Polaris Inc (PII) 2004 Q1 法說會逐字稿

Good morning, my name is April, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Polaris Industries’ First Quarter 2004 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press "*" and then 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 first quarter 2004 earnings conference call. Mike Malone, our Chief Financial Officer and Tom Tiller, our President and Chief Executive Officer will be participating in the call. 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 risks and uncertainties. There are number of important factors that could cause results to different materially from those anticipated. Additional information concerning the number of these factors can be found in Polaris's 2003 Annual Report and in the 2003 Form 10-K, which are on file with the SEC. Now, I'll turn it over to Tom. Tom?

Thanks, Richard. Good morning everyone. Thank you for your interest in Polaris. We are pleased to report increased sales and earnings per share for the 24th consecutive quarter. For the first quarter earnings were 32 cents per share, up 14% from last year on 10% sales growth. This was a record first quarter. The results exceeded our expectations and were driven by balanced growth across the Company. Every division delivered sales growth and margins expanded nicely.

The balance sheet and cash flow also showed improvement from the prior year. 2004, the 50th anniversary of Polaris, is off to a good start.

Our expectations for the remainder of 2004 remain unchanged from 90 days ago. We expect for the full year earnings per share growth of 8-13% or $2.65-2.77 per share on mid-to-high single digit revenue growth.

And with that overview, let's turn to the individual business segments, starting with the All-Terrain Vehicles division. The ATV division had a decent quarter with 3% shipment growth. The ATV industry retail environment was healthy during the quarter. Industry retail sales in the United States were up 8% from one year ago. I would describe the promotional environment as relatively unchanged from 90 days ago, still competitive, but promotional levels are not increasing or decreasing materially. Most promotions continue to offer low interest retail finance programs for periods of 6-12 months and may include dealer or consumer rebates.

Polaris is doing well with international sales of ATVs, RANGER Utility Vehicles and with the new Sportsman 700 EFI, world’s first fuel-injected 4x4.

The first quarter entry of John Deere has not made a noticeable difference to either the ATV industry nor Polaris to-date. Dealers reported receiving shipments of Deere products in February, and retail sales of Deere ATVs have been well less than 1% of the industry. Polaris has not lost any dealers to John Deere. While we are careful not to underestimate any competitor, our primary competition in ATVs for the next few years will remain Honda and Yamaha, not John Deere. We continue to expect for the full year that industry sales of ATVs will be up mid-single digits and we expect Polaris’s sales growth to be about the same. Polaris will introduce some impactful new models, which should help drive profitable growth.

Snowmobiles. The snowmobile business will show nice improvement in 2004 versus 2003. This past winter was a decent year for snowfall and riding. Most regions in the country had good snowfall and consumers were able to accumulate miles. Industry retail sales for the season were down slightly from a year ago, but that was expected due to the high number of low mileage machines in consumers’ hand, particularly in the Midwest.

The primary goal that Polaris accomplished this year was a substantial reduction in dealer inventory of snowmobiles, which are about half of what they were at the same time a year ago. You will recall that we substantially reduced snowmobile production last season and that move has paid off.

To drive future growth, we’ve introduced some dramatic innovations for the upcoming season, including an entirely new chassis, the IQ. This chassis has been in development for several years. There are two new models, both powered with an all-new 900cc engine, designed to produce both terrific power and lower emissions. The new Fusion and 900 RMK models will be the flagships of the line for the upcoming season.

While dealer orders and snow checks are not yet complete, we expect the Snowmobile division to show 15-20% growth this year.

Personal watercraft. Shipments of personal watercraft were up sharply for the quarter, as we began deliveries of the new four-stroke MSX Personal Watercraft. The 46% increase in shipments is a little misleading though, as much of it was due to timing and relatively soft comparisons. Perhaps the more telling point is the fact that industry retail sales so far this season are about flat with the year ago levels. Of course, we are only now entering the heart of the retail selling season, so the next few months will be the deciders. Personal watercraft sales, which represent about 3% of the Company total are expected to remain about flat to slightly up for the full year. Polaris will do just about the same as the industry.

Victory motorcycles. We had an awesome quarter, our best yet in Victory motorcycles. Shipments were up a solid 40%. The interest in motorcycles generally remains strong and growing. Industry retail sales of heavyweight cruiser and touring models were up 11%. Of course, Victory sales continue to dramatically outpace the industry. And while it's hard to quantify, there is definitely a buzz building around the Victory motorcycle brand. You can see it everywhere you go; motorcycle shows, rallies, and dealerships. Average retail selling prices are up dramatically. The new models, both the Vegas and the Kingpin, are hot and winning a lot of awards. The press is behind us and both the volume and quality of dealer applications is growing fast, which not only helps Victory but also the rest of the Polaris line. In short, the Victory train is rolling and people want to get on board. And while the absolute numbers are still small, we are definitely seeing Victory as a significant growth engine for the Company.

Parts, Garments, and Accessories. We had a very strong quarter in PG&A. 18% sales growth was balanced throughout the division across product lines and commodities. As you would expect the snowfall benefited first quarter PG&A, but the growth rate for snowmobile-related PG&A was not dramatically different from the rest of the division. We are benefiting here from solid new product innovation, compelling marketing, and solid execution. We should continue to grow PG&A sales somewhat faster than the overall company.

International. International sales remain solid, up 28% for the quarter. We had nice growth in both ATVs and PG&A. International continues to be a great story for the Company, and we are executing very well outside of North America. The usage of ATVs, particularly in Europe continues to increase for both on-road and off-road applications. International sales of all products now represent more than 10% of the total company sales.

In terms of the future, as we look towards the rest of the year and beyond, we have a number of things to watch carefully. Each of these factors can impact the business either positively or negatively. Certainly, we are seeing commodity inflation; prices for steel, aluminum, and energy are all substantially higher than they were a year ago. At this point, we believe the situation is manageable, but margin improvement will be dampened somewhat.

Inventories are in good shape. Total dealer inventory is 7% lower, and factory inventory is 11% lower than at this time last year, even with a 10% sales growth. We expect interest rates to go up. The question is how much and when. We are planning for a modest increase, perhaps 50-100 basis points later in the year. Terrorism remains a concern but is largely unpredictable. And finally, our 50th anniversary celebration will be a terrific opportunity to thank our customers, build the Polaris brand, deliver innovative new products, and attract positive attention to Polaris. We have factored all of these things into our thinking about the future.

To summarize, before I turn it over to Mike, we had a good first quarter with balanced growth across the Company. We see the risks and opportunities that lie ahead about equally balanced and we are confirming our full year guidance. With that, I would like to turn it over to our CFO, Mike Malone.

Thanks Tom. I share Tom’s enthusiasm about the first quarter results. This marks our 24th consecutive quarter of increasing sales and earnings and I feel confident in our ability to deliver further improvements for the remainder of the year. Let me give you some qualitative comments and why we feel confident in delivering record full year 2004 results, beginning with ATVs. Sales of ATVs in 2004 are expected to continue to grow driven by new products and ongoing modest growth in the overall ATV industry. Let me remind you that our ATV reported sales include our RANGER and international businesses that are growing significantly faster than the overall industry and our base North American ATV business.

We continue to expect full year 2004 Polaris ATV sales to increase in the mid single-digit range, reflecting a continuing competitive marketplace and a continued aggressive but stabilized promotional environment. Personal watercraft sales for the full year are expected to increase modestly as we begin -- began shipping our first four-stroke watercraft models here in the first quarter. The improvement in the watercraft sales dollars will also be aided by a significant average sales price per unit increase throughout the year as a result of the mix change to the higher-priced four-stroke models.

Victory motorcycles are expected to continue to grow significantly and have another strong year as the award winning Vegas continues to gain share in the Custom Cruiser segment, and the new Kingpin model enters the Classic Cruiser market segment. The new Kingpin has already begun to win awards with the recently announced award of the V-Twin Bike of the Year by V-Twin magazine. Additionally, our dealer network continues to expand and gain strength and the overall heavyweight cruiser market continues to grow. We are increasing our guidance slightly, and now expect Victory sales growth in the mid-20% range for the full year 2004, up from the 20% guidance we gave in January.

The first quarter was a good start for snowmobiles in 2004, although the first quarter is historically the smallest quarter of the year for snowmobile sales. With better snowfall this past winter in most regions, dealer inventories at about half the level of a year ago, and the introduction of two significant new models this spring, we continue to expect a much improved year for snowmobiles in 2004.

Dealer orders are coming in at levels we expected and as we do every year, we match our snowmobile production to the dealer ordering levels. Although we are still completing the order process we expect snowmobile shipments for 2004 to be up in the 15-20% range, a significant change in trend from the last couple of years. We are very excited about our snowmobile business in 2004.

Parts, garments and accessories sales are expected to increase slightly faster than the overall company sales growth for the full year 2004. This guidance is up a little bit from previously issued guidance as snowmobile-related PG&A sales were strong during the first quarter.

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 continue to benefit from cost reductions, efficiency improvement initiatives, and savings from more effective sourcing of component parts. Based on what we saw in the first quarter, we expect the promotional environment, particularly in ATVs, to remain aggressive but stable throughout the year and our guidance is based on that expectation.

For the full year 2004, we continue to expect a 20-40 basis point improvement in gross margins which is unchanged from our previous guidance. Although as expected we experienced higher gross margin expansion during the first quarter, we are beginning to experience commodity cost pressures, particularly for steel, aluminum and fuel which together represent a little less than 10% of our total cost of sales.

We are exploring various alternatives to offset these commodity price increases, including potentially a temporary surcharge added to the invoice price to our dealers. Our gross margin guidance has factored in the impact of these raw material cost increases based on the information we have today, we will update you throughout the year as this situation develops.

Operating expenses are expected to increase slightly as a percentage of sales for the full year 2004, as we continue to invest in research and development projects, and dealer development initiatives. Additionally, in 2004, we will be incurring the planned one-time cost associated with our 50th anniversary celebrations.

As we experienced throughout last year, income from financial services had a strong first quarter growing 86% over the prior year first quarter with the majority of the growth coming from profitability generated from the retail credit portfolio. Our expectation is that income from financial services will continue to grow throughout 2004 although at more modest rates of increase than what we have experienced over the past few quarters.

At March 31, the wholesale portfolio related to floor-plan financing of our dealers in the United States was approximately $528 million, about flat with last year’s first quarter receivable balance of $524 million. Credit losses in this dealer portfolio continued to be minimal averaging well less than 1% of the portfolio over the life of the partnership. The household retail credit portfolio balance at the end of March was approximately $536 million, up significantly from $375 million a year ago at this time, and up slightly from $517 million at the end of 2003.

For the first quarter, we financed about 30% of our products sold to consumers in the United States through the household relationship, approximately equal to the 32% we realized 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 the sales line on the income statement, we are earning some of that back with higher profitability from the retail credit business.

Receivable losses in the retail credit portfolio have remained stable averaging a little more than 3% of the portfolio, which is in line with our expectations. Consistent with what we have discussed in prior calls, we have not seen deterioration in the delinquency or loss trends in either of the wholesale or retail credit portfolio.

The provision for income taxes has been recorded at a rate of 33.0% of pre-tax income for the first quarter of 2004, which is up slightly from the 32.5% recorded throughout last year. Our expectation is that the income tax provision rate will remain at 33% of pre-tax income for the remainder of the year.

Let me take a moment to talk about the impact of currency fluctuations on our operating results. In general, our foreign currency hedging strategy is to protect our downside risk yet preserve some upside opportunity if it's economically feasible. For the first quarter of 2004, the currency fluctuation of the Canadian dollar and euro had a positive impact on sales and gross margins while the Japanese yen had a negative impact on gross margins when compared to the first quarter of a year ago. In addition, the gains and losses caused by currency movements in our foreign currency cash transactions and associated hedging activity during the quarter are recorded in other income, which is the primary component of the modest $371,000 expense in the first quarter this year. You will recall that in the first quarter of last year the effect of the currency movements were the primary component of the $2.5 million of other income.

We currently have foreign currency hedges in place for the remainder of 2004 for the Japanese yen, which average approximately 108 yen to the dollar and contracts through the third quarter of 2004 for the Canadian dollar, which average about 72 cents. We currently do not have any euro currency hedging contracts in place for the remainder of the year. Based on the foreign currency hedges that we have in place and the current exchange rates of each of the currencies today, we expect a positive impact on profits from the Canadian dollar and euro currencies for the full year 2004 compared to last year, while the Japanese yen is expected to have a negative impact on the gross margins for the full year. Our current expectation is that net-net for all the currencies combined, the impact on profit for the full year 2004 will have somewhat of an offsetting impact resulting in perhaps a slight positive variation year-over-year.

Now, let’s take a look at some balance sheet and cash flow information for the quarter. We ended the quarter with $26.3 million of cash on the balance sheet, up 46% from the first quarter a year ago. We were able to reach this level of cash after share repurchases of 474,000 shares at a cost of $19.8 million and paying cash dividends of $9.8 million during the quarter in addition to making appropriate investments in the business through capital expenditures and tooling totaling $18.2 million.

For share repurchases, we currently have approximately 3.9 million shares remaining under our existing board authorization, and expect to continue our repurchase activity throughout the year.

First quarter cash flow items are as follows. Depreciation and amortization was $13.0 million, other non-cash items netted a positive $6.4 million, and working capital items were a net use of cash flow of $57.8 million, which is a significant improvement from the $92.6 million use in the first quarter of last year. This resulted in net cash flow use for operations of $24.1 million for the quarter compared to $69 million used for operations in the quarter a year ago. This significant improvement in cash flow is primarily due to the lower inventory levels than a year ago, particularly ATV factory inventories. As we have mentioned earlier, we expect our operating cash flow to increase for the full year 2004, finishing the year at a level well above the $156 million recorded for the full year last year.

Capital expenditures for the full year 2004 are expected to be in the range of $85-95 million, as we continue to invest in new product tooling and engine and technology projects in addition to the incremental funding of $22 million for our new product development facility in Wyoming, Minnesota. We continue to expect depreciation for the full year 2004 to be in the range of $60-65 million.

Accounts receivable at the end of the quarter were $55.0 million, down 2% when compared to the first quarter a year ago. The inventories at the end of the quarter were $201.3 million compared to $227.4 million at the end of the first quarter last year, a decrease of 11%. We have made a conscious effort to reduce our factory inventories and have seen results of that effort over the past few quarters. Debt to total capital was just 7% at the end of March, down from 23% last year at this time.

Now, to summarize. For the full year 2004, we expect balanced growth across the company with total company sales increasing in the 5-8% range with EPS growing to $2.65-$2.77, an increase of 8-13% over the $2.46 per share earned last year.

Second quarter 2004 sales are expected to increase in the range of 5-9% with earnings per share expected to be in the 50-53 cents per share range, a 6-13% increase over last year’s second quarter earnings of 47 cents per share.

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

Yes, sir. At this time, I would like to remind everyone in order to ask a question, please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Go ahead, April.

Your first question comes from the line of Ed Aaron with RBC Capital Markets.

Thanks. Good morning and congratulations.

Thanks, Ed.

A couple of questions for you. First, you mentioned that snowmobile sales should be up about 15-20% this year. Could you talk a little bit about your market share expectations for next year's snowmobile season? In other words, do you think that the new products are going to enable you to gain back some share? And then also I was hoping you could elaborate a little bit on the dealer development initiatives. How much of the selling and marketing increase was due to the dealer development, and then could you maybe just give us a progress report on where you are in that process?

Okay. Let me take a part of that, and Mike maybe you can take the other part. In terms of snowmobile market share, well, we haven’t issued any specific hard guidance. I would expect model year '05 should see Polaris gain some market share as a result of the new product and a variety of decisions that we've made in terms of where inventory is and I just -- I feel good about where we are there and I wouldn’t think it’s going to be tremendous share growth, but I would expect us to have modest share growth in 2005 in snowmobiles.

Regarding dealer development, we are working hard to improve our dealer network. We’ve mentioned this not typically during conference calls but at conferences and annual reports and that kind of thing. During the quarter we actually upgraded approximately 50 dealers; in other words, replaced poor-performing dealers with approximately 50 higher-performing dealers with substantially greater productivity in those dealers, more than double. Probably if you think of the key product lines that that’s affecting, I'd say motorcycles would be number one, I alluded to the fact that we have a lot of interest right now from some very high-quality dealers in carrying the motorcycle as they have seen success in the last 18 months, a couple of years in Victory, it represents probably one of the best growth opportunities for a dealer in the North American power sports industry right now. So, there’s a long list of prospects there. With regard to specific numbers on dealer development expenses, Mike, I don’t know what you want to say about it.

Well, I guess what I'd say is where that shows is in the selling and marketing line of our P&L and as -- we are up 17% for the quarter and we are up quite a bit last year in that line as well. That’s where it shows up. We are making investments here for the long-term and expect to continue to make investments in our dealer development initiatives and long-term we’re going to see significant benefit from that.

Okay. Thank you.

The next question comes from the line of Bill Lerner with Prudential Equity Group.

Thanks guys, few questions. One just a follow-up on the comment you guys had about the temp surcharge of that fuel or general energy pricing. Could you talk about how difficult that might be in what seemingly is a very competitive environment? That’s the first one and I have a couple of quick follow-ups.

I think what Mike said is we are considering that, we have not made a decision on that. But there are people in our market, particularly in the more utility end of things that are announcing fairly big surcharges. We’re not in that frame of mind, but if we continue to see continued commodity pressure, we do use steel and aluminum, and plastics and other oil-dependant commodities that at some point we may do that. We have not announced anything to do that yet and if we do I would suspect it would be relatively modest, Bill, but I don't see it in a situation where it would jeopardize our competitiveness, we are pretty careful about that.

Okay. Thanks Tom, and then the other would be generally speaking, you know, as you see the slowdown in unit growth for ATVs for the industry and then you guys moving towards seemingly what is industry average, should we be concerned about the fact that now there is this renewed dependence on snowfall annually, obviously, this season we got a great lift in P&A and inventory is low and we'll see the unit opportunities in snow next year, obviously, much smaller than the ATV segment, but how -- can you kind of quell some concerns about that, if there are any?

Yeah, I think the year is unveiling very much the way we had anticipated it would. I think rather than being dependant on just one segment of our business what we are seeing is balanced growth, I mean, every division of the Company grew in the first quarter and I think that’s a terrific thing. With regard to ATVs, we are expecting mid-single digit growth, I think that’s fine. We are not in the position where I would consider us to be tremendously weather-dependant. Snowmobiles are well less than 20% of our sales. If you went back not that many years, it would have been 80 or 90% of our sales. We have demonstrated the ability to hit the number through wars, through tough weather, through floods. I am pretty confident that regardless of the weather patterns over the next several years that Polaris should continue to be able to drive profitable growth, and I am very excited about the balanced growth, you know, I'd much rather see reasonable rates of growth across the whole company than being totally dependent on any one part of our business.

Okay. I'll leave with that, thanks guys.

The next question comes from the line of Bob Evans with Craig-Hallum Capital.

Good morning. Nice job in the quarter.

Thanks Bob.

First, I think I missed this snowmobile industry sales, what are you expecting for the industry this year -- upcoming year?

What we said -- we didn’t say what retail sales would be for the coming season, that does depend on weather and other factors as well as you know.

Right.

We said for the past season, for the '03-'04 season, that retail sales were down slightly as we expected that they would be. And we said that our wholesale shipments for snowmobiles for this calendar year will be up 15-20%, but we did not make a prediction on what retail sales would be for snowmobiles for the coming season.

Would you care to make a prediction on the industry for a wholesale shipment? That’s, I guess, what I was getting to, in terms of --

That depends on what people outside of Polaris do, and I really can't predict that intelligently, Bob, I am sorry.

Okay. I'm just wondering if you are looking of double-digit kind of growth in the industry or if you would expect -- you are expecting to grow faster, and I know you're expecting to grow faster than the industry. I am just trying to get a sense of the magnitude.

Yeah, I would expect that our shipments will grow quite a bit faster than the industry because we took inventory down more aggressively than the rest of the industry. And, you know, our new product came later in the cycle than either Arctic's or Ski-Doo's, the two primary competitors in the business. So, you would guess that we would see a little bit bigger lift than they would. But, you know, it’s a wildcard, you don’t know what their production decisions are going to be. I would -- if you can get them to email those to us, we would really appreciate that; that would be very good.

I will let you know.

Okay.

Can you also talk about kind of your targets or what your thoughts are as it relates to operating expenses as a percentage of sales, I know you are making investments in various parts of your business, particularly the dealer side of the business, but as you see this unfolding, say, over the next kind of year or, you know, kind of 2-3 years and where do you want to drive that?

Well, I think, obviously we expect to be able to leverage our growth on the operating expense line. We have made investments in last couple of years, particularly in significantly enhanced research and development activities, some engine technologies, a lot of the new products that you see with our new snowmobile products and the ATV products that we will be introducing are all investments that are affecting operating expenses. The dealer development initiative will continue. So we’re going to continue to invest where we think it's appropriate, but for the current year our expectation is that expenses as a percent of sales will be flat to grow a little bit and over time that we'll see leverage and they will be lower as a percent of sales.

What’s the appropriate amount of leverage that you think you can see, I am just trying to get some sense of magnitude, is that 50 basis point, 100 or I am just trying to get a sense of what you think you can get to over time?

Well, I don’t know that I want to throw a target out there, you know, over time. I mean, I would expect that we should be able to get to the point where we were historically a few years ago, I think that would be reasonable.

Okay. Fair enough. And the 2 or 3 products this year that, you know, as you look in to '04 that you think will have kind of the biggest impact or more meaningful impact on the top line?

I think that certainly in the snowmobiles, which we've already announced we have the 700 EFI, that’s the flagship of the ATV line. Victory in total is driving great growth and we also have in combination with the 50th anniversary some pretty significant new products coming later this year, but obviously I can't discuss what those are yet.

Okay. Thank you.

The next question comes from the line of Shalini Aggarwal with Merrill Lynch.

Good morning.

Good morning.

Good morning.

A question on what initiatives are you taking to increase awareness of your brand, especially in this anniversary year, and if you can talk a little bit about the demographic base or the profile of your Victory purchasers, that would be great. Thank you.

In terms of building the brand, there is things that we do all the time, you know, basic advertising, mass-market advertising, more enthusiast advertising. We also have a strong presence at rallies and events. We attend approximately 300 events a year in front of about 6.5 million people whether that’s the international motorcycle shows, whether that might be some type of Ag fair where you would showcase ATVs, it could be both shows, those types of events and those are pretty standard, we’ve done those for many years.

In terms of the 50th, we have a number of events that are unique this year that will be designed to bring attention to the company. Earlier this year when we introduced the new snowmobile, we actually set the world record of the largest snowmobile ride ever attempted over 1000 people -- nearly a 1000 people in Roseau, Minnesota, our home, that was in early February, the line of over 20 miles of snowmobiles, that was pretty fun. We're going to ringing the bell on New York Stock Exchange, we anticipate, in early May. That will be the first time that Polaris has done that, that will be kind of fun. We have a number of rides that are set up for each of the different product lines including 50 states in 50 days, it’s going to be all designed to show up at the big 50th anniversary celebration which will be here in Saint Paul, Minnesota, where we expect tens of thousands of people, we don’t know precisely yet but, you know 25, 30, 35,000 people could be at the Minnesota State Fair grounds in July 21st for a big celebration. So, those are some of the things.

With regard to the demographics, majority of our buyers are male, early 40s. You see it varies by business, but average incomes would be in the 60,000 range for snowmobiles and all-terrain vehicles and substantially higher than that for watercraft around 95,000, around 75,000-80,000 for Victory motorcycles.

Great, thank you.

The next question comes from the line of Tim Conder with A.G. Edwards.

Thank you and first of all, my congratulations gentleman.

Thanks Tim.

Couple of clarifications, Mike, you said that the steel, aluminum, and resins and so forth is at 10%, was that of cost of goods sold or of overall sales?

Cost of sales, less than 10%.

Okay, great. And then in the SG&A, you mentioned that you have some one-time expenses this year for the 50th, any color on the dollar amount roughly, how much you are spending there, so we can kind of adjust that on a go forward basis?

Less than 5, but more than 1 million.

Okay. Sounds fair. Couple of other clarification issues, FOREX in the first quarter, Mike, what was the impact to revenues and gross margins?

Well, we don't give specific impact. I talked in my speech about the relative impact of the currencies. They were positive for the Canadian dollar, and euro, and other miscellaneous currencies. They were negative on the yen. Net-net on gross margins, I would say it was positive and by the time you get down all the way to the bottom line net income, it was slightly positive.

Okay. A little bit of question on your sled sales were a little bit surprising in the first quarter granted it’s not a big dollar amount, but given that you don’t produce and you had a little bit stronger season, was that part of your inventory draw at the company level, I guess, how much of inventory pull down was ATVs versus sled?

The majority of it was ATV-related, Tim. You are right; we don’t typically ship many sleds in the first quarter. We have before; I think if you go back 2 or 3 years ago, we shipped a few sleds. Basically, what we did this year was, we offered dealers that had excellent sell through and still had snow on the ground, access to certain early model year '05 product if they were interested in it and a number of dealers stepped up and bought snowmobiles. Because we haven’t had, you know, terrific snowfall in five out of the last six years, that’s not something that we've typically done, but I think if you check you will see that some of our competitors have done that previously as you get towards the end of the season, again for the dealers that are pretty much completely there and think that there is some incremental business there. They order a model year '05 sled and then if they aren’t successful in selling it, it’s not an old model that they have to carry through its new product. So not a huge number as you mentioned, but that’s what’s going on.

Okay, and then if I may, Tom, you talked about the dealer development there. What percent would you say are you completed with? I think about 2 years ago at your July dealer meeting, you outlined the beginnings of that initiative, what percent are you completed with and then you also cited, is that an average number greater than two times the returns, for the new dealers that you are getting for the deal?

Yeah, that’s an average number. It's about 2.5 times as productive. Our new dealers compared to our old dealers. And I would say, you know, I can give you a percentage or whatever, but I would say we are still very early in the dealer development process, Tim. This is going to take, you know, it took Harley about 10 years from, you know, the mid 80s to the mid 90s. We have been at it for a couple of years. I think we’ve made some decent progress, but I would say that it’s still very early and that remains a significant long-term opportunity for the Company. I think if you look at Polaris, generally speaking, we are pretty strong on the product side, we are pretty strong on the cost and efficiency side, we diversified the Company. I think improving the brand and improving the distribution are two things that we are going to focus on the next 5-10 years. It won’t be, you know, you are not going to see an overnight thing that will make the number move in 15 minutes, but improving our brand, improving our distribution are two very, very important things that we are focused on around here.

And Tom when you talk new dealers, are these -- is a part of them existing dealers that are purchasing weaker dealers or dealers that you want to get rid of, are they consolidating markets? I guess the bigger question is your overall dealer base, how has that number trended, and then in particular with Victory you had about 300 dealers where do you stand now and where do you see that by end of '05, for example?

Yeah, the overall dealer count, I would not anticipate to increase materially for sure. We have enough coverage. What we are trying to do is improve the quality and strength of our dealers, particularly in metro areas for example, historically Polaris because of it being primarily snowmobiles and ATVs, we are stronger in rural areas. We are working hard on trying to improve in metro areas and I think seeing some success there. The Victory dealer count is going up gradually, it's above 300, I don't have the number here off the top of my head, Tim, but it's up from that number and we, as I mentioned, are seeing very high-quality prospects. In some cases those dealers are consolidating markets where they may take a smaller dealer and put in a larger dealership or more effective dealership. It's not all about size, it's about representing the brand well, giving the customer a good experience, good service capability, those kinds of things. So, it's an important but it will be a gradual trend, it's not something that investors going to see happen in a year or even two, but we think it's very important building the long-term value of the brand and the Company.

And I apologize, but two last questions. First of all, when do you anticipate Victory turning profitable in the operating margin line? Number one. Number two is on ATV's, given that, I think, as somebody alluded to your core growth appears to be moderating and actually a little less than the market in the first quarter, maybe that was a timing of shipment issues. But if you -- if interest rates increase, are you worried about your growth in ATVs slowing even more given that the promotional environment as such or would you do more promotions to keep that growth rate where it is and would you anticipate that for the industry, I guess?

In terms of Victory or any other division's operating performance, we don't disclose operating performance by division for competitive reasons, that’s been a long-standing policy of the Company and I don’t see that changing. In terms of the growth rate of ATVs and how it's affected by interest rates, I think, you know, as I mentioned in my prepared remarks, Tim, we try to -- when we give guidance we try to the best of our ability factor in all the things that we can see. As I mentioned, we anticipate interest rates going up 50-100 basis points throughout the year. If they go up 500 basis points, then I think, we may be -- it may be difficult for us to reach our objectives, but I don’t anticipate that happening. What we said for ATVs is that we expect mid-single digit growth in ATVs this year, and I am happy with that. I think that’s -- given all of the factors, what we are looking for as a business, I think that’s just fine. I would point out that the total company is growing substantially large -- substantially faster than it has been for the last several years and it’s more balanced growth. So I think that that’s a good thing. I guess, and may be this is a more qualitative comment, but we tend to be fairly even headed here. We don’t get maybe as excited when something is going great, maybe we don’t jump off the top of the building when something isn’t going perfectly great. At any -- in any part of the Company I would point out the fact that we have delivered 24 quarters in a row here of revenue and earnings per share growth and 21 years of increased earnings. So, I am pretty confident that '04 is going to be a good year.

Well, again, congratulations and you do have a very, you know, a very thin air as far as people able to demonstrate high returns on equity and consistency.

Okay thanks.

Next question April?

The next question comes from the line of Bryan Knoepp with FTN Midwest Research.

Good morning guys.

Good morning.

Hi, Brian.

Could you guys talk a little bit, I know that, you know, there is a couple of components to the gross margin expansion, you have obviously got cost savings that have helped you a lot in the past and you’ve got incremental promotions that will probably hurt a little bit, can you talk sort of qualitatively about what the drivers are to cost improvements, you know, for example low cost outsourcing of non-key products and so on, could you just talk about what some of those initiatives are?

Yeah, I think there's not a whole lot of new initiatives here Brian. This is the stuff that we have been working on for quite a while. It's the same things that we have talked about with model consolidation and improvements in the factories with efficiency drivers and productivity enhancements. We are looking to source product more effectively on a global basis; we are making some inroads on some of that with some of our component parts. You know, we are focused on improving the quality of our products and reducing the rework and efficiency costs that are related to that including warranty and other claims. So, there is a number of those initiatives that we've been working on for quite a while and those will continue.

The only things I would add to that, Brian, is obviously as Victory grows that’s a beneficial factor because it’s working off from pretty small volumes in comparison to our other businesses. So, fairly modest increases in volume can have a very positive effect on margins there and then just mix. If you look at what’s growing in the company, it tends to be, you know, PG&A for example is very helpful, in our highest margin business that grows margins also. So, I think all of the things that Mike mentioned and also Victory and positive mix.

Okay, that actually leads into one of my questions, would you -- Mike, would you be willing to give what the warranty accrual was in 1Q this year versus last year?

Certainly.

Thanks.

The warranty balance at the end of March on the balance sheet is a little more than $26 million -- 26286. A year ago at this time it was 26933. So, pretty much at the same level that it was the year ago, which is kind of the same story at the end of the year. At the end of the year it was -- '03, it was about 30.5 million and that was pretty comparable to what it was a year before that.

Are you seeing the expense equal what’s going on, could you talk about what the actual expense in your P&L was in the quarter?

Yeah, as it was last first quarter and historically is, the claim activity is higher than the provision rate during the quarter. Because of the seasonality, particularly in snowmobiles, the seasonality of claims in the first quarter is significantly higher than the expense. So, that trend was similar to what it was last first quarter and historical levels.

Okay. Tom, in the 4Q call, you helped us sort of understand where the growth in international was coming from, and you said it was up 28% in first quarter total, can you tell us like a breakout of volume and now if you're getting sort of an incremental benefit from dealer direct, can you quantify those in terms of percentage of the growth that you saw in international?

Yes. I think we talked about in the fourth quarter call really three factors driving it. One was volume, both in terms of market growing and us growing our share, secondly being dealer-direct; in other words, Polaris a few years ago started the process of replacing distributors in very large markets with Polaris employees, that’s been very beneficial and then finally currency was quite helpful. I think those same three trends exist. Currency perhaps has moderated a little bit here in the first quarter compared to previous quarters, but we are seeing terrific growth in a bunch of places. You know, we have improved our market share in snowmobiles in Scandinavia; ATVs particularly in Europe are growing quite nicely. We've had some successful foreign military sales, we have grown our watercraft business a little bit, we have not yet materially sold any motorcycles outside of North America. So, that’s something at some point down the road that could be a further growth opportunity, but I think, you know, again, if you look at it over the longer-term horizon, a few years ago we said we were going to get serious about international and we have put about roughly 100 people on the ground, both here in Medina and outside the U.S. particularly concentrated in the larger markets and I think that over the last few years those people have come on board really working hard to get products that are designed for the international market, do a better job marketing those products, building the dealer networks and executing and I am really proud of what they have done.

All right, thanks a lot guys, have a good day.

Thank you.

Next question April.

The next question comes from the line of Assia Georgieva of Stanford Group.

Hi, good morning and congratulations again. I will try to keep it short. Two questions, first of all, higher promotional costs this quarter is one of the factors you mentioned, can you talk qualitatively how average prices were trending for you for ATVs and snowmobiles in the retail environment?

I'd say that average retail selling prices for all of our products would be trending up. That’s not data that we have perfect visibility into, some of that is quantitative. We, of course, know what our wholesale sales prices are doing, but in terms of what's happening at retail we don't have terrific data -- terrific visibility into that, but my sense is that for the total business, average retail prices are trending up. A number of factors are driving that. I mentioned Victory. We have seen substantial increases in, as more higher-priced models are developed and then sold, that’s driven average selling prices of quality, the inventory there has improved, our watercraft average selling prices are up year-over-year as a result of four-strokes being more expensive than comparable two-strokes. In terms of retail, there is not a lot of those that have retailed yet, so that’s probably in front of us. ATVs would be up a little bit, products like the Sportsmen 700, EFI selling relatively more than used models, which are at the lower end of the line and snowmobiles have trended to larger displacement products. So, I would say, you know, across the product lines, we've seen a trend of higher average retail selling prices. But I don’t have perfect data for you.

Okay. No, this is very helpful, thanks. And sort of a longer-term view on the business, you did discuss improving the brand and the distribution network. What do you think over the next 3 years would be sort of the sales potential for ATVs and snowmobiles if you take out some of the one-time weather factors and just took a 3-year or a 3-5 year view on your businesses?

Yeah, we are not prepared this morning here to give, you know, quantitative guidance for the next 3-5 years in a quarterly call, but we certainly anticipate the business growing, a lot depends on what the external environment is, you know, are we going to have a terrorist event or are we not going to have a terrorist event, what snowfall looked like, all those sorts of things. But I would point to the, you know, last 5 years we have grown the business roughly 7%, top line we have grown earnings way faster than that -- we have grown earnings per share way faster than that and if we can see an environment that doesn’t have an uncooperative weather pattern and doesn’t have major terrorist attacks and the worldwide recession, if we can see a decent external environment, I would anticipate the growth rates of the company to be higher in the next several years than they have been in the last several years, but in terms of the specific number that's not something I'm prepared to do it this morning.

Okay, well, thanks again and congratulations.

Thank you.

April, that's all the time we have. I apologize for not being able to get everyone's questions. We want to thank you all for participating in today's call. Please remember that our presentation and responses to your questions contain certain statements that could be considered forward-looking for purposes of the Private Securities Reform Act of 1995 and that actual results could differ materially from those projected in any forward-looking statement. Thank you again for listening and I will talk to you next quarter. Goodbye

This concludes today's conference call, you may now disconnect.