Polaris Inc (PII) 2003 Q4 法說會逐字稿

Good morning my name is April, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Polaris Industries Fourth Quarter Full Year 2003 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 "*" then the number "2" on your telephone keypad. Thank you. Mr. Edwards, you may begin your conference.

Thank you April and good morning everyone and thank you for joining us for our fourth quarter and full year 2003 earnings conference call. Mike Malone, our Chief Financial Officer and Tom Tiller our President and Chief Executive Officer will be participating in the call this morning.

During this presentation, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, and other matters including more specific guidance on our expectations for future periods, which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statement, which, by their nature, involve risk and uncertainties. There are a number of important factors that could cause the 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 will turn it over to Mr. Tiller, Tom.

Thanks, Richard. Good morning, everyone and thank your for interest in Polaris. We are pleased to report increased sales and earnings per share for the 23rd consecutive quarter. For the fourth quarter earnings were $1.68 per share up 11% from last year on 8% sales growth. For the full year earnings per share were $4.92 per share up 12% on 6% sales growth. This was the 15th consecutive year that earnings per share have increased at Polaris.

The quarter and full year results slightly exceeded our expectations and were driven by a strong balance performance across much of the Company. 2003 was a good year for Polaris. We faced three main challenges, the slow start driven by the war in Iraq, of course snowfall last winter, and an aggressive competitive environment. But we successfully over came these hurdles and our businesses remain solid throughout 2003. We had another strong year in ATVs and Victory motorcycles, a very strong contribution from the Ranger utility vehicle business and from our international division.

Parts, garments, and accessories division got back on track with a good year. Our biggest concern during 2003 was the snowmobile business but the good news is that snowmobiles will get better in 2004. We were successful in substantially reducing snowmobile dealer inventory and in fact total dealer inventory of all products is 8% lower now than it was at the same time last year.

Speaking of '04 we expect this year will be an even better one. The economy is stronger, each of our businesses should grow including snowmobiles and we will leverage the fact that 2004 is our 50th anniversary. Throughout the year we'll introduce a number of exciting new products. 50th theme promotions and special events and with that overview let's turn to the individual business segments starting with All Terrain Vehicles.

The ATV division representing 65% of the revenue of the Company had a respectable fourth quarter to cap a strong year. ATV shipments for the year were up 11% with very strong growth in both RANGER utility vehicles and in international sales. Despite the war the ATV industry grew by 4% for the full year and we expect that growth will continue in 2004.

One of the exciting new products we introduced in 2004, the All Terrain Pickup or ATP, which recently named "ATV of the Year" by ATV magazine. This is just one more in a series of industry awards for the ATV division, including recent ATV of the year awards for the Predator Sport ATV and the "King of the 4x4s" the Sportsman 700.

Speaking of the 700, late in the fourth quarter, we began shipping the worlds first electronically fuel injected 4x4, the 700 EFI. This is just one more in a series of innovations that Polaris has introduced to the ATV industry over the last 20 years. Innovation is alive and well at Polaris, and we will continue to invest in innovation and product development.

During the fourth quarter we announced that we intend to build a new product development center just north of the twin cities in Wyoming, Minnesota. The new R&D center will compliment our existing facility in Rosa, Minnesota and will consolidate work currently done in two other locations. There will no changes to production as a result of this R&D investment.

In terms of 2004, I would expect the ATV industry to grow mid single digits and for Polaris to achieve that same rate of growth. We expect that the industry will remain competitive particularly with the entry this spring of John Deere in to the ATV business with a relatively small line of sourced ATVs from Bombardier the number 7 player in the game. And while we certainly respect Dere as a company, we feel that we are well positioned for this competitive battle because we have done this before. Throughout our 50-year history we have consistently faced strong competitors like Honda, Bombardier, Harley Davidson and in fact John Deere both in snowmobile and in utility vehicles. We've also faced new entrance in the utility vehicle business in 2004, but again I like our chances with the Ranger. So, look for '04 to be another good year for Polaris in ATVs.

Snowmobiles. The snowmobile division had a difficult year in 2003 but we for a significantly improved performance in 2004. You'll recall that last winter was much drier than normal particularly in the Midwest, which accounts for about half of the industry sales and as a result our shipments to dealers in 2003, were down 22% as we have discussed in earlier calls. Our primary goal this season was to reduce dealer inventory of snowmobiles and we've been very successful in doing that. By the end of this season, we expect dealer inventories will be dramatically lower than they were a year ago. We've also had some cooperation with Mother Nature this year. Snowfall for the west has been good and the east is been relatively good. The Midwest has been a challenge as it was mostly brown until earlier this week when much of the Midwest receives significant snow. Well, this year hasn't been a great snowfall year; compared to 2002 it is definitely better.

What this means is that people will ride, accumulate miles and perhaps be interested in buying a snowmobile at the end of the season. And as part of our celebration of the 50th year anniversary of Polaris inventing the modern snowmobile, we plan on introducing a very exciting new snowmobile later this spring.

In the next quarterly conference call, following the end of the riding season and after our annual dealer meeting, we will be more specific about the new product and our future guidance in snowmobile. But for sure, our 2004 snowmobile results will represent a solid improvement over 2003.

Personal Watercraft. The Watercraft business representing about 3% of our total sales remain a challenge for us and for the rest of the industry in 2003. Our sales were about flat, which is relatively consistent with our performance over the last several years, the same core issues remain, a declining industry with a hope of potentially flattening out at some point. The biggest positive news of the year for Polaris was the fact that our new watercraft the MSX received the industries highest honor "Watercraft of the Year". This was the first time in our 12-year history of making watercraft that we have won this prestigious award. For 2004, I would expect more of the same an industry that's about flat. Shipments could be up modest, primarily driven by timing due to a slightly later production of this year's personal watercraft model lineup. It remains to be seen if the new cleaner, quieter 4-stroke technology will spark growth in this sector of our business.

Victory motorcycles. Strong fourth quarter close, what was another strong year for the Victory motorcycle division. Victory shipments were up 112% for the quarter and 70% for the year. Consumer and dealer interest in the motorcycle continues to grow rapidly as we have seen throughout the fall and winter motorcycle shows. The Victory Vegas, which last won virtually every year that cruiser motorcycle industry had to offer, was not a one-hit wonder. This summer we followed the Vegas with an all-new kingpin and it too is attracting very strong interest and won its first award earlier this month.

Compared to a couple of years ago we have made real progress in the motorcycle division. The bikes are better looking, more reliable and cover a broader range of price points. The Victory brand is starting to become fairly well known among motorcyclists. Victory dealerships are improving and the quality of dealers expressing interests in carrying the Victory brand is much stronger than when we first started. One important competitive development during the quarter was the demise of Indian motorcycles. That event was difficult for Indian's investors, employees and dealers was a positive development for Victory as it removed the competitor and helps us strengthen our distribution network. Another important albeit internal milestone was that Victory sales surpassed personal watercraft sales for the first time in 2003. And now Victory represents 4% of our total sales. 2004 should bring more good news for Victory. We'll build on the strong momentum and help growth this business into a solid part of Polaris Industries.

Parts, garments, and accessories; we'd a strong fourth quarter for PG&A with sales up 17%. The growth was quite balanced across the product segments. 2003 was a year of real improvement for the PG&A division and we expect more of the same in 2004.

International; and finally international had a great year in 2003 and for the full year delivered 57% growth driven by strong increases in both ATVs and snowmobiles. We were helped by three factors; volume gains, a better dealer direct distribution model, and favorable currency. Volume contributed about half of the improvement while the other two factors, the dealer network and the currency each accounted for about 25% of the gain.

Before I turn it over to Mike, let me just summarize our expectations for 2004. '04 will be stronger than ' 03, revenue growth will be solid, up in the mid to high single digit range and more balanced across the Company, rather than being concentrated in a single division. Earnings should grow 8-13% on a range of $2.65-$2.77 per split adjusted share. I am confident that with the plans we have in place, 2004 should be another record year, our 16th in a row. At this time I would like to turn it over to our Chief Financial Officer, Mike Malone.

Thanks Tom. As Tom mentioned we are pleased with our 2003 results, our 15th consecutive year of record sales and earnings per share growth and I feel confident in our ability to deliver further improvements in 2004. As you know last week we announced the two-for-one stock split payable March 8 for shareholders of record on March 1. Therefore all earnings per share guidance numbers that I will discuss today have been adjusted for the two-for-one stock split.

Also a week ago we announced the increase of our dividend by 48%. The decision to increase the dividend significantly was driven by our optimism for the future as well as reflecting the impact of the tax law change to investors and in no way restricts our ability to invest in further projects.

We continue to have a solid balance sheet and we expect to continue strong cash flow for 2004 and beyond. And as in prior years we will continue to share repurchase in 2004.

Now let me give overall guidance for 2004 and comment on certain aspects of our fourth quarter 2003 results. For the full year 2004 we are expecting total sales for the year to increase in the 5-8% range driven by sales increases across each of our product lines. We expect EPS to grow to $2.65-2.77 on a split adjusted basis, which is an increase of 8-13%, when compared to the $2.46 per share split adjusted in 2003.

First quarter 2004 sales are expected to increase 4-6%, with earnings per share growing to the range of 29-31 cents per share, an increase of 4-11% over the 28 cents in the first quarter of 2003, again adjusted for the stock split.

Let me give you some qualitative comments on why we feel confident in delivering these full year 2004 results beginning with ATVs. Sales of Polaris ATVs in 2004 are expected to continue to grow, driven by new products and ongoing modest growth in the overall ATV industry. Keep in mind that our ATV reported sales includes our RANGER and our International business that are growing significantly faster than the industry and our base North American ATV business.

As Tom mentioned earlier, the ATV and RANGER businesses are seeing a few new entrance coming into the market which we are monitoring closely. But as we've said before, Polaris has been in the ATV business for a long time competing against some of the biggest industrial companies in the world and we have performed very well by staying close to the customer and adapting quickly to change. We expect 2004 to be no different.

Full year 2004 Polaris ATV sales are expected to increase in the mid-single digit range, reflecting a continuing competitive marketplace, and continue aggressive but stabilize promotional environment.

Personal watercraft sales for the full year 2004 are expected to increase modestly as the new MSX 4 stroke Personal Watercraft began to ship to dealers in the spring. The improvement in the watercraft sales dollars will also be aided by a significant average sales price per unit increase, in 2004 as a result of a mix change to the higher priced 4-stroke model.

Victory motorcycles are expected to grow significantly and have another strong year as the award wining Vegas continues to gain share in the custom cruiser segment and the new Kingpin model enters the classic cruiser market segment as well as our dealer network continuing to expand and gain strength and the overall heavyweight cruiser market continuing to drop. Sales of Victory are expected to grow 20% -- around 20% for the full year 2004.

For the first time since 2001 we are expecting growth from snowmobiles in 2004. With better snowfall so far this winter in most regions, dealer inventories in better shape than they have been for a number of years, and the introduction of a significant new model this spring we are expecting a strong year for snowmobiles in 2004. At this point it's a little too early to tell what the dealer orders will look like but given what we know today we would expect snowmobile sales to increase at least double digits for full year 2004.

Parts, garments, and accessories sales are expected to increase at a similar pace of the overall Company for the full year 2004 with balance growth across product lines.

Now moving down the income statement. On a consolidated basis gross profit for the full year 2004 is expected to continue to show improvement on a percentage of sales basis as we benefit from cost reductions, efficiency improvement initiatives, and savings from more active sourcing of component parts. Although difficult to project at this early date we expect the promotional environment will remain aggressive throughout 2004 and our guidance is based on the expectations of the promotional levels will stabilize at rates comparable to 2003 level. For the full year 2004 we expect a 20-40 basis point improvement in gross margins. Operating expenses are expected to remain approximately flat as a percentage of sales for the full year 2004 as we continue to invest in research and development projects and dealer development initiatives.

In addition, in 2004 we will be incurring the plan one-time costs associated with our 50th anniversary celebration. Income from financial services for the full year 2004 is expected to grow at a pace faster than the overall Company with the majority of growth again coming from the profitability generated from the retail credit portfolio.

At year-end 2003 the wholesale portfolio related to floor-plan financing for dealers in the United States were approximately $581m, which is down 1% from where it was at the end of last year due to the lower inventories with dealers.

Credit losses in this dealer portfolio continue to be very reasonable averaging less than 1% of the portfolio over the 7 plus year life of our partnership. The household retail credit portfolio balance as of the end of the year 2003 was approximately $517m up from $329m at the end of last year and up sequentially $470m at the end of the third quarter. As expected this portfolio continues to grow as our penetration rate increases from better linkage with our significantly increased promotional efforts, particularly with ATVs.

For the full year 2003 we are financing approximately 32% of our product sold to consumers in the United States through the household relationship, which is up from about 23% for the full year last year. Let me remind you that, even though the higher promotional environment is costing us more as an offset to sales line on the income statement, but we are earning back some of that with higher profitability from the retail credit business.

Receivable losses in the retail credit portfolio have remained stable, averaging slightly more than 3% of the portfolio, which is line with our expectations. Consistent with what we have discussed in prior calls, we have not seen a deterioration of the delinquency or loss trends in either of the wholesale or retail credit portfolios. The provision for income taxes on the P&L has been recorded at a rate of 32.5% of pre-tax income throughout 2003. For 2004, our expectation is that the income tax rate will be in the range of 32.5-33% of pre-tax income.

Let me take a moment to talk about the impact of currency fluctuation on our operating results. For the full year 2003, our currency hedging strategy performed very well for us. We protected the downside risk, yet preserved some upside opportunity. For 2003, the currency fluctuation of the Canadian dollar and the Euro had a positive impact on sales and gross margins, while the Japanese Yen had a negative impact on gross margins. The gains and losses from our hedging activity are recorded in the other income and expense line, which is the primary component of the $2.3m expense which you see in the fourth quarter of 2003. For 2004, we currently have foreign currency hedges in place for the first quarter of 2004 for both the Japanese Yen at approximately 108 yen to the dollar and the Euro hedges, which are at an exchange of about 115. For the Canadian dollar, we have hedges in place through the third quarter of 2004 at an exchange rate of about 71 cents. Based on the hedges that we have in place, and current exchange rates of each of the above mentioned currencies on our business plan projects a positive impact on profits from the Canadian dollar and Euro currencies for the full-year 2004, compared to the prior year, while the Japanese Yen is expected to have a negative impact on gross margins for the full year 2004.

Our current expectation is that net net the total currency impact on profits for the full-year 2004 will have a somewhat offsetting impact resulting in no significant variations year-over-year.

Taking a look at some balance sheet and cash flow information for the 2003 year, we ended the year with $82.8m of cash on the balance sheet, which is up 2% from the prior year. We were able to generate this level of cash after returning a significant portion of the full-year 2003 profits to the shareholders, through share repurchases of over 1.2m shares at a cost of $73.1m and paying cash dividends of $26.7m during the year. In addition, to making the appropriate investments in our business through capital expenditures totaling $61.4m, which is an increase of 9% over last year.

Other 2003 cash flow items are as follows; depreciation and amortization was 54.8m, other non-cash item netted to a negative 3.1m, and working capital items were a net use of cash flow of 6.8m. This resulted in net cash flow provided by operations of a $155.8m for the full year 2003 compared to $192.8m in the prior year. This decline in cash flow from operations is somewhat improved from the earlier quarters of 2003 and relates primarily to the growth in inventory levels. We expect our operating cash flow to increase in 2004, finishing the year at a higher level than the $192m recorded in the 2002 year.

Full year 2004 capital expenditures are expected to jump significantly, in the range of $85-95m as we continue to invest in new product tooling and engine and technology products, in addition to an incremental funding of about $22m for our previously announced new product development facility in Wyoming, Minnesota. We expect depreciation for the full year 2004 to be in the range of $60-65m. We also expect to continue to repurchase shares during 2004 under our existing Board authorization, which has approximately 2.2m shares remaining. However, with the significant increase in the dividend announced last week we would expect the repurchase activity to be somewhat less than the 2003 levels.

Accounts receivables at the end of 2003 were $51.9m, up just 2% when compared to a year-ago. Inventories at the end of 2003 were $182.8m compared to 155.9m last year, which is an increase of 17%. Inventories are up from the prior year primarily in three areas; higher factory ATV inventory as shipments was slowed to maintain targeted dealer inventory levels, additional inventory in our new subsidiaries in Scandinavia, and higher PG&A inventories to improve customer service levels. It is important to note that the -- the level of inventory increase year-over-year has come down sequentially since the second quarter of 2003, and we expect the inventory improvement to continue throughout 2004. Debt-to-total capital at the end of 2003 was just 5%, down from 6% last year. EBITDA was $221.6m for the full year 2003, up 4% from a year ago.

Now let me recap our full year guidance for 2004. Sales for the year are expected to increase across each product line resulting in total sales increase in the 5-8% range with EPS growing to a split adjusted $2.65-2.77 for the full-year 2004, which is an increase of 8-13% over 2003. First quarter 2004 sales are expected to increase 4-6% with earnings per share expected to be in a split adjusted 29-31 cents per share range.

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

Yes sir. Again, I would like to remind everyone in order to ask a question, please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your question comes from Rob Evans with Craig-Hallum Capital.

Good morning, nice quarter.

Thanks Bob

Thanks Bob.

Can you comment first Mike on the percent of your business that was financed for the fourth quarter on the retail side. I think you said 32% for the year?

Yeah I don't have an exact number Bob, but it would have been a little less than the 32, I think at the end of third quarter we were at 34%. So, its tapered off a little bit, which is primarily related to the snowmobile volume of retail sales, generally the penetration rate on retail sales of snowmobile is less than our other products.

Sure.

That's why it's tapered a little bit.

Where do you see that ultimately going -- where would you like to see it go?

Well our ultimate goal is in the 40% that would be what we would look to be at the very attractive percentage.

Okay and at what point is your portfolio maturity you think or you know more mature where your pretty comfortable with the trend that you are seeing on the loss side I think.

Well I would say that we are comfortable today.

Okay.

It is -- the portfolio continues to mature as we grow and add volume but we are comfortable that our losses that we are seeing are consistent. They haven't moved significantly, and we are comfortable with -- clearly comfortable with our reserve levels.

Okay. And can you comment on your -- on the snowmobiles sales, the PG&A has been better snow, lately especially this you know in '04. I mean are you seeing an uptick in that business, or are you seeing better riding? Can you give us a little more color there?

Sure, this is Tom, Bob. In the fourth quarter, I mentioned that PG&A sales were up 17%, really and it was quiet balanced. Snowmobile parts were up, I think, around 16%. So, not a huge drop, we -- I would expect based on -- probably the best riding that we've had in five years here in Midwest than over the next few weeks. We would expect to see quiet a bit of riding just qualitatively, you know, here in Minnesota, Wisconsin, Michigan, which is the heart of the snowmobile business, we near as a kind of pinup demand. I've talked to employees and friends that can't get a hotel room up North, where people commonly ride. So, if that, if the snow continues and I think it was 16 below here this morning. So, there is not an imminent melt down coming. If that continues of for the next six or eight weeks as I would expect it would, we should see some lift out of parts, garments, and accessories here over the next several weeks.

Okay. Thank you and then could you also comment on how many John Deere's dealers that you currently distribute Polaris products, what do you think the potential impact might be given that there are going to start off in ATV?

Yeah, there has been, we've received a number of questions from investors about the Deere entry into ATVs and maybe it would be useful just to kind of frame that up a little bit. Deere is a strong company, it's a large company with very good brand, a very good distribution network, and they are entering the ATV business in a relatively small segment, about 15% or so of the ATV business with the source product from Bombardier and I think almost everybody knows that we are number two in ATV; Bombardier is actually number seven in ATV. I think the reason Deere is doing this is primarily a distribution play and certainly we are well aware of what they are doing, but I would not immediately hit the panic button here. I think that there are a number of reasons why we should be successful in defending our business from Deere. You know its not easy going into the ATV business, ArtiCat and Bombardier both have entered in the last 5 or 6 years and each has -- you know one has about 5-6% market share after 8 years, one has 2 or 3% market share after 6 years and this is their full time business not a source product strategy. In terms of attacking us, in the segment of the business that they are entering, we are actually the strongest competitor. We are not the weakest competitor and if you would argue that probably they will get some business I guess it would be a question mark in my mind anyway if they are likely to take it from the strongest competitor or from the weakest competitor. I think the specific products that they are introducing have been in the market for several years, that Deere products are derivative of the Bombardier Traxter and that has not been a particularly successful a product for customers. You mentioned distribution we have I think the exact numbers is around 110 or. [Deere] dealers, dealers that carry John Deere and Polaris, and none of those dealers have dropped Polaris ATVs. They may choose to sell Deere ATVs as well because selling the big farm tractors is a very important part of their dealership. But I don't believe there is anyone that would replace their ATV business, the Polaris ATV business with the John Deere business. So I suspect that there it's going to take them like it has other competitors entering new segments, us going into Victory, ArtiCat, Bombardier, [inaudible]and everybody else that comes into the business. It takes time and it takes substantial dollars. There are going to put money behind this but I would not expect that certainly in 2004 that Polaris' ATV business is going to be significantly impacted by this. We will aggressively defend the crowned jewels of this company, which are the sportsman line of ATV products.

Okay. Thank you.

Next question April.

Your next question comes from Brian Knoepp of FTN Midwest Research.

Good morning guys.

Hi Brian.

Hi, Brian.

Got a question on ATVs, in the past sometimes you guys have talked about average selling prices in the percentage change versus last year. If you guys have that -- for the fourth quarter and for the full year?

ATV average selling prices for the quarter were about flat with a year ago. We saw, I think up just slightly actually for the rest of the product line we actually saw fairly significant positive mix. We saw snowmobiles, as the snowmobile industry has slowed down. The people that are buying snowmobiles tend to be the very performance oriented riders, which are the higher price machines, Rangers, which are relatively high-priced product, Victory, both have shifted positive mix. We've seen a positive mix shift in watercraft; ATVs have been about flat, which you would expect on a year-over-year basis, because there hasn't been a dramatic shift in ATV industry. So I'd say that hopefully that's helpful for you.

Oh yes it is and for next year assuming that, think that was either you or Mike said it that promotional should not necessarily accelerate based on the current plan.

Yeah

Should we assume basically the same kind of average selling price in dollars or should it decline slightly in 2004 as you are sort of anniversary the first half of 2003, which were sort of higher selling prices.

Yeah I would say that flat would be a good assumption. So what we know right now, we did see you know acceleration in promotion throughout 2002 and 2003, but towards the tail and I am talking about ATV specifically now. In the last quarter or so of 2003, we saw kind of a flattening of the promotional environment and I think what could be happening is that as the economy is improving I think everyone is well aware of that, that would tend to perhaps moderate a little bit, the rate of promotional spending and so you know kind of our guidance at this point subject to change -- this is a comparative environment that we are in, but subject to change would be I'd expect both promotions in average selling prices to be about flat in ATVs. In the other product lines as again in aggregate about flat, we may see some ups and downs a little bit, watercrafts could be up a little bit as we sell more four strokes, which tend to be a little bit higher price and snowmobiles, perhaps down just a whisker. If we are successful in bringing back to more casual snowmobile, but I think certainly for modeling purposes, average would -- flat would be a good average ASP.

Great. Thanks a lot guys.

Yeah.

Your next question comes from the Edward Aaron with RBC Capital Markets.

Hi, Good morning guys and congratulations.

Thank you, Ed.

I just have three questions for you. First, with respect to your earnings guidance for '04, the mid-point of your guidance has suggested acclerated in earnings growth and it was seen that earnings growth should actually maybe accelerate given the improving economy and the better outlook for snowmobiles? And then I was also hoping if you comment on [inaudible] for Victory as well as your take on the Yellowstone issue with snowmobiles and how you think that might effect the industry? Thanks.

Okay. The first question is the earnings guidance range. You know, the best way to respond to that is we have established a guidance range to provide some level of assurance of where we see our plan for this year. Whether you chose to be at the low-end of that range, the mid-point or the high-end of the range. You can make lots of different assumptions on both the sales, guidance, and the earnings guidance and I don't -- draw too many conclusions from picking an midpoint and comparing to any other guidance that we are giving.

I guess the only other thing I would add is that we are pretty confident in -- as we historically have been you know I don't think we've been too far off on our guidance in either direction in previous years and if you compare for example where we were a year ago you know with the war and all the uncertainty around that I feel fairly confident that we are getting an improving economy. We can see now that we are going to have a significantly improved snowmobile business, there is no doubt about that, so you can draw your own conclusions, but we will let the guidance stand where it is.

And the other thing I would add Tom is that we -- for the last number of years have been very successful at growing earnings faster than our sales growth and that is absolutely our expectation for 2004 as well.

Okay.

You had two other questions, Victory retail, Victory is a -- I am very, very happy with Victory right now. We have got significant momentum. You know literally I think the key to getting Victory going was time more than anything else and the improvement in the appearance of the motorcycles and we did that with the Vegas, which we introduced about 18 months ago and that got the motorcycle world excited and the Kingpin has been every bit as good as the Vegas. We have those units in stock at dealerships. You will recall that in '03, the first half of the motorcycle season was not terrific for the industry, pretty slow growth a lot driven by the weather, you know I don't know what the weather is going to be like but we are not going to have a war or so. I would be fairly optimistic about Victory retail in 2004, but we'll let kind of time take care of that and we'll see. Yellowstone for people that have been following the company for a long time -- you will be -- you are certainly aware that there has been a long running dispute concerning snowmobile, they are allowing snowmobile in Yellowstone National Park. The dispute is going on for a 20 plus years. There has been a fixed year or so, [cold fight] involved in it. I think from an investment point of view we are sure to answer that it doesn't matter. We are talking about a couple of 100 miles of trial in a network of over 207,000 miles. Okay so, it's not going to dramatically affect the number, it's not going to materially affect number of snowmobiles we sell or the profitability of the company or anything else. We feel though from a -- what is right perspective that snowmobiles should be allowed in Yellowstone National Park. There is no scientific reason why they should not be and we will continue to press the legal fight along with the other snowmobile manufacturers. It's a complicated legal battle and I think that the short answer is it's going to continue probably, beyond the investment horizon of most people on this call. So, I don't think that it matters from an investment point of view.

Okay, thanks.

It will continue, you will continue to see it in the news. So it's a popular news items and you'll continue to see it. But it's not something that affects our business financially.

Okay.

Next question April.

Your next question comes from the line of Bill Lerner with Prudential.

Thanks guys. I apologize if I missed this, but have you given any guidance, that just kidding, a joke. Okay two quick ones, one is on the interest rate front, when -- can you consider your guidance internally. Are you baking in any interest rates increases on the demand side or do you feel as though there is enough cushion from where we tell rates all right now that where any of these products are getting finance that its really not going to be material. Will that be the first one?

Sure I would respond over the joke, but I wont do that. After yesterday, obviously investors are pretty concerned about interest rates. That was a pretty dramatic move.

Yeah sure.

Well we are in interest rates -- what we are expecting for the year is a modest increase in interest rates, something in the 50 to 75 basis points comparing the beginning of 2004 and the end of 2004. We fully expect that interest rates will rise later in the year and if they go up you know 50 to 75 basis points, I think our business is going to fine and all of our assumptions and the guidance that we offered were based on those --that kind of interest rate assumptions. If we saw a dramatic increase in interest rates that would affect our business, however, we don't think that's likely to occur.

That's really helpful and the follow-up is, can you give us any update on your JV with Brunswick on the sports [boats]?

We are sourcing boats from Brunswick. We are not interest in going in to that boat manufacturing business, that's not a core competency of Polaris, but it will help our watercraft dealer to sell a broader line of marine products, so for, I don't know 18 months or so, we've been sourcing boats from Brunswick, they do a great job, there are dealers that carry them, which is a relatively small number of dealers having 25 dealers, are having success with them. It's not a big part of our business, but helpful part particularly to the dealer network.

Okay. Thanks, Tom.

Next question, April.

Your next question comes from the line of Jo Hovorka with Raymond James.

Thanks. I've got a couple of quick questions. First, can you give me the warranty reserve in the quarter?

Certainly. For the quarter, the beginning balance at the end of the third quarter in our warranty reserve was $29,137,000. It ended up at the end of the year $30,674,000.

Okay.

Which is compared to $30,936,000 at the end of last year.

Okay and on the income statement, your G&A expense went down in dollars. What was driving that and is that a sustainable number?

Yeah, there was -- as the stock price has risen significantly, we re-evaluated some of our stock based compensation plans. So, and that's what happened there in the fourth quarter. We expect full-year 2004, operating expenses to rise at a pace that's comparable to our sales, so as the percent of sales, it'll be about flat for all of the operating expenses combined.

So, you are saying you've changed that your competition structure in the fourth quarter?

I wouldn't say that we changed our compensations structure. What I said was there was a stock based comp component that was reevaluated given the rise in the stock price.

Okay. And on Victory, I know you don't talk about profitability by product lines, but I am going to ask it anyway, so you have breakeven yet or do you expect to be there next year?

We don't talk about profitability in the product lines.

Okay, thanks. That's all my question, thank you.

Yes. Thank you.

Okay April, do we have any other questions.

At this time sir, there are no other questions. I would like to remind everyone in order to ask a question, please press "*" "1" on your telephone keypad.

Okay. April, I think we are going to close the call at this point of time. We want to thank everyone for participating in today's call. Please remember that our presentation and responses to your question contains certain statements that could be considered forward-looking for purpose of the Private Securities Reform Act of 1995 and that actual results could differ materially from those projected in any forward-looking statement. Thank you again for listening to our call and we'll talk to you next quarter, goodbye.

This concludes today's conference call. You may disconnect your lines.