Polaris Inc (PII) 2003 Q3 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the third-quarter 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. (OPERATOR INSTRUCTIONS) Mr. Edwards, you may begin your conference.

Thank you, Lisa, and good morning, and thank you for joining us for third-quarter conference call. As before, Tom Tiller, our President and Chief Executive Officer, and Mike Malone, our Chief Financial Officer, will be participating in the call. During this presentation, we will be discussing certain topics, including product demand and shipment, sales and margin trends, income and profitability levels, and other matters -- including more specific guidance on expectations for future periods -- which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements which, by their nature, involve risks and uncertainties. There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning a number of these factors can be found in Polaris' 2002 annual report and the 2002 form 10-K, which are on file with the SEC. Now I will turn it over to Mr. Tom Tiller. Tom?

Thanks, Richard. Good morning, everyone. Thank you for being on the call. We're pleased to report increased sales and earnings per share for the 22nd consecutive quarter. For the third quarter, earnings were $1.74 per share - up 11 percent from last year on 5 percent sales growth. This was the best quarter in the history of our company.

The quarter met our expectations, driven by a strong performance from the ATV division, our international division and from our financial services business. Our expectations for the balance of 2003 remain solid. For the full year, we're narrowing EPS guidance to a range of $4.85 per share to $4.90 per share -- up 10 to 12 percent from one year ago on revenue growth of 4 to 6 percent. The lower end of the earnings range has increased by 5 cents per share from 90 days ago, while the upper-end is unchanged. And as we usually do with the third quarter call, we will give you some early qualitative thoughts about 2004. With that overview, let's turn to the individual business segments, starting with personal watercraft.

The personal watercraft retail season concluded in September with mixed results. From a positive perspective, after six years of decline, industry retail sales were flat versus last year. Polaris introduced a great new platform -- the MSX -- which received the industry's highest honor for watercraft of the year. At the end of the season, dealer inventory was clean -- well below last year's levels.

Following three years of market share gains, Polaris lost a modest amount of market share this year. The primary factor was that competitors introduced four-stroke models ahead of us. We will begin production and shipment of four-stroke MSX's in the 2004 model year -- which should successfully combat the competitive offerings. In terms of the future, personal watercraft currently represents about 4 percent of our sales. And I would anticipate that until the industry starts growing, it's likely that things will remain relatively unchanged. I would expect 2004 to be relatively similar to 2003 in terms our watercraft business.

Victory motorcycles. We had another good quarter in Victory, with sales up 27 percent. The Victory brand continues to build momentum. The entire motorcycle industry had a good summer -- following a sluggish start to the retail year as a result of the war in Iraq and a wet spring. The industry experienced 15 percent growth over the summer, and is now 7 percent ahead of last year's retail pace.

Victory's news during the quarter was very positive. At this year's dealer meeting, we introduced two new exciting models -- an all-new Classic Cruiser called the Kingpin, and a limited edition Arlen Ness Signature Series machine. The new models are built on the same chassis as the award-winning Victory Vegas, which won every major award for cruiser motorcycle this season. We also announced a return of the Victory custom order program -- which is similar to our Snowcheck Select program which allows customers the option of ordering a bike of their design which we custom build at the factory. For 2004, we expect Victory to continue to grow substantially faster than the rest of the company, as we gradually expand distribution, introduce even more new models, and continue to build the Victory brand name.

Snowmobiles -- as expected following last year's poor snowfall, the early snowmobile season has gotten off to a somewhat soft start. Retail sales of the industry through September were down mid-single digits from a year ago -- largely because preseason Snowcheck sales were down. But it remains very early, as we're just now entering the heart of the retail-selling season. We were anticipating the soft start. And as we have previously announced, we substantially reduced the shipment levels to dealers versus one year ago. As a result, dealer inventories are now significantly lower than they were at the same time last year. Polaris has taken some difficult steps to get the snowmobile inventory situation back in line. We will benefit from those decisions if Mother Nature cooperates this winter. The fourth quarter of '03 will be an important quarter for the snowmobile business. As the weather turns colder, we will carefully monitor dealer traffic and retail sales. If this year brings normal snowfall, it's quite likely that 2004 could provide a rebound to our oldest business.

ATVs -- we had another good quarter in our largest business -- with shipments up 14 percent versus last year. The ATV business continues to be strong and the trends appear to be favorable. Industry retail sales strengthened during the summer, similar to the motorcycle business, with July, August, and September all showing positive comparisons with a year ago. And the two most recent months were particularly strong. Similar to motorcycles, ATVs experienced a slower start to the year because of the war, but picked up in the spring and accelerated through the summer. Industry retail sales were down 4 percent during the first quarter, up 3 percent during the second quarter and up 11 percent during the third quarter. In addition to the economy doing better, part of what's fueling the growth are aggressive promotions from all competitors, including Polaris. And I would anticipate that the promotional environment will remain aggressive.

Polaris continues to do relatively well with our sportsmen line, our youth products, and our Ranger line of utility vehicles. During the quarter, we expanded the Ranger model line by introducing a more affordably-priced model of the hardest-working, smoothest-riding vehicle in the business. It should allow us to profitably reach value-oriented customers who previously would not consider Ranger because of the price.

The dealer inventory of ATVs is in good shape and remains slightly lower than a year ago. Finally, we expect to announce additional new ATV products yet this year in the fourth quarter.

2004 should be another good year for ATV's. I would expect the industry to continue to grow as the economy continues to strengthen, and for Polaris to remain aggressive in our largest, most important business.

Parts, garments, and accessories -- we had another good quarter in our highest margin business, which grew 5 percent despite experiencing a more than 20 percent decline in snowmobile-related items. We would expect the PG&A to continue to perform well in the fourth quarter and could benefit in year-over-year comparisons if snowfall returns to the Midwest this winter.

International -- our international business continued its stellar performance this year with another very strong third quarter. International sales were up 36 percent, as we continued to benefit from our investments in new distribution channels outside North America. We also benefited from positive currency comparisons and from new products specifically designed for European markets. Sales outside North America now account for 9 percent of Polaris sales -- up from 6 percent two years ago. Of course, the costs, the accounts receivable and the inventory associated with growing this business are also higher than one year ago.

Review of 2003 and expectations for 2004 -- as we approach the end of 2003, all indications are that it will turn out to be another good year in what I would call an improving environment. On balance, things this year went about as we had forecasted. The war finished quickly and consumer confidence picked up after a somewhat shaky first quarter. ATVs has had another good year, and Victory continues to improve. Parts, garments and accessories have rebounded after a tough 2002 and margins have expanded somewhat. On the other hand, snowmobiles were a bit of a struggle after the dry winter, and personal watercraft were about the same as one year ago. The balance sheet remains very strong, giving us options for the future.

Looking forward, I remain optimistic for 2004. It will be a historic year for Polaris in that 2004 is our 50th year in business. It should also be another record year. Sales should be higher than '03, especially in ATVs and motorcycles and quite possibly snowmobiles. We expect margin expansion will continue as a result of our quality initiative and other productivity programs. The economy appears to be strengthening. Aggressive promotions will likely continue, particularly with the low interest rates. To mitigate any risks, we will use our flexibility, our clean balance sheet, strong cash flow and most importantly, our strong team to deliver another record year. We will unveil another very strong line-up of new products in 2004 -- similar to this year's introduction -- many of which will be in our 50th Anniversary theme. In a nutshell, you can expect more of the same from Polaris in 2004. As is usually the case, we will give you a more quantitative guidance for 2004 in the fourth quarter call.

With that, I will turn it over to Mike Malone. Mike?

Thanks, Tom. As Tom stated, this quarter marks our 22nd consecutive quarter of increased sales and earnings -- a gratifying accomplishment. As in the past conference calls, I will focus my comments this morning on our guidance for the fourth quarter and the full year 2003, and then we will take questions that you may have. For the full year 2003, we are narrowing our previously issued guidance and now expect EPS to grow to $4.85 to $4.90 -- an increase of 10 to 12 percent over the $4.39 per share earned last year. As Tom indicated, this new range has increased by 5 cents per share on the lower end of the range.

We are also adjusting our full year sales growth expectations to be in the range of 4 to 6 percent for the full year of 2003 -- a slight increase from our previous guidance of 3 to 5 percent. For the fourth quarter of 2003, sales are expected to increase in the mid-single digit range, with earnings per share finishing in the range of $1.61 to $1.66 per share -- a 7 to 10 increase percent increase over the fourth quarter of a year ago.

I would like to point out that the reported year-to-date earnings per diluted share for the period ended September 30th totaled from $3.24 cents per share. However, if you add the individual first, second and third-quarter reported earnings per diluted share amount, the total is $3.23 per share. The $3.24 is the correct year-to-date number. The penny-rounding difference has occurred in other years, and is the result of the impact of the share buy-back program and increased stock price on the diluted shares calculations. We anticipate this one-penny-per-share rounding difference will apply to the full-year 2003 EPS as well.

Now, let me give you some qualitative comments about why we're confident we can deliver these results for the balance of the year, beginning with ATVs.Sales of ATVs for the balance of 2003 are expected to continue to grow, driven by the same factors that we have seen all year -- new products, growth in international markets, and a continued rebounding growth in the overall ATV industry in the latter part of the year. Our Ranger product line continues to grow significantly faster than the utility vehicle industry and our base ATV business. The Predator 500 Sport ATV, which began shipments a year ago, will continue to bring incremental sales to us throughout 2003 and beyond. Sales of ATV's outside of North America grew 45 percent during the third quarter. In addition, the sales mix of ATV models has improved, resulting in an average selling-price-per-ATV-unit increase of 9 percent during the third quarter of 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 low-double-digit range. ATV inventories were at anticipated levels at the end of third quarter, both at the factory and at the dealer, with factory ATV inventories just slightly higher than a year ago and dealer ATV inventories slightly lower than a year ago.

We continue to expect personal watercraft sales for the full year 2003 to improve over last year, as our new MSX personal watercraft continues to generate retail excitement. The improvement in watercraft sales will also continue to be aided by a significant average-per-unit selling price increase this year from a mix change to the higher priced MSX models. Although watercraft sales declined during the third quarter -- due to the timing of shipments at the end of the season -- year-to-date watercraft sales are up 12 percent from the same period a year ago.

Victory motorcycles sales are up 53 percent for the year-to-date period ended September. Victory sales for the full-year 2003 are expected to increase significantly over a very strong year last year, and on a percentage basis something similar to the year-to-date sales increase through September. The new Vegas is gaining share in the custom cruiser segment, and our dealer network continues to expand and gain strength. Our newest motorcycle offering, the Kingpin, is expected to begin adding to sales in the fourth quarter 2003. We continue to be pleased with the progress in our motorcycle business.

And for snowmobiles, we continue to expect the reduction in snowmobiles sales for the full-year 2003 to be in the area of what we experienced last year -- down in the low 20 percent range,which guidance is unchanged from a quarter ago. A lack of snowfall last season, particularly in the Midwest,which historically accounts for about half of the snowmobile industry sales and where our share is significant,and because of the lower dealer-ordering levels -- those are all reasons for the anticipated decline in snowmobiles sales for the full-year 2003. And as we stated last quarter, we have been shipping snowmobiles to the dealers later this year, in order to help the inventory burden of our dealers.

Parts, garments and accessories sales continue to be forecast at the increase for the full year of 2003 at a slightly faster pace than the overall company. ATV and motorcycle segments of PG&A are expected to continue to grow the remainder of the year, contributing to the increase.

In summary, each of our product line sales will increase in the fourth quarter of 2003 from the fourth quarter a year ago. And as we have previously guided, we continue to expect each of our product lines to grow sales for the full-year 2003,with the exception of snowmobiles.

Now let's move down the income statement. On a consolidated basis, we continue to expect gross profit for the full year 2003 to show improvement over last year on a percentage-of-sales basis. Reasons for our optimism include production efficiencies, cost reductions and favorable mixed benefits which we have detailed in our press release.

Our gross margins are improving in spite of continued higher levels of promotional expenses incurred and the negative impact of the sales mix from shipping less snowmobiles this year compared to last. During the third quarter, the currency fluctuation of the Canadian dollar and the Euro has a positive impact on gross margins, while the Japanese yen currency fluctuation had a negative impact. We currently have foreign exchange currency hedging -- hedges in place for our remaining 2003 Japanese yen, Canadian dollar and Euro exposures. For the fourth quarter of '03, we expect a positive impact from the Canadian dollar and Euro on margins and the Japanese yen, once again, having a negative impact in the fourth quarter.

Operating expenses are expected to increase somewhat as a percentage of sales for the full-year 2003, as we continue our investment in research and development for new products and technologies, as well as our dealer development initiatives. In addition, we continue to add the resources needed in our new international subsidiary to maintain and accelerate the growth in that business. In the fourth quarter of '03, operating expenses as a percentage of sales, are expected to be about flat with the fourth quarter a year ago.

We've been very pleased with our financial services business so far this year. Year-to-date, through September, income from financial services is up 60 percent compared to the prior year -- driven primarily by the profitability of the retail credit portfolio. We expect this positive trend to continue in the fourth quarter as well, although perhaps not at the 60 percent pace.

At the end of September, the wholesale portfolio related to floor-plan financing for dealers in the United States was approximately $573m, down 5 percent from the $605m at the end of September last year, which reflects the lower dealer hold good unit inventories when compared to a year ago. Credit losses in this dealer-receivable portfolio remain very reasonable and predictable, averaging well less than one percent of the wholesale receivable portfolio. Household retail credit portfolio balance as of the end of September was approximately $470m -- up significantly from the $223m at the end of September last year and up sequentially from $430m at the end of June of this year. As expected, this portfolio continues to grow rapidly, as our penetration rate increases from better linkage with our significantly increased promotional efforts, particularly with ATVs.

For the year-to-date period this year, we are financing approximately 34 percent of our products sold to the consumer through this household relationship -- up from about 18 percent for the first nine months a year ago. So, even though the higher promotional environment is costing us more in the gross margin line, we are earning some of that back with higher profitability from the retail credit business.

Receivable losses in the resale credit portfolio have remained stable, averaging slightly more than 3 percent of the portfolio -- which is in line with expectations. We have established adequate reserves for both the wholesale and retail portfolios, and together with our partners continue to pay close attention to loss-reserve levels and monitor delinquency trends closely. As we have discussed in prior calls, we have not seen a deterioration of the delinquency or lost trends in either of the wholesale or retail credit portfolios.

Now let's take a look at some additional information in the third quarter. We continue to repurchase our stock during the quarter, buying back approximately 154,000 shares at a cost of $11.6m. This brings the total shares repurchased for the year-to-date 2003 period, to approximately 1.1m shares at a cost of $60m for an average of about $55 per share. We will continue to be active in the share repurchase program in the fourth quarter. Year-to-date through September the cash dividends paid, totaled $20m and capital expenditures totaled $45.4m. We expect full-year 2003 capital expenditures to be in the $65m to $70m range, as we continue to invest in new product tooling, engine and technology projects and engineering capabilities.

Other cash flow items for the nine months ended September are as follows. Depreciation and amortization was $40m, and other non-cash items netted to a positive $0.9m. Working capital items were a net use of cash flow of $38.6m,up from a net use of $1.7m in the year-to-date period a year ago. The primary reason for this increase is in inventories and, to a lesser extent, receivables.

Polaris' inventories at the end of September are higher than a year ago due to the following factors. First, our increased inventory of about $18m at the subsidiaries in Sweden and Norway, which were established late last year. Secondly, increased North American PG&A inventory of about $13m, a result of the Company's goal of improving order-fill rates to the dealers. And most of the remainder of the increase, is related to the timing of the model-year 2004 Victory production and shipments to the dealers.

As is typical with our seasonality, the Polaris inventory levels will decline in the fourth quarter, as we ship the remaining snowmobile orders to the dealers. But at year-end, inventories will continue to be higher than a year ago, due to the growth as well as the structural change in our international distribution. It is important to point out that total North American whole goods, system-wide inventory, which is both Polaris and the dealers combined, is lower in September of 2003 than a year ago.

Receivables increased from year ago primarily from international customers. Remember, sales outside of North America have increased 65 percent in the year-to-date period, and these customers are not financed through Polaris acceptance. Net cash flow provided by operating activities was $75.2m for the nine months ended September, compared to $118.8m in the same period last year. The debt-to-total-capital ratio was 6 percent at the end of September, which is the same level as a year ago.

To recap, the full year 2003 guidance -- sales for the full year are expected to increase in the 4 to 6 percent range with EPS growing to the $4.85 to $4.97 range, an increase of 10 to 12 percent over last year. This will put our fourth-quarter EPS guidance in the range of $1.61 to $1.66 per share, up 7 to 10 percent over last year's fourth-quarter earnings of $1.51 per share, with anticipated fourth-quarter 2003 sales growth in the mid-single digits over fourth-quarter 2002.

At this time, we would like to take any questions that the analysts may have. Lisa, would you please open up the lines?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Go ahead, Lisa.

Your first question comes from Bob Evans.

Good morning. Congratulations on a nice quarter. First, can you comment on the currency impact. Can you clarify what it was for the quarter in terms of, I guess from a net income standpoint?

As I said in my comments, the currency net had a positive impact in the third quarter, as it has throughout the year this year. Specifically, the Canadian dollar was very helpful, the Euro was somewhat helpful. And the Japanese yen offset that, being somewhat negative. That had an impact on our sales line, being positive, which followed-through down to our gross margin line being positive. On the operating expenses, it had somewhat of a negative impact with our costs in foreign countries. And in other income, this quarter, it had kind of an offset -- pretty much a zero impact on our non-operating income. So bottom line, net-net, it was positive in the third quarter as it has been all year.

Okay. Can you give us any degree of magnitude, Mike?

No.

Okay. Can you also talk about, Tom, the Polaris professional series? I was just wondering how that program was going and what you are seeing there?

Polaris Professional Series is doing well. We continue to have about 200 dealers across North America. We have had some products through that channel that have been quite successful and others that we have struggled a little bit with. I think the most successful products have been utility vehicles -- the Yellow Rangers, if you will. Those seem to be quite popular. We've had a little more difficulty with ATV derivatives. Those don't seem to be as natural a fit. But we continue to see very nice growth in CPS, along with the consumer version of the Ranger -- is very, very strong right now.

How many dealers would you expect to have for PPS next year? What kind of growth --?

I think it's going to be pretty stable there, Bob. We're going to be -- I wouldn't expect that is going to grow a whole bunch.

Okay. And can you also comment in terms of sell-through on the motorcycle -- the retail sell-through. I missed that. I've got the unit shipments but what -- how did you do for the quarter from a retail, sell-through standpoint?

I think all we said in all of the product lines were -- we gave you industry numbers. I would say that we're very pleased -- you know, that the retail for the entire industry -- if you just go back and take a look at my comments where you're talking about ATV snowmobiles, watercraft or motorcycles. With the motorcycles up, the industry up 7 and a half percent -- 15 percent this summer. And we're pleased with how we're doing in the motorcycle business. I guess would be how I would phrase it.

Okay. And from a model's standpoint, the biggest seller, I assume, would be Vegas?

Sure. Vegas has been a real hit for us from both a retail sales perspective and also from a sort of industry credibility point of view. In Harley's 100th year, we won every single substantial award there is for a cruiser motorcycle, which is a pretty cool thing. So I think that Vegas really helped build a very positive buzz for Victory. Just to give you a sense for that, our website traffic on Victory this year is up about a factor of 6 versus a year ago with about one million unique visitors for the site, which is pretty cool for a new brand.

Okay. Final question. Has the promotional environment changed much on the ATVs -- what are seeing there now versus, say, a quarter ago?

I think we're seeing continuation of the same trend that we have seen throughout the year, with promotions continuing to increase by all competitors, including Polaris. And we have been able to offset those additional costs with additional cost reduction and favorable currencies have also helped us there. But promotions seem to be continuing to increase. Even though you see the economy picking up and the industry picking up a little bit, we have not yet seen any sign of the promotional pressure really allaying up at all, and I would not anticipate it just based on recent history. So, we are prepared for continued, kind-of-tough battle, and we're being competitive with the rest of the industry.

Okay. Thank you.

Your next question comes from Ed Erins.

Thanks. Good morning. A couple of questions for you.

First, on ATVs. I know over the past couple months, a lot of your competitors have been working to clear inventories of last year's products. I was just hoping to get a sense of demand for current-model-year inventory, or current-model-year products as we're heading into hunting season here. And then, a couple of questions just on the international business. Number one, if you could give us -- maybe break out what the total international receivables amounts to? And then, second, the annual revenues of those new international subsidiaries that you have set-up over the past year?

I will take the first one of those. In terms of demand for current models ATVs. I don't know what each competitor out there -- seven competitors in the ATV business -- I don't know what everyone's current non-current mix is. I do know that there are some competitors that apparently had some significant model year '03 inventory that they have been clearing out. That is not unusual as you come to the end of a model year. In our case, I am very pleased with our mix of current non-current and our demand of new products as we head into the fall-hunting season. That's traditionally the segment of the ATV business that we're quite strong in, leading with products like the Sportsman 700, Sportsman 600, Sportsman 500 and hunting versions of those and also our own Camel Ranger. So, in terms of a current, non-current problem, certainly we don't have any non-current issues that we're concerned about in ATVs, for sure. The other -- the receivable stuff I will let Mike go through that.

Okay. Your next question was the international -- the accounts receivable and how much that is due to the international business.

Well over half of the increase in the receivable balance from September of a year ago, is due to increases in our international customers. The bulk of that is in our Sweden and Norway subsidiary, which we didn't have a year ago at this time. That's one of the largest -- in fact, is the largest snowmobile market outside of North America as we start to sell product into there this year. And then also some of the other international customers are -- the balances are up a little bit, as we've grown that business significantly this year. So, well over half of the increase is international.

You asked about what the annual revenues are for our international operations. I guess, we don't really want to get into too much specifics there. I guess, I would say, though, that overall sales outside of North America will continue to grow. As Tom said it was 6 percent of our sales in the past few years. Year-to-date, it's about 9 percent of our sales, and I would expect that it would end-up the full year around that -- 9 or maybe 10 percent of our sales. We're real excited about the international business and the opportunities that it provides for us going forward. We're real excited about that.

Okay. And then just one kind of last question to follow up on that. Could you give us a sense of inventory composition by product category?

In the 10-Q, we state that detail. And I can give that to you. Inventories are $226.2m. That is comprised of raw materials of $38.8m, PG&A of $65.9m and finished goods of $121.5m.

And then in the international business, are you comfortable with the amount of inventory and receivables that you have picked up from those new businesses that you have developed over the past year?

Yes. I think that this is -- some of the business is new to us. We're dealer direct in territories for the first time. So I tell you we're learning as we go. But I would -- we're pleased with the growth, and we're not at all surprised by the level of receivables in our inventory. They were planned. They were part of our budget process this year, and we're right on plan.

Your next question comes from Tim Conder.

Thank you. Let me offer my congratulations, also, gentlemen.

A couple of items here. On the gross-margin side, I know you gave just some sort of some broad overviews to '04, but this will encompass a couple of questions here. Given where you are hedged currently, Mike, with currencies for the year, if you could sort of just list out that level for your three major currencies that would be great. And then given where currencies have moved, are you still comfortable with that and the overall mix of growing gross margins in the tune of 60 to 80 basis points, as you have laid out before, as a sort of a general guideline on year-over-year progression?

Okay. The hedging. As I said we are hedged for the balance of the year. The yen is hedged -- has been -- in the third quarter the yen was an average of about 118 yen to the dollar, compared to 122 a year ago. So you can see that's slightly negative. Fourth quarter will be a negative as well. The current rate on the yen is 110-ish, 109. So it's looking forward to next year, that will be a hurdle. That clearly will be an obstacle that we will have to overcome. The Canadian dollar, on the other hand, has been favorable. A year ago, we were at about 64 cents to the dollar, and this third quarter was around 68 cents with our hedged position, and will be a little better than that in the fourth quarter. So that will be positive in the fourth quarter. And based on where the Canadian dollar is today at around 75 cents, we expect that to be quite positive for '04. In fact, we are hedged through the first half of '04 on the Canadian dollar, which will be very helpful.

The Euro, we have hedged in the third quarter at about 109. We have not hedged the Euro in prior years. That has been helpful to us this year, and we are hedged in the fourth quarter as well, which we expect to be, again, helpful. Based on where the Euro is today -- I think it's about 117 or so. If it stays there, we would expect the '04 impact. The Euro would also be positive.

So the impact on '04 of all those currencies. At this point in time, the yen will be more hurtful than it has been this year. So I would expect net-net, the total currency impact will be much smaller than it has been during this year.

Are we still confident in '04 that we can grow our gross margins? Yes. We've been growing our margins steadily over the last few years. '03 has been no exception. And we would expect that our cost reduction activities and our quality improvements, our sourcing initiatives, will all help to increase our margins next year.

With a couple -- let me just tack on a couple comments here, Tim -- the obvious wildcards, as you know, and the reason we don't really go too quantitative in guidance at this point, is we just simply don't know what the snowmobile situation is going to be. And that, of course, also impacts the snowmobile portion of our parts, garments and accessories business, which is a very profitable part of our business. So before we put a number out there, we'll try to get a sense on where those businesses are. And in the fourth quarter call, we'll do that. But I would expect the trends to continue to be positive.

Okay, very fair. Thank you. Also, thank you for the break out on the receivables and inventory explanations and your commentary on some of the previous questions. It's very helpful.

Could you, at this point -- you said that inventories will be up year-over-year given the international and so forth. Any idea, percentage, direction or range or anything that you guys are somewhat targeting? Or do you feel comfortable commenting on that? And then also with the demise of Indian. Any interest there in potentially considering that that name brand would become available? And then, finally, also relating to motorcycles. If I remember right at the end of the second-quarter conference call, you said that Victory was looking to be up similar to what you saw in '02 which was 75 - 80 percent and now you're talking 60. Am I remembering something wrong there or has there been a little bit of change there in your guidance on Victory for the full year?

Let me take a couple of those and then see if I can handle this. No, there's no change in the Victory stuff. Victory's going to be way up -- 50, 60, 70 -- big number. We're really pleased with how Victory is going. And I think, strategically for longer-term investors, one of the big question marks for the last five years has been can we be successful in the motorcycle business. And I think the last few years were tough. They were challenging, as we knew they would be. Last year we started to build some pretty nice momentum. This year, we've built on that. And I'm really pleased with how things are going in the motorcycle business.

Some investors may be aware, others not, that Indian motorcycles, which started at about the same time we did, ceased their operations about two weeks ago. Indian had a quite different idea than Victory is. The Victory is the new American motorcycle. We are the new kid in town with new technology, forward-looking, brand-new brand. If you're interested in something new and exciting, come take a look at Victory. Indian was the common concept of resurrecting the oldest brand in motorcycling, a 103-year-old brand. It was also quite different in that it was a start-up operation. It did not have the natural benefits that a $1.6 billion manufacturer brings to a start-up operation -- the financing, the technology, the manufacturing, the engineering. And after five years of working really hard to try to bring that brand back alive, unfortunately they just simply ran out of money.

In terms of would we be interested or not? I guess I can’t comment specifically on that, Tim, other than to say I'm quite certain that we will pick up some incremental distribution that there are high-quality Indian dealers who are interested in -- they have a store, they are selling cruiser motorcycles, and they now have, at least at this point, a manufacturer that can provide product to them and support. And we've been in contact with a number of those dealers, and so I would expect that there's distribution opportunities.

In terms of the brand and the other assets of the company, there is an auction process which is taking place. In terms of whether we're going to be involved in any of that, that's just not something I can comment on at this point. There was one other question that I will give to Mike.

Okay, the other question was what's the projected inventory balance at the end of year? We are at $226m at the end of the third quarter. By year end, we will be under $200m. How much under? I guess it's a little uncertain. That remains to be seen. The wildcard here is, what snowmobiles do we sell in this new Scandinavian operation? What's new for us will be selling to dealers over there rather than the distributor, and the timing of when those dealers take delivery of the snowmobile product is something that we are going to be learning. So we will be under $200m. How much under, I'm not quite sure.

Okay. Thank you for the clarity, gentlemen.

Your next question comes from Brian Snow.

Good morning, guys. Could you talk a little bit -- I know you guys ran some promotions in snowmobiles to clear out some of the '02 and '03 model-year snowmobiles. And as I recall, usually you accrue for promotions when you sell the vehicle. Is this a different situation, these new promotions? Have they already been accounted for when those were sold a year ago or was there an incremental promotion there? And then I have some others.

No. Those are all -- all the snowmobile promotional costs are recorded in the period when they are sold. We estimate what those are going to be and our estimates have been accurate and any promotional programs that you're seeing right now -- the move, carry-over snowmobile inventory had been recorded last year.

Okay. And on international, you have obviously seen some really solid growth there. Could you talk about that sort of qualitatively? Is that mostly market growth or is that mostly market-share growth? Or is it just the delta and the average selling prices that you see when you go to dealer direct versus selling to a distributor?

It's a combination of three factors. It's -- we are getting obvious lift from going dealer direct. We are gaining market share, in some cases pretty substantially. And we're also seeing very positive currency benefits. So all three of those are sort of a "perfect storm" type deal -- that's why we are up 65% or whatever. We certainly can't count on currency being helpful going forward or not.

But I do think that we have a much better distribution model. I also think that we are investing in products. Specifically in the ATV segment, we are introducing some on-road ATV's for Europe that are quite popular and that business is growing -- the whole market is growing and we're benefiting with that growth. So we're positive in just about each one of those categories, Brian.

Okay. And finally just on the snowmobile dealer situation. It sounds like that provided we get some good snow, you could have a clear inventory channel at the end of this year. But is the guidance or the commentary still that we wouldn't see an impact from production and shipments for you probably until the second half of next year?

Yes. You won't see any additional production this year, of course. We made that bet back in February and March. We know how many we have to build. It's simply a matter of building and shipping some more units here in the fourth quarter and we'll deliver those.

The benefits. If we see even decent snowfall this year, you will see a much cleaner dealer inventory at the end of the season. More immediately, possibly even some in the fourth quarter and definitely in the first quarter of '04, you would see a lift on PG&A sales. And then you would start to see whole good benefit in the second, third and fourth quarters of next year. That's all assuming it snows, and we don't know that. So that's why we give quantitative guidance in the fourth quarter call, not in this call.

Here is kind of a silly question. Is there a historic relationship between the amount of precipitation that you get when it is warm out to the precipitation you get when it's cold out? Because it's raining like crazy this year. If there is a relationship, then maybe we will have some good snow.

I cannot answer that question.

You are not a meteorologist?

No. But what I can tell you is that we do subscribe to a number of services which attempt to predict the weather long-term, which is, I think, at best an inexact science. But at least the current predictions that the National Weather Service puts out for long-range forecasts do show a normal winter in the Midwest and the East with temperatures and precipitation at normal levels. Those will both be good things. But those are forecasts and probably about as accurate as forecasting the market six months from now.

Right. And just finally did you say anything qualitatively about revenue growth for next year? Are yours like a single digits or did you just say any words or anything like that and I missed it?

We said the company will grow. We didn't quantify it.

Great. Thanks a lot.

Your next question comes from Bill Lerner.

Thanks, guys. I will keep it to just one question. This one is for Tom. A year ago June, I think when we were in Orlando, you guys had talked about an acquisition by 1Q '04. Now that Lombardia (indiscernible) Vehicle segment is resolved, where do you stand in terms of an acquisition? Where's the white space for you guys? What can you say or what would you say now?

I would say that our position towards acquisitions really hasn't changed a whole bunch. We continue to look quite actively for acquisition opportunities. If you look at the balance sheet, we've got six percent debt-to-total-capital -- a very, very clean balance sheet. A strong cash flow. I think we have a management team that is capable of successfully integrating the right kind of acquisitions. We have a few ideas that we know makes sense -- three or four ideas. There is a number of issues with each of these potential partners that include things like price and having the right management team and so forth. And so we're patiently pursuing each of those.

I would say that to be successful do not need to do an acquisition, okay? We're not in a situation where defensively we are concerned. The only reason we would do an acquisition is if it can add to the story. So I would say that we continue to be very careful and disciplined about examining the opportunity. But I would not say that the situation where we have to, from a competitive point of view, do an acquisition or we're somehow going to be in a weaker position.

Thanks, Tom.

Lisa, we have time for maybe one more question.

Your next question comes from Joe Hovorka.

Thanks. Actually, two quick questions. First, on the foreign currency issue again. If you didn't have the foreign currency benefits, would you still have shown gross margin improvement in the quarter?

Joe, I would rather not give any specifics on affects. I think I've made the comments qualitatively and I would like to leave it at that.

Okay. And could you give the cash warranty claims and the amount accrued in the P&L for third quarter this year and the third quarter last year?

Sure. As you have noted in our 10-Q filing, each quarter of this year we are putting details in for the warranty reserve. As we have talked about, the warranty reserve is seasonal. It kind of bounces around throughout the year. It's typical for the warranty reserve to increase in the third quarter of each year, and that's the case again this year.

Our warranty reserve at the beginning of the quarter was about $26m. We added about $9m of provision or expense during the quarter and had claims of about $6m during the quarter. So our ending reserve is a little bit over $29m for the third quarter of this year. That compares to a year ago when we started out with $29.5m of reserve at the beginning of the quarter and ended up at $31.5m at the end the quarter.

Thank you.

Joe, I would just maybe tack one comment on the foreign currency question that you asked.

I think that foreign currency changes are an important but uncontrollable factor that affects our business. There are lots of important and uncontrollable factors that affect our business. Whether we have a terrorist event, whether the country is at war, whether it snows or not, whether the economy is good or not. And I think what Polaris has successfully demonstrated over the last 22 years is the ability to deliver ever-improving results in a wide variety of environments. So I think that foreign currency is an important uncontrollable, but certainly there are lots of other ones. Some of those are positive. I mean this year we have had benefits from foreign currency but we've also had some pretty significant negatives -- the war in Iraq, no snowfall, and a pretty sluggish economy in the first of half of the year. So I think that these things tend to balance themselves out over time. We will continue to try to successfully manage the environment in which we operate.

Great. Thanks.

Thanks, and that's about all the time we have for today. 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 the purposes of the Private Securities Reform Act of 1995 and that actual results could differ materially from those projected in any forward-looking statements. Thanks again, and goodbye.

This concludes today's third-quarter earnings conference call. You may now disconnect.