growth. The quarterly results were slightly ahead of our expectations. We had another strong performance from the ATV division, our international division and our financial services business, which more than offset a previously announced decline in our snowmobile business. As we expected, retail activity has picked up following the end of the Iraq war and we are optimistic this trend will continue for the balance of the year. Based on a successful first half we have modestly raised our expectations for the full year. We believe 2003 will be our 22nd consecutive earnings growth in Polaris with earnings per share in the range of $4.80 to $4.90 per share, up 9 to 12%. Compared to 90 days ago, we have increased the lower end of the range by 10 cents and the upper end by 5 cents. With that overview, let's turn to the individual business segments, starting with personal watercraft. Wholesale shipments of watercraft were up over 100% for the quarter. As we discussed during the first quarter call, this is a timing issue associated with the delivery of our new flagship MSX watercraft. The first quarter had relatively low shipments and we are now caught up. Retail sales of personal watercraft have been somewhat tepid this year. Season to date industry retail sales have declined about 7%, from a year ago. Both the war in Iraq and the wet weather across the East Coast have negatively impacted sales. Polaris has lost a modest amount of market share so far this season but our share is improving as our new MSX are delivered to dealers. Dealer inventory is in good shape and lower than one year ago. We remain focused on improving quality and cost and continue to follow this strategy. For the full year, we continue to expect a modest sales increase, driven by significantly higher average selling prices, and the introduction of our new sport boat line.

Victory motorcycles. Things continue to improve with our motorcycle division, driven by the Victory Vegas. This bike remains hot. This quarter, the Vegas was named the best cruiser motorcycle by cycle world magazine, which is the largest motorcycle magazine and a recognized authority on motorcycle products. Motorcycle industry retail sales are improving after a slow first quarter. Industry retail sales were up 8% in the second quarter, after being down 3% in the first quarter. Victory dealers are reporting higher average selling prices and strong interest, particularly with the Vegas. We expect to continue to build on Victory's momentum throughout the remainder of this year. You can expect to see additional new products introduced at our dealer's show in Las Vegas later this month. For the full year, Victory's shipments should be up substantially. Similar in percentage terms to last year, as we continue to build the new American motorcycle.

Snowmobiles. The snowmobile business remains tough, as expected, following a dry winter across the upper Midwest. As a result of the weather, dealers have higher than normal carryover inventory. We're working together with our dealers to assist them in paying for the cost of the carryover inventory and when the cold weather returns to help them retail the product. All these cost have been previously accounted for. You will notice shipments to dealers were down sharply in the second quarter compared to last year. Because of the unusually high dealer carryover inventory we're delaying shipments until closer to the retail selling season. You will see relatively larger shipments in the thirty quarter and fourth quarter. You can expect the full year shipments to be down in the low 20% range from a year ago, consistent with our first quarter guidance.

ATVs The ATV division is doing well, driven by the return of consumer confidence, industry growth in the second quarter, competitive promotions, and a strong product line-up. The products that have driven the growth, namely the sportsman the predator sport ATV, the ranger line of utility vehicles and the new all-terrain pick-up or ATP are all performing well. You will recall that during the first quarter, industry retail sales of ATVs measured in units declined by 4% in North America. In the second quarter, industry retail sales of ATVs, measured in units, grew by 3% in North America. The primary drivers were the rebound in customer confidence and higher advertising and promotional spending by all competitors, including Polaris. While significantly increasing our promotional spending, we have slightly increased our margins. As a result of aggressive cost and quality effort and a positive mix shift. We expect these trends to continue. Polaris is outperforming the industry at retail. In addition to our core ATV business, we are seeing good growth in areas not included in the MIC reported data, specifically, internationally, and in our ranger Polaris professional series, utility vehicle businesses. Factory inventory of ATVs remain somewhat high at the end of the second quarter. At approximately the same level as it was at the end of the first quarter. As a result of the war in Iraq. You will recall that in the first quarter call, we said that we expected ATV factory inventory would remain a little higher than usual through the end of the second quarter. We expect ATV factory inventory will decline in the -- decline in the third quarter and return to a more normal seasonal level. Dealer inventory of ATVs remains in very good shape. It is at the same level as one year ago. In fact, dealer inventory of all types of Polaris products is also in good shape. And is 6% lower than at the same time, one year ago. For the full year, I would expect ATV sales to be higher than last year, likely in the high single digit range.

Parts, garments and accessories. We had another solid quarter from the PG&A division with sales up 4% off a relatively strong second quarter last year. Sales of ATV and motorcycle related items were strong. 22% higher than a year ago, offsetting the lower shipments of snowmobile related items.

International. We had another stellar quarter internationally. Outside of North America, sales were up 80% versus a year ago. The primary drivers were a very strong ATV sales, and being dealer direct in several major countries, including France, Great Britain, Norway, Sweden, Australia and New Zealand.

Dealer show. Later this month, we will have our summer dealer show in Las Vegas. In addition to introducing some great new products, we will also announce how we intend to celebrate our 50th anniversary. Polaris was founded in 1954, so next year will mark our 50th birthday. We're planning a series of events throughout the next 18 months to thank our customers, dealers, employees, suppliers and shareholders for their terrific support for the last 50 years and build excitement for the next 50 years. We'll announce more specifics on the 50th anniversary throughout the fall.

Expectations throughout the remainder of 2003. In summary, the second quarter was another good one for Polaris. We continue to face the challenges of the snowmobile business but the retail environment is strengthening. Dealer inventories are in good shape. We're optimistic about the remainder of the year. For the full year we expects earnings per share growth in the range of 9 to 12% or $4.80 to $4.90 per share on mid single digit revenue growth, which will be our 22nd consecutive year of earnings growth. With that, I'll turn it over to our chief financial officer Mike Malone.

Thanks, Tom. As announced this quarter marks our 21st consecutive quarter of increased sales and earnings. You have seen your press release issued this morning describing our second quarter earnings results. Tom has given you qualitative comments on our businesses. I will focus my comments this morning on the guidance for third quarter and full year 2003. For the full year 2003, we're increasing our previously issued guidance and now expect EPS to grow $4.80 to $4.90 an increase of 9 to 12% over the $4.39 per share earned in 2002. Full year sales growth is expected to grow 3% to 5%, for the full year 2003, unchanged from the previously issued guidance. Third quarter 2003 sales are expected to increase in the 2 to 4% range, with earnings per share finishing in the range of $1.69 to $1.74 per share, and 8 to 11% increase over the third quarter of last year. Additionally, for the fourth quarter of this year, we expect to show mid to single digit sales growth, and earnings per share for the fourth quarter to grow at a faster pace than sales. I will now give you some qualitative comments about why we are confident we can deliver these results for the balance of the year, beginning with ATVs.

Sales of ATVs for the balance of the year are expected to grow from the 2002 levels, driven by new products, growth in international markets, some share gain, and a modest rebound in growth in the overall ATV industry the back half of the year. It is important that I remind you that our reported ATV sales includes our new PPS line of products, as well as our ranger product line, which is growing significantly faster than the utility vehicle industry and our base ATV business. The predator ATV, which began shipment in the fourth quarter of last year will continue to bring incremental sales to us throughout 2003 and beyond. The new ATP model is selling well in many markets and sales of ATVs outside North America grew 80% during the second quarter. In addition, the sales mix of ATV models has improved. Resulting in an average selling price per ATV unit increase of 8% during the second quarter 2003. Based on the success of our new products and expectations for industry growth, we now expect. Full year 2003 ATV sales to increase in the upper single digit range. You'll recall that our previous guidance was an increase in the mid to upper single digit range for ATV sales. Tom explained earlier why current ATV factory inventories are higher than last year. One additional point I want to make is last year's second quarter ATV inventory was unusually low, primarily due to the timing of our model year changeover last year. In anticipation of the introduction of several new models in July of last year, we purposely lowered our ATV factory inventory in the second quarter of 2002, to unusually low levels. In addition, we had a temporary production disruption in June a year ago due to the (inaudible) flood. Personal auto craft sales were up significantly in the second quarter due to timing of shipments, and increases in the average unit selling price in the second quarter of this year, compared to last year. Year-to-date watercraft sales are up 16% from the same period last year. We continue to expect sales for the full year 2003 to improve over last year, as our new MSX personal watercraft model continues to generate excitement. The improvement in watercraft sales will also continue to be aided by a significant average per unit selling price increase in 2003, from a mixed change to the higher priced MSX models. Additionally, the new EX 2100 jet boat will add sales to the 2003 year although the number of units sold in this year will be limited.

Victory motorcycle sales for the full year 2003 are expect to improve significantly over a very strong last year. Something similar to last year's 81% increase. The new Vegas is gaining share in the custom cruiser segment. Our dealer network continues to expand and gain strength. We're pleased with the progress in our motorcycle business. The reduction in snowmobile sales for the full year 2003 will likely be in the area of what we experienced in 2002. Down in the low 20% range, which guidance is unchanged from last quarter. Dealer snowmobile orders came in at lower levels than last year due to the higher season ending snowmobile inventory for the dealers. As we do every year, we match our snowmobile production to the dealer ordering levels. As Tom mentioned, we started shipping snowmobiles to the dealers much later this year in order to help ease the carryover inventory burden of the dealers. Parts, garments and accessory sales continue to be forecast to increase for the full year 2003 at a slightly faster pace than the overall company. The ATV ranger and motorcycle segments are expected to continue to grow for the balance of the year contributing to this increase. In summary, we continue to expect each our product line to grow sales for the full year of 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 over 2002 on a percentage of sales basis. Reasons for our optimum -- optimism include the continued benefit from cost reduction efforts, quality and efficiency improvement initiatives, a positive ATV sales mix change, higher PG&A sales and improved international margins, including favorable currency fluctuation. All these are offset somewhat by higher promotional expenses and the negative sales mix impact of less snowmobile sales. Operating expenses are expected to increase slightly as a percentage of sales for the full year 2003 as we continue our investment in research and development efforts for new products and technologies, as well as our dealer development initiatives while watching other costs closely in the slow to recover economy.

We continue to expect income from financial services for the full year 2003 to grow at a pace faster than the overall company, as the retail credit portfolio penetration rate continues to increase as we experienced in the first half of this year, as well as improved profitability from the wholesale portfolio at Polaris acceptance. At the end of June, 2003, the wholesale portfolio related to floor plan financing for dealers in the United States was at approximately $508 million, down 1%, from $515 million at June of last year. As Tom mentioned earlier, dealer whole good inventory -- unit inventory, in total are less than a year ago. Credit loses in this dealer portfolio remain very reasonable averaging well less than 1% of the portfolio. The household retail credit portfolio balance, as of the end of June 2003 was approximately $430 million, up significantly from $192 million, at the end of June of last year, and up sequentially from $375 million, at the end of march of 2003. As expected, this portfolio continues to grow rapidly, as our penetration rate increases from better linkage with our significantly increased promotional efforts. For our year-to-date period, 2003, we are financing approximately 34% of our products sold to the customer, up from 15% for the first half a year ago. Receivable loses for this retail credit portfolio have remained stable, averaging about 3% of the portfolio, in line with expectations. I want to remind you 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 the loss reserve levels and monitor delinquency trends closely.

We have not seen a deterioration of delinquency or loses trends in either of the wholesale or retail credit portfolios. Taking a look at some additional information for the second quarter of 2003, we continue to repurchase our stock during the quarter, buying back approximately 242,000 shares, at a cost of $14.3 million. This brings our total share repurchases for the year-to-date 2003 period to 932,000 shares, and $48.3 million. Cash dividends paid totaled $13.4 million and capital expenditures in the year-to-date period totaled $31.2 million. We continue to expect full year 2003 capital expenditures to be in the $65 to $75 million range, as we continue to invest in new product tooling, engine and technology projects and engineering capabilities. Other cash flow items for the six month period ended June 2003 are as follows. Depreciation and amortization was $26.4 million, and other non-cash charges netted to a positive $0.9 million. Working capital items were a net use of cash flow of $70.5 million, up from $11.9 million in the year-to-date period a year ago. The primary reason for this increase is inventories, driven by an increase in ATV factory inventories discussed earlier, as well as an increase in snowmobile inventory, resulting from the much later start-up of shipments to dealers, in 2003. In addition, as we discussed on the last conference call, anniversary at our international locations are higher due to our new distribution structure in Europe. This accounts for about $15 million in higher anniversary at the end of this June compared to June of last year.

Factory inventory levels will be reduced in the 3rd quarter as we adjust our production schedules and ramp up snowmobile shipments to dealers. Net cash flow used for operating activities was $9.9 million for the first six months of this year, compared to net cash flow provided by operating activities of $55 million in the same period last year. What the anticipated reduction in inventory, the operating cash flow generated in the second half of 2003 will be substantially better than the second half of 2002. The debt to total capital ratio was 16% at June of this year 2003, compared to 7% at this time last year. To recap, third quarter and full year 2003 guidance, sales for the full year are expected to increase in the 3 to 5% range, with EPS growing to 4.80 to $4.90 range, increase of 9 to 12% over last year. Third quarter 2003 sales expected to increase 2 to 4%, with earnings per share expected to be in the $1.69 to 1.74 cents per share range increase of 8 to 11% over the third quarter of last year. At this time, Tamyra, we would like though take any questions that the analysts may have.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment and compile the roster.

Your first question comes from Bill Lerner with Prudential Securities.

Thanks, guys. Great quarter. Two questions. The first is, can you give us a sense for what percent of your ATV mix TPS and ranger represent now, where you like that to be going forward in the number two, given than you guys brought it up on the last call, where are you at with those Bombardier rec vehicle assets? Thanks.

Let me talk about Bombardier. Mike, maybe you want to take the ranger piece of that? With regard to Bombardier, I think we mentioned in the first quarter call that Bombardier is selling their recreational products division. All of the information that we have is the same information that anybody that's been following this closely in the newspapers would have, and that's that they continue to plan to divest recreational products as a single entity. They expect to conclude the sale in July of this year. They've narrowed the list of bidders to six or so bidders, and they've said very publicly, that they will not sell the business to a direct competitor. There's a lot of speculation beyond that, about who may buy the business, but we certainly don't have any additional information than that. Want to talk a little bit about rangers

Yeah. Bill. Your question was, how much of the ATV business is the ranger business now?

Yeah. What percentage of the ATV units do ranger and PPS -- just thinking same ATV chassis but different channel, however you want to classify that, whether it's ranger and the PPS combined. What range of your ATV units are non-ATVs? Is really what I'm getting at.

Between 10 and 15%, somewhere in that range, Bill, I don't know if we want to get more specific than that. It is in that range.

Are you comfortable at those levels? Do you like them to be I guess the ASP's must be-I imagine you want them to move higher?

The utility vehicle business for us has been a very successful story for the company for the last couple of years, as we've really gone to the new ranger platform and have grown that business very well, then added an additional channel with the Polaris professional series the last year or so. So we're very pleased with how that's going. I would expect that business to continue to grow faster than the base ATV business.

Thanks.

Once again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

We have some more questions here, it's just taking a minute to get the callers lined up, so just bear with us for a minute, please.

Tamyra, do you see Ed Aaron?

Yes, sir. Your line is open. You may ask your question.

Nice quarter. A couple questions on retail trends. The growth rates you gave for motorcycles and ATVs for the second quarter would suggest a pretty big pick-up in the month of June. Did you in fact see that in the industry?

Yeah. June was a very strong month across. I'd say all segments of the power sports business, particularly motorcycles and ATVs. We have to be a little bit careful in that MIC has not yet released the specific data, Ed, and we have an agreement with MIC we won't release ahead of them, but I think it's fair to say that everybody had very strong Junes.

Okay. My second question was, in terms of market share and ATVs, it's pretty clear you are gaining share. Did you see any difference in Q2 versus Q1 in terms of market Share in ATVs?

No material change.

The same basic trends that have been driving the business, you know, relative to the competition in the last really three-quarters have continued. Real strong on sportsmen, real strong on predator. Real strong on rangers and ATPs. I think probably the big unusual this quarter, we really didn't expect the international business to continue to grow at 80% in the second quarter. I mean, really going great guns there. The ranger business, while we expected it to be real strong, has been even stronger than we expected it to be. Those would be the two kind of quantitative things. But directionally, it's been pretty much the same story through the year. Now, obviously, everybody benefited by the rebound in the industry in the second quarter. I think we did, too.

Great. One more question for you. If you look at the two factors that put you on the gross margin this quarter, promotions and lower snowmobile volumes, which one would you say had the greater impact?

I would -- in relative -- relative terms, I would say snowmobiles had a bigger impact. They're our highest margin product, and with sales down 68% 67, 68%, it's quite significant. We'll get relatively speaking, we'll get that margin benefit back in the second half of the year.

Okay. Thank you.

Next question, Tamyra?

Your next question comes from Gary Cooper with Bank of America.

Hi, guys. A couple of questions here. On the inventory, you talk about it being up, or it looks like it's up about 75 million dollars from year-end. You said it was going to be down in Q3. Can you give us some idea of where you think it will be at the end of Q4 and therefore how much of a usage it will be this year, and closely related to that, the cash flow from ups and down 10 million in the first half. A big part is inventory. Can you give us some idea whether you think cash flow from operations will be similar to what it was last year once we put this year on the books. Two other quick ones? Can you detail the currency impact the quarters of international sales rep so strong? Lastly, your retail market share retail financing market share, plus 34, 35%, I believe, any sense for where that can go? I mean, does that end up being right around here? Which I believe is similar to what Harley Davidson's is or does that go to 40 to 50%? Thanks.

A lot of questions in there. Let's try too take them one at a time. Regarding the penetration of retail financing, I don't see that going to 50%. I would say that number will be somewhere between where it is now, at 34, and around 40. I don't know, I can't give it to you to the exact number, but I would expect that to be, you know, 35, 40ish, somewhere in that general area. With regarding the inventory, I'm comfortable saying that inventory will be back at the end of the third quarter to kind of a seasonal level, a normal level. I'm not going -- on a seasonal level, a normal level. I'm not going to get pinned on a specific dollar item. If you think of the inventory being driven up, what's driven the increase, it's about roughly 60% ATVs, 30% sleds, 10% international, from a year ago level. The sleds are a timing issue. We chose to ship the sleds in the third and 4th quarters for the reasons we talked about in the call. That will definitely go away. The ATV piece of it will go away 90% in the third quarter, big chunk of it. The international piece is going to stay. That's because we have purchased our distributors, we now carry that inventory overseas, roughly 10% of that increase would be there. I would expect we'll be back to normal levels of inventory at the end the third quarter and will continue in the fourth quarter. Mike, you want to take the currency question?

The currency question, we have exposures in a number of currencies, Buts three primary currencies, the Japanese yen, the Euro and Canadian dollar. The impact of the yen, for the quarter, year-over-year, was slightly negative. But not, not significant. The impact of both the Canadian dollar and Euro-were favorable and had a significant impact on the favorable earnings of the company, both in revenues and in -- throughout the P and L. A net significant impact, helpful impact from currencies in the quarter. Based on where we are, with our hedging contracts, which tend to -- the way we hedge our currencies, it has a tendency to minimize the upside when currencies are like they are. Because of our hedging contracts have continued positive impact for the balance of the year, but -- and slightly negative impact from the yen. Your other question, Gary, related to expectations for cash flow for the full year. As our inventories are reduced, the cash flow from operations will improve. And we'll see for the second half of the year, we'll see significant improvement over the second half of last year. And where we end up at the end of the year, we anticipate being slightly positive net on cash flow from operations compared to a year ago.

So it will be up, compared to last year?

Yes, slightly.

Thank you.

Our next question comes from Brian Kanope from Midwest Research.

Good morning. Earnings growth looks like it went up a couple of points but no change in revenue growth. Would you characterize that change as a delta in your mix expectations or a change your cost expectations, can you talk to what's driving the higher earnings growth?

Brian, when you say -- is your question relative to our previous guidance?

Exactly.

Okay. Our previous guidance. Let me see if I understand your question. Our previous guidance for sales was about what we hit. Our previous guidance for earnings was a little lower where we ended up.

I'm sorry. I'm talking about for the full year, your previous revenue growth expectation was 3 1/2, 3 to 5, earnings 7 to 10, still 3 to 5 for the full year but earnings is now 9 to 12. I was trying to figure out if that is sort of a change in your expectations for product mix or you expect costs to be better than what you previously had in your model.

I'd say the primary factor would be positive mix. We're seeing positive mix really in all the product lines. I talked a little bit about that. A little bit strengthening in ATVs, which is a very good business for us, obviously. Costs are about where we expected them to be.

Okay. Can you remind us what your -- what your earnings growth guidance assumed with respect to any benefit you would get from sharer purchases?

We -- if you recall, the first quarter, we were quite heavy, from a historical perspective, in the purchasing of our shares, so that obviously is embedded in our forecast for the balance of the year. We do expect to continue to buy back shares in the market, at a pace, for the balance of the year, at a pace comparable to what we've historically done. That is what's embedded in the guidance.

I think what we tried to guide people historically, Brian is that we've been in the market over the last several years, in that million to million 1/2 share repurchase kind of independent of the price, absent an acquisition, okay, year-to-date, we've repurchased 931,000 shares. We expect to continue to be active in the second quarter and third quarter. The reason we were so active in the first quarter obviously is because of the price dip.

Right. Makes sense. The last one is, could you -- Mike, could you remind us what the balances are for promotions and dealer hold back and accrued liabilities, please, at the end of the quarter?

Yes. Our cue, will show accrued expenses of $198 million. And that's as much detail as the cue discloses.

Oh, okay. I can't remember, was it in the -- the detail behind promotions and holdback was that in the first quarter of cue or something we just talked about on the call.

That's in the year-end K.

Thanks a lot. That's all I had.

Your next question comes from Joe Hovorka with Raymond James.

Thank you. I actually got a couple quick questions here. First, I want to make sure I got the numbers right on retail sales for ATVs and motorcycles, did you say up 3% for ATV and 8% for motorcycle on?

That's right. The second quarter, North American retail change, retail percentage change in registrations for ATVs was up 3%. That number was fairly significantly volatile throughout the quarter, with April being up, May being down and June being significantly up. Motorcycles, the same pattern. You may realize that MIC reports several different segments of the motorcycle business. What we're talking about here is all motorcycles.

So this is on highway number would be comparable in the MIC data?

All motorcycles.

So even off highway

All motorcycles.

If I do the math, maybe I don't have the right number in front of me it looks like June would have to be up like mid 30s. Am I doing the math incorrectly or is the June month that strong?

MIC will release the monthly data shortly. I'm not going to release that information this morning, Joe.

Fair enough. The other question I had, was do you have the warranty reserves, any warranty reserve in the quarter?

Yes. Bear with me here. The ending warranty reserve that will be disclosed in the footnotes in the 10-Q is $26 million. $26,033,000.

Is that down slightly from the first quarter?

Right.

Which is $26,933,000. I think we talked about after the first quarter when it was disclosed, will we expect that to go back up in the second and third quarters or no. There was a mismatch between timing and snowmobiles, right?

Right, Joe. What we talked about at the end of the first quarter was there was a significant seasonality to the claims. The other component that's affected it here a little bit in the second quarter is because our snowmobile shipments were down so much. We accrue warranty when we ship the product, that there's relatively less going back into the warranty provision for snowmobiles. In the second quarter, that will catch back up later in the year

So the third quarter we'll see that go back up. If the timing of snowmobile shipments have shifted from say the second to third and fourth quarter, we'll see that warranty reserve actually climb in those two quarters is what you're saying?

Yep.

Also, is the snowmobile or are the snowmobiles the products that have the highest warranty accruals? Is that why it's meaning so much when they're do you know even though ATVs are up 24%, just the accruals on the ATVs are smaller on a unit basis? You see what I'm saying, total revenue is up 4%

Compared to ATVs, that's true. Motorcycles are, you know, higher price point, obviously,, you know,, there's -- it's a relative to the price point. But comparing sleds and ATVs, snowmobiles are higher?

Great. Thank you.

Our next question comes from Tim Conder from A.G. Edwards.

Congratulations on a great quarter.

Thank you.

Thank you.

A couple of items, one to beat a dead horse on the MIC data that relates to ATVs. Tom, you said that was a North American number, the MIC reports usually on a U.S. only basis? Did I hear you wrong or is that up 3% for UF?

The data I gave you was for North America, Tim. We actually receive data that you don't receive or not you individually, but the investment community in general, so we're giving you additional information than what MIC would normally tell you. They tell you U.S. now, U.S. is 90%, Canada 10% of it, roughly. So hopefully give you a little more complete picture. I gave you North America data. Generally what's published by analysts typically is U.S. data. But it's not a whole bunch different.

Right. Okay. Correct. Clarification issue on the inventory side. Mike, if I heard you right or Tom, I apologize which one, did you say about 15 million of the year-over-year in creeps in inventory is due to the acquisition of UK and Scandinavian distributions?

Yes.

Mike, to circle back to a previous question, how much benefit in the revenue line and then on the P and L line did you get in dollars and earnings per share?

Tim, I'm not going to -- I'm not going to quantify that for you. I'll stick with my previous comment that currencies had a significant impact on the quarter.

Okay. And then, looking at victory, gentlemen, are you approaching break even there? Are you approaching the levels of break even, given the success to date of the Vegas?

We, just as matter of policy, don't talk about individual segment profitability for competitive reasons, for victory snowmobiles or any other part of our business, we just don't break that down. I would say that the victory trends continue to be improving, in terms of about every metric. We're pleased with the progress of the motorcycle and we keep gaining on it every quarter.

Okay. And then two questions. Two last questions here. If you saw the snowmobiles were going to be down so much, which I mean, obviously you do, was there any way or was it just more of an efficiency plan doing ship the production back a little closer, say, by a few weeks or month or whatever, on the sled bill?

I don't think we're saving any money necessarily in doing it, Tim. It's just that dealers had higher than normal carryover in inventory, as we talked about in the first quarter call and in this call. Because their carryover inventory is higher, it made sense to deliver the current model years later, closer to the retail selling season. It's just something that, you know, we've done things like this in the past, when we have unusual circumstances. I think I define this year's snowmobile business as unusual circumstance. Next year, I expect to us be back with a more normal second quarter percentage shipping pattern but this year because the inventory was a little higher, we chose to ship it later.

Okay. Lastly, Tom maybe segway in there into next year, I think in the past, you said maybe looking out a couple of years, in general, generalizing here, you would anticipate margins improving 60 to 80 basis points on the gross line. Could you maybe just add a little additional color to that, and maybe trends and operating expenses looking into '04, again on a very early basis obviously?

Yeah. It will be on a very early basis. We do not have a forecast yet for 2004 that we're comfortable sharing. Generally, in the third quarter call, we give a kind of qualitative outlook for where we see 2004. But I guess, you know, just generally, where are we, trying to give investors a little broader picture. I'd say we had a pretty solid recovery in the second quarter after the completion of the war. I think the ATV business is definitely on track. We feel real good about that. Sleds are just about where we expected they would be. We delayed the shipments into the third quarter and fourth quarter. Our PG&A business is good. Margins are improving despite spending more money from a promotional perspective. We're getting some favorability out of the currencies, which I good fortune and we’re pretty optimistic about the second half. That's why we've raised the guidance. That would be kind of my general qualitative outlook on the future. I think the business is doing pretty well right now and we're optimistic.

Great. Again, congratulations on a great quarter.

Thanks, Tim.

Our next question comes from Bob Evans with Craig Column Capital.

Good morning and congratulations on a great quarter.

Thanks, Bob.

Can you comment on the retail sell through of motorcycles? I'm not sure if you were specific as relates to Polaris how you track during the quarter and what you see the trends going forward?

Yeah. What I said -- what I said, I didn't really comment specific loin the retail sales of any of our individual lines. That's competitive data. We do try to give you sense of, you know, how the industry's doing, are we optimistic relative to the industry or pessimistic relative to the industry. I think in ATVs, we're kind of optimistic in watercraft, where we're losing a little bit of share there. We try to tell you both the good news and bad news. With regard to victory, I'm pretty encouraged. I think the Vegas has been a -- -the Vegas has been a real hit for us. It's done a lot to bring visibility to motorcycles. It's garnered four cruiser of the year awards including "Cycle world, " the largest motorcycle magazine in North America. Behave built some pretty strong momentum in motorcycles. Wholesale shipments are going to be up, somewhere around, you know, 80% or so, compared to last year. We didn't specifically comment on the retail.

Fair enough. Could you also comment on internationally, you had a strong quarter on international. Can you keep that trend going?

I think we can keep the trend going. I don't think we can keep 80%. I'm very encouraged with what's happening on the international side of our business. A couple of years ago, we started buying out distributors in the large markets and we put Polaris people on the ground and we have some terrific sales people there. It certainly has helped what's happened with the U.S. dollar relative to the other currencies that's been helpful. I think we're really whacking it. I expect that we're going to continue to see very strong comparisons. Not 80. I think that's unsustainable but very strong.

Final question. On the gross margin side, Mike, I think you elaborated it was both mixed and promotional spending, do you see the promotional spending staying at certain levels? Is there any way to ballpark quantify the impact promotional spending had on gross margins, 100 basis points or relative degree, maybe relative to last year?

I'm not repaired to specifically identify a basis point on promotions. We continue to experience a heavy promotional environment, particularly with ATV. We fortunately, are able to offset the additional costs of that through all the other cost reduction initiatives that we've got that are helping our margins. We continue to fund the higher levels of promotions and I expect that trend to continue. Whether the promotional environment continues to escalate, we don't know. I don't think anybody knows. We'll continue to operate the way we have, and if we need to round up on our promotions going forward, we'll do what we need to do from a competitive perspective. We're confident we can continue to offset those increases and continue to expand margins.

Okay. Thank you.

Tamyra, we can have one more question.

Okay. Your next question comes from Ed Rosenfelt with LESARD Asset Management.

Thank you for taking my calls. I had two questions. One is the tax rate at 32 1/2. Is that something we should expect going forward, and if you would comment on that? I assume it's affected by the international sales increasing. You, Tom, any change in the thought about dividends, given the recent tax law change? Thanks.

Ed, we had difficulty hearing your question. I think I've got it. Let me try and help me if I missed part of it. The tax rate is -- the effective tax rate is currently 32 1/2%, down from 33 1/2% in the prior period. We expect to be able to maintain that 32 1/2% for the foreseeable future.

Regarding dividends, the board obviously sets the dividend policy for the company. We have announced no changes with regard to our policy for paying dividends, and anything that would -- that would change would come from the board. There was one other part to that question.

Ed, I didn't get the other part to your question.

If you could maybe get a little closer to the phone, Ed, it's hard for us to hear.

Sorry. On the tax rate assume the lower tax rate is due to the higher sales from international operations, is that correct?

Actually, the lower tax rate has not been impacted significantly by the international business. It was -- it has been getting lower gradually for a number of years, and we expect it to be at 32 1/2% for the near term, that we can see.

Thank you.

Okay. Tamyra, we have one more question. We'll take one last question, then we'll have to close.

Your next question comes from Ed Aaron with RBC Capital Market.

One follow up question. If you look at the international business and exclude acquisitions and currency. What would you say the internal growth rate for international would be?

I'm not sure I can give you a firm answer on that, Ed. It's in 15 to 20% kind of range, I would guess, for the full -- for the 12 month period, something in that range. It's not 80. We've been beating our forecasts like crazy internationally in the first half of the year. Some of that has been as a result of the dollar situation. It was good, relatively good snowmobile year in Scandinavia this year, our ATVs are doing well. I'd guess that number to be 15, 20% kind of number.

The snowmobile shipments work kind of the same in the U.S. in terms of timing?

They ship -- tend to ship a little earlier, just because we have to get them over there.

Thanks.

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

This concludes Polaris industries 2nd quarter 2003 conference call. You may now disconnect.