Polaris Inc (PII) 2004 Q2 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 second quarter 2004 earnings 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 star then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you.

I would now like to turn the conference over to Richard Edwards. Please go ahead, sir,.

Thank you, April.

And good morning and thank you, everyone, for joining us for our second 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.

As before, 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 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 the number of these factors can be found in Polaris' 2003 annual report, and in the 2003 form 10-K which are on file with the SEC.

Before I turn it over to Tom, I also want to remind you that we will be celebrating our 50th anniversary next week with a number of events throughout the week. The celebration will be held at the Minnesota State Fairgrounds in St. Paul, Minnesota.

On July 21st and 22nd we are hosting an analyst investor meeting in conjunction with our new product introduction dealer meetings. You will have an opportunity to meet many of the Polaris managers and dealers, see all of our new product introductions, demo rides, demo ride some of the new products, and see many of the historical products we have introduced over the 50 year history of Polaris. If you are interested in attending please let me know. Tom will say more about this event shortly.

Now, I will turn it over to Tom. 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 25th consecutive quarter. For the second quarter, earnings were 54 cents per share, up 15% from last year on 12% sales growth. The quarterly results were slightly ahead of our expectations and were driven by stronger and balanced growth across the company. Every division delivered sales growth, and margins expanded. And while growth has accelerated, the balance sheet and cash flow also showed solid improvement from the prior year, primarily as a result of a 12% decline in factory inventory.

Based upon a successful first half, we have narrowed, and modestly raised our expectations for sales and earnings growth for the full year. We believe 2004 will be our 23rd consecutive year of earnings growth at Polaris, with sales growth of 8-10% and earnings per share in the range of $2.72 to $2.80 per share, up 11-14%. Compared to 90 days ago we have increased the lower end of the EPS range by 7 cents and the upper end by 3 cents per share. [COUGH] Excuse me.

And with that overview, let's turn to the individual business segments, starting with the Personal Watercraft division. The Watercraft business has had a decent first half of the year. Both Polaris and industry retail sales are slightly higher than a year ago, and consumer acceptance of the 2004 model line has been good. The main trend that is affecting the entire industry this year is a fairly rapid shift to four-stroke machines. This year about half of the watercraft that will be sold at retail will be four-stroke machines and next year we expect that percentage to approach 2/3. Consumers seem willing to pay the additional price to get a cleaner, smoother and quieter machine. Structurally ,both the industry and Polaris' position within the industry haven't changed much. We continue to believe that watercraft will continue to represent about 3% of our sales and are not expected to grow much until the category experiences growth.

Victory Motorcycles. As things continue to go well for Victory Motorcycles. The motorcycle industry remains very strong and Victory is experiencing retail sales growth at a rate approximately five times that of the industry growth. We are seeing continued improvement in all aspects of the business. The product is better in terms of its attractiveness, costs and quality. The dealer network continues to grow and strengthen, and the brand and consumer following continues to build.

For example, as part of our 50th anniversary we expect the largest gathering of Victory Motorcycles ever. Members from 13 chapters of the Victory Riders Association are taking their vacation this year by riding their motorcycles to St. Paul. Groups are coming from all over North America including places like California, Texas, Georgia and so forth. We expect over 700 riders to attend the event. To be sure, a passion for the Victory brand is at an all-time high. For the full year we continue to expect Victory Motorcycle sales to increase in the mid 20% range.

Snowmobiles. As we expected, we are seeing improvement in the snowmobile division this quarter and this year. Shipments for the quarter are way up, 65% compared to a weak second quarter last year. I would say that consumer acceptance of the 50th Anniversary model year '05 line has been pretty good. Snowchecks, while they are up from the previous year, frankly were a little less than we had hoped but still fairly good. Consumers reacted positively to the new Fusion and 900RMK models, those were the flagship models that we introduced in February, but many customers are waiting to see that same new IQ chassis with a smaller displacement engine. We definitely heard that from customers. We continue to expect growth from the snowmobile business to be in the 15-20% range for the full year.

ATVs. The ATV division, our largest business, had another solid quarter with shipments up 7%. Retail sales of ATVs across the industry have been a bit unpredictable this year, but overall remain on a record pace and are slightly ahead of last year's rate.

For Polaris, here in North America, we have seen some rather large swings in retail results from month to month. Sometimes without a clear reason why. For example, April was a terrific month, May was very weak and June was another very good month. This does not appear to be the result of competitive or promotional efforts which have largely stabilized. Dealers are reporting fairly large fluctuations in floor traffic perhaps driven by the weather.

We continue to see strength in the upper end of the line including our RANGER and Sportsman 700EFI models, and it looks like several of our competitors are seeing basically the same thing. In reaction to rising commodity costs, things like fuel, steel, plastics and so forth, several key competitors have modestly raised prices approximately $50 to $100 per unit at retail. Polaris has also raised prices slightly to respond to increased steel, fuel and plastics costs.

Outside of North America, international ATV sales continue to grow very rapidly and they were up 55% for the second quarter. Based on the exciting new model year '05 products that we're going to introduce next week, we remain confident that ATVs will grow in the mid single digit range for the full year.

Parts, garments and accessories. We had yet another strong quarter from the PG&A division with sales up 11%. The growth came across the board from all product categories and marks the fifth straight quarter of strong PG&A performance.

International. We had another stellar quarter internationally. Outside of North America sales were up 54% versus a year ago. The primary drives were, as I mentioned, a very strong ATV sales, and also improved distribution, particularly in Europe. And for the second quarter, international sales represented over 12% of the total.

Richard mentioned the 50th anniversary celebration. Next week we are going to have our 50th anniversary celebration in St. Paul. It should be a very, very exciting week, and actually is the largest event in the history of the company. We're going to begin on Wednesday with the dealer show where we'll unveil our 2005 line of ATVs, Victory motorcycles, RANGERs, personal watercraft, and the related PG&A. The product introduction will include 12 new models and will significantly strengthen our competitive offering across the line. As most of you know, product innovation is one of the core strengths at Polaris, and I think this may be our most impressive introduction of new products ever.

Following the dealer meeting we will have a large consumer event where we will thank the tens of thousands of customers who have helped make Polaris successful over the last 50 years. And as Richard mentioned, we are also going to conduct an analyst event during the week.

Finally, during the second quarter we broke ground on our new research and development center which we are building in Wyoming, Minnesota. We've talked about this project before. We expect to begin moving in around the middle of next year, 2005.

And just to wrap it up, in summary, the second quarter was another very good quarter for Polaris. We're excited to see the growth accelerate, to see the improvements in the balance sheet and cash flow and we remain confident about the rest of the year. And with I'll turn it over to Mike Malone.

Thanks, Tom.

It is very gratifying to have generated 25 consecutive quarters of sales and earnings growth. As Tom mentioned, we are producing these results through balanced growth across all of our businesses. Tom mentioned our change in overall guidance for the full year 2004, so I'll focus my comments on the more specific guidance for the third quarter and full year, as well as comment on certain aspects of our second quarter results.

Our third quarter 2004 sales are expected to increase 5-8%, with earnings per share growing to be in the range of 90 cents per share to 94 cents per share, an increase of 3-8% over the 87 cents per share generated in the third quarter of last year. Our guidance for third quarter earnings percentage increase is slightly lower than the full year 2004 earnings guidance due to the expense related to the 50th anniversary celebration next week. This one-time nonrecurring event will result in an increase in operating expenses of approximately $2.8 million in the third quarter.

Now, let me give you some additional qualitative comments in each of our businesses. Sales of Polaris ATVs for the year are expected to continue to grow, driven by new products and an ongoing modest growth in the overall ATV industry.

I remind you that our ATV reported sales include our RANGER and international businesses that continue to grow significantly faster than the overall industry, and our base North American ATV businesses. I also want to reiterate our confidence in our ability to compete effectively in the very competitive ATV business. We will continue to lead with innovative models and technologies to maintain our position of strength in the market. We expect full year 2004 ATV sales to increase in the mid single digit range, but perhaps a bit stronger than we expected three months ago. This guidance reflects the anticipated success of our new model introductions, a modestly growing marketplace, and a competitive, but stabilized promotional environment.

Personal watercraft sales for the full year 2004 are expected to increase modestly. The improvement in watercraft sales, as we have mentioned before, have been, and will continue to be aided by a significant average sales price per you unit increase. A result of the mix change to the higher priced MSX four-stroke models, as well as an improving overall personal watercraft market.

Victory motorcycles are expected to continue to grow significantly during the year and have a strong year as both the award winning models, the Vegas and Kingpin, continue to gain share in the custom cruiser segment. Additionally our dealer network is getting stronger and the overall heavyweight cruiser market remains very healthy.

The first half of 2004 was a very good start for snowmobiles. With better snowfall this past winter in most regions, carry over dealer inventories at about half the level of a year ago, and the introduction of two significantly new models this spring, we continue to expect a much improved year for our snowmobile business in 2004. With the dealer orders confirmed we are confident in our guidance for snowmobile sales to increase in the range of 15-20% for the full year, a significant change in trend from the last couple years.

The 65% increase in snowmobile sales for the second quarter looks unusually high, primarily because the shipments in the second quarter a year ago were dramatically reduced due to the high dealer inventory levels. For a point of reference, snowmobile shipments in the second quarter of 2002, two years ago, were $91 million. Additionally, the percent increase in the snowmobile shipments in the third quarter 2004 is expected to be less than the full year percent increase as the majority of our new Fusion and RMK900 models are expected to be shipped to dealers in the fourth quarter of this year.

Parts, garments and accessories sales are expected to continue to slightly outpace the sales growth for the overall company for the full year '04. Increased innovation and driving industry-leading products and service quality continue to be the primary goals for the PG&A business.

On a consolidated basis, gross profit for the full year 2004 year is expected to show improvement on a percentage of sales basis as we continue to benefit from the efficiency improvement initiatives, and savings from a more effective sourcing of component parts. During the second quarter the promotional environment, particularly with ATV's, remained aggressive but stable, and we anticipate this trend to continue throughout the balance of the year. Our guidance is based on that expectation.

For the full year we now expect a 30-50 basis point improvement in gross margins. Most of which has already been realized in the first half results. For the balance of the year we expect the commodity cost pressures to continue, particularly for steel, aluminum and fuel. The currency fluctuation which has benefited us recently will anniversary and cease to be accretive in the second half. And the start up costs for the new products to be introduced will each put some pressure on the gross margin improvement in the balance of the year. And our full year gross margin guidance takes into account the impact of these cost pressures.

Operating expenses are expected increase as a percentage of sales for the full year as we continue to invest in R&D projects, and dealer development initiatives. Additionally, as explained earlier, we will be absorbing the nonrecurring one-time costs of approximately $2.8 million associated with our 50th anniversary celebration in the third quarter of the year.

As we experienced throughout last year, income from financial services had another strong quarter, growing 59% over last year's second quarter, with the majority of the growth coming from the profitability generated from the retail credit portfolio. Our expectation is that income from financial services will continue to grow throughout the balance of the year, although at more modest rates of increase than what we have been experiencing, as the comparables become tougher in the second half of the year and the retail credit portfolio growth becomes more stable.

At the end of June, the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $549 million, up from last year's second quarter receivable balance of $508 million. Credit losses in this dealer portfolio continue to be minimal, averaging less than 1% of the portfolio. Even though the dollar amount financed by Polaris Acceptance in the United States has increased somewhat, it is important to note that the total number of units in dealer inventory in North America is flat with a year ago.

The household retail credit portfolio balance at the end of June was approximately $540 million, up from $430 million a year ago and up modestly from $522 million at the end of March of this year. For the year-to-date period, and in June, we financed approximately 30% of our products sold to consumers in the United States through the household retail credit relationship. Slightly less than the 34% for the first half of last year.

Let me remind you that even though the higher promotional environment that we have been operating in for the past number of quarters 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 portfolios.

Now let me comment a little bit on currency fluctuations on our operating results. As we've stated before, our foreign currency hedging strategy is to protect our downside risk, yet preserve some upside opportunity if economically feasible. For the second quarter of the year, the currency fluctuation of both the Canadian dollar and the euro have had a positive impact on sales and gross margins, while the Japanese yen has had a negative impact on margins when compared to the second quarter of a year ago. These currencies movements roughly net each other out and had minimal impact on the gross margin percent for the second quarter.

We currently have foreign currency hedges in place for the remainder of the year for the Japanese yen, which averaged approximately 108 yen to the dollar, and the Canadian dollar which averaged about 73 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 we have in place, and the current exchange rates of each of the above mentioned currencies, we expect a positive impact on profits from the Canadian dollar and the euro for the balance of the year, while the Japanese yen is expected to have a negative impact on gross margins for the second half of the year.

Our current expectation is that net-net, for all the currencies combined, the impact on profit for the second half of '04 will have an offsetting impact resulting in perhaps a slightly negative variation year-over-year.

Some balance sheet and cash flow information for the period ended June 30th is as follows: We ended the quarter with $38.8 million of cash, up from $11.8 million at this time a year ago. The cash balances were after we have repurchased shares of388,000 shares at a cost of $16.8 million, and paying cash dividends of $9.7 million during the second quarter. As well, we have made appropriate investments in the business through capital expenditures which, for the year-to-date period, have totaled $38.6 million.

Related to the share repurchases, we have currently have approximately 3.6 million shares remaining under the current board authorization and expect to continue our repurchase activity throughout the balance of the year.

Some cash flow items. At the end of June, as follows depreciation and amortization was $27.6 million. This is for the year-to-date period now. $27.6 million depreciation and amortization and other noncash items netted a positive $7.6 million. That results in working capital items being a net use of cash flow of $35.2 million, which is significantly lower than the $70.5 million used in the same period a year ago.

The resulting net cash flow provided by operations is $38.7 million for the six months this year compared to a net use of cash flow of $9.9 million a year ago. This significant improvement in cash flow is primarily due to Polaris inventory levels that are at 12% lower than a year ago spread across the all product lines and geographies.

As we've mentioned earlier, we expect our operating cash flow to increase significantly for the full year 2004, finishing the year at a level well above the $156 million recorded for the full year last year. Our expectation is that the full year 2004 capital expenditures will 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 an incremental funding of $22 million for the new product development facility. We continue to expect depreciation for the full year to be in the range of $60-$65 million.

At the end of June our receivable balance was $68 million compared to $46 million a year ago second quarter. The higher receivables balance is due primarily to the 54% increase in international sales. Remember that our international sales are not financed through Polaris Acceptance, but rather are largely financed directly from the dealers and distributors by Polaris. Additionally the Quadricycle onroad ATV product requires a certain amount of upfitting to be done by the dealers in Europe which require somewhat longer credit terms by Polaris.

Inventories at the end of June were $200 million, down 12% from the end of the second quarter last year. We have made a conscious effort to reduce our factory inventories and have seen the results of that effort over the last few quarters.

Our debt to total capital was just 5% at end of June, down from 16% at this time last year.

In summary, for the full year 2004 we expect balanced growth across the company with total company sales increasing in the 8-10% range, with EPS growing to $2.72 to $2.80, an increase of 11-14% over the $2.46 per share earned last year. Third quarter sales are expected to increase in the range of 5-8% with earnings per share expected to be in the 90 to 94 cents per share range.

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

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

Okay. Go ahead, April.

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

Thanks, good morning.

Good morning.

Good morning, Ed.

Just a few questions on ATVs.

First I was hoping you could clarify the industry growth in the second quarter. I think you said we were up slightly on a year-to-date basis. What was the growth rate Q2?

And then also, if you could give domestic shipment growth for ATVs in the second quarter.

And then finally, just maybe a little more commentary on the international markets. Was it purely a matter of demand or did you also convert some distributors to subsidiaries? And then how much of the growth do you expect to come from international in the second half of the year?

Okay. Well, there's quite a few questions there, Ed. Let's see if we can take them one at a time.

The first question, I think was, what was the ATV industry growth in the second quarter? You may be aware that that information comes from the Motorcycle Industry Council and they have to announce that information. Part of our agreement with sharing the information with MIC is that they have to announce that. I expect that is going to be announced shortly, within the next few days, if they stick to their schedule. So you will have to look for that from them. But what I did say is that, you know, for the year the industry was - - is up slightly, off from what you may recall is a record year. Right? So it's up - - it's up a little bit from a record level.

You asked about what was our domestic shipments of ATVs. We don't break that out separately. I don't know, Mike, if you have got anything you want to say about that. I mean we don't give guidance by, you know, region in terms of shipments.

I'm under the impression that ATV sales outside of North America are maybe about 10% of your total ATV sales, is that roughly a close number?

Well, I think what I did say is that total international sales were 12% of our total sales for the quarter. And you know most of the sales in the second quarter are ATV sales. I won't break it down any finer than that ,but that is probably at least a reasonable starting place.

Okay.

In terms of international, it was - - there were no changes in the structure regarding, did we take any more market to make them dealer direct or anything like that. As you probably are aware, you know, we are dealer direct now in Australia, New Zealand, France, the U.K. and in Sweden and Norway. And that has been the case here for about a year or more I guess since the last conversion. So there is no - - no - - it's sales growth.

And there was one more. I apologize. I didn't get that one.

Oh, yeah. Sorry. Kind of a lot of questions.

But I just - - for the second half of the year, what type of growth do you think we should look for in international?

Mike do you want to comment on that?

Well, I think our expectation is that our international business will continue to grow. Year-to-date it is at 36%. Year-over-year I think that is a fair expectation for the - - you know, for the balance of the years. Some place close to what we have drawn on the year-to-date basis.

Okay. Thanks.

Thank you.

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

Good morning and congratulations on a great quarter.

Thank you, Bob.

Thanks, Bob.

Can you comment, Mike, a little bit more in terms of operating expenses? You said, you know, we will see an increase. Obviously there is a one-time cost for the anniversary, but net of that, what type of growth should we expect for the year?

Well, as you can tell, our R&D expenses have increased quite consistently, you know, quarter-to-quarter for some time. That - - that obviously will continue. We're focusing very heavily on product innovation, and developing new technologies, and you will see evidence of some of that next week when we introduce our new products.

There is other products that are still in development that - - that we're spending investments on that won't be introduced next week that will be later. So that - - that is a key component for us that we will continue to do.

We have talked for a number of quarters about our initiatives in the dealer development area. And you're seeing evidence of that in our sales and marketing line, and I think you will continue to see investments there as well. So, we expect operating expenses will continue to grow at a slightly higher rate than the sales over the near term.

Okay.

And when do you expect - - I mean when you are kind of looking forward, at what point do you think trend reverses, where you will see the revenue growth higher than the operating expense growth?

Well, I think we obviously haven't given specific guidance yet beyond the end of the year, but generally speaking, we have demonstrated an ability to grow bottom line margins and earnings faster than our top line. And I, obviously, would expect that trend to continue throughout, you know, for the next number of years. We will get closer - - I would say next year particularly we could get operating expenses closer to the sales rate increase, and then going beyond next year, I would expect it to be less than sales increase.

Okay. Fair enough.

Yeah, I would say, you know, I would be in agreement with that, Bob. I think the one part that you're going to see structurally hiked spending will be in R&D.

Okay.

With Wyoming coming on line, I mean, those costs are not going to go down. We are on the gas pretty hard on product innovation, as you can tell.

And, conversely, I would expect that the trend that we see in the gross margin improvement should continue.

Yeah. We haven't issued, you know, guidance for next year buy segment, as Mike said, but certainly that is our objective, is to keep the same kinds of trends going that we have had for the last several years which is, you know, steady, constant expansion of gross margins. You know, this year we're battling some pretty tough commodity costs. With oil, I think, was over $41 a barrel, and steel and fuel and aluminum and all the rest of that, and we still expect gross margins to be up, I think, 30 t0 50 basis points for the year, so that's not all bad.

And, you know, once we have a little better idea what the environment is like next year we will give you specific terms, but we're going to keep working on the costs and productivity side, and trying to deliver value for the customer the same way we always have.

Okay. Thanks. And one final question. Tom, can you comment on, you're going to have a number of new products coming out next week. Should we expect to see kind of new sub-segment type products?

Yeah --

You have done a very good job in the ATV industry coming up with niches that are new or different. Should we expect that, or you- - you know, I mean, I'm just - - can you give us a little bit more flavor of what to expect?

Yeah. Not too much, as you probably would guess. But, yeah, there will be no new families of products. We are not going to, you know, enter the airplane business next week. But there will be completely new niches within our current business, and also, as you would expect, updates and significantly new molds within the current offerings that we have.

All right, thanks.

Your next question comes from the line of Craig Kennison with Robert W. Baird.

Good morning and congratulations.

Thank you.

Thanks, Craig.

First question has to do with distribution. I believe last quarter you upgraded 50 dealers. Did that effort continue in the second quarter? And also, how many Victory dealers does Polaris count?

Yes. That effort does continue, I apologize, Craig, I don't have that number with me here in the room. That is something we will have to get for you after the call. But that effort does continue. I just don't know the specific number off the top of my head.

Just as a comment there, next week in the analyst meeting, we will spend a lot of time talking through our dealer development initiatives with our V.P. of Sales and Marketing, Ken Sebastian.

With regard to Victory I do happen to know that number off the top of my head. We have added 31 Victory dealers this year and the total is approximately 320.

That's helpful. And Victory sales, for our model, were below expectations, but snowmobiles obviously were well above expectations. To what extent is that driven simply by timing of shipments?

On the Victory side, 100%. We - - the comparison, you would probably, may not have that right in front of you. But last year's second quarter, we shipped relatively late last year. Second quarter sales were up 124% in the second quarter of '03, so the comparison was quite high. This year we shipped a little bit more in the first, so that it is a timing issue. We continue to be very, very positive on Victory, and total year we continue to ride, you know, mid 20s in terms of sales growth and we're not coming off that one iota. Then - - and year-to-date our Victory is up 20%.

Okay.

So it as timing deal. The second part of your question is - - is snowmobiles. And it is kind of the same thing with timing. A year ago our snowmobile shipments were very, very light in the - - in the second quarter, so this year is more normalized, I would say.

If you'll recall, that last year we had pretty high dealer inventory. A - - snowmobile, I'd say this year, is a much more normal situation. I think Mike gave you the comparison to two years ago, which is fairly reasonable.

And finally Mike, if you could run through the warranty expense. What was the warranty expense in the quarter, and what were the actual claims paid?

Certainly. Very comparable trend to a year ago in the second quarter. The expense was about $6 million this year, about $7 million a year ago. And the claims paid this year was about $7 million this year, about $8 million last year. So the trends are very - - very comparable. Our ending balance in the warranty reserve at the end of the second quarter this year is about $25 million versus about $26 million a year ago.

Terrific. Thanks again.

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

Thank you. Solid quarter, gentlemen. A couple of questions.

If - - a little bit on the receivables. A little bit of confusing to me there. If the majority of it was drive by international, international is 12% of sales, that would only account for - - and international's up 54%, that would only account for about 7% or so of the increase in receivables. Can you kind of help us on the rest of that there? And then a little surprised, but to your credit, inventories were down despite the pending large new product launch. If you can maybe discuss that a little bit.

And then finally, on the ATV market. If first quarter historically has been about 20% of annual sales for the industry. Second quarter about 25%. And through the first quarter, the industry was up 7-8%. And it would appear that now year-to-date being up low single digits, that would imply some substantial slowing, that May was really down, and to offset a good April and so-so June. If you could maybe just talk through that a little bit more, please?

Why don't you take this?

Okay.

International receivables, maybe to help you a little bit - - the, you know - - the sales were up internationally 54% which, in dollar terms is $18 million. So, and our total receivables are up $22 million. So the terms in - - for our international sales are quite lengthy, as I talked about. It takes awhile to get the product there. And much of the product needs some upfiting done by the customers to sell it into the European market. So, substantially all of the increase in receivables is due to the very healthy international business that we have got.

Okay.

The second question was inventory. And how are inventories down while you have a whole bunch of new products that you're going to launch, I think was basically the question.

Most of the new products are going into production, Tim, July through, even middle, latter part of September. I think Mike mentioned that, you know, most of the new snowmobiles, new model snowmobiles are going to be shipping in the fourth quarter, the Fusion and 900RMK. So it's a fairly big changeover, but it's taking place in the third quarter, not the second quarter. So really, we were taking down model year '04 inventory. And beyond that I just attribute it to inspired leadership. If you don't have anything else to blame it on.

Okay.

With the ATV thing, you know, I think you got the facts about right. Again, I can't announce MIC information. They have to announce that. And I think you understand that, that is part of the deal.

But you're right, the inventory was up for the first quarter, and for the full year it's up a little bit. It is, you know, as I said in my speech, it is bouncing around a little bit in terms of, you know, we are seeing some - - some unusual patterns. It's a little spotty. We will have a good month and then a not so good month, then a good month. And it does - - there doesn't appear to be, you know, often times in past you could probably point to what is causing that. And - - I don't - - I don't really know.

I think we are not the only industry that is seeing that. I think the car companies are seeing a little bit of that. I know some of the retailers are seeing a little bit of that, and we are seeing a little bit of that. You know, in terms of our business, we're pretty comfortable with where we are with ATVs. Particularly, again, and I know that you are aware of this, Tim, but there may not be - - there may be others on the call that aren't. The parts of our business that are really showing the growth are the parts that are not reported in the MIC data. RANGERs, and international sales. Which is in the ATV number that we report to investors, but is not in the Motorcycle Industry Council data.

Um-h'm. Okay. Well, so would it be then, Tom, in the core business ex--RANGER and ex--international, the core domestic business, you guys are losing some share then, that would imply that?

No, I don't know that that would imply that. I think what I said was, that the other part of our business, the RANGER and international, which are - - we consider them core parts of our business. They are - - happen to be sold through the same dealer network, RANGER is sold through the same dealer network, they're just not reported in the Motorcycle Industry Council data.

So I guess, you know, all in, what are we saying? We're saying that we expect for the year ATV sales to be up mid single digits, and actually, we're a little more optimistic now than we were 90 days ago. I think Mike - -Mike said that in his speech. So I feel okay about ATVs.

How do you - - how was the channel inventory from your perspective on ATVs, both from Polaris individually and the industry as a whole on a year-over-year basis?

I can speak very specifically to Polaris. The industry is a lot more - - we don't have data on that. That is more anecdotal. I'm very comfortable with dealer inventory across the board, Tim.

I think in the past we characterized it, sort of, on a scale from 1-10. 10 being, you know, very, very heavy. 1 being, jeeze, we don't have enough product in there to meet the sales needs. I would say, you know, kind of across the board right now, we are at about a 4. We don't have anything that I'm particularly concerned about in terms of dealer inventory. In the industry - -

Tom, just to clarify there. You're talking ATVs in particular, or Polaris products as a whole?

All Polaris products including ATVs, Tim. I think, when you think about dealer inventory, I think it is almost a little misleading to look at it at an individual product level. I mean what really matters to that dealer is the check book, and whether the box is a snowmobile or an ATV, it affects their check book. So I feel very comfortable with where all Polaris inventory is. I think, as Mike mentioned, it's the same number as last year and we got 12% sales growth.

Okay.

So that is not all bad.

The - - in terms of the industry, there is nothing that I'm aware of, Tim, in terms of any of the large competitors having big inventory issues. You know, there have been times in the last 18 months where we know that some of the real large competitors were - - were way out of whack. I'm not aware of that , but again, I don't have data there. So I - - I may not- - you know, we get those reports pretty sporadically through - - through the field.

Okay. Okay. And again, so year-to-date it sounds like the industry as a whole, though, the second quarter slowed down, so to year-to-date you dropped at the end of the first quarter up 7-8% for the industry, to maybe - - maybe up to just low single digits, but again, that excludes your international. That excludes RANGER?

Right.

Okay.

And for the full year we are a little more bullish than we were 90 days ago. Obviously for the total business, but also for ATVs.

Okay, thank you.

Yep.

As a reminder, in order to ask a question, press star, then the number one on your telephone keypad.

Your next question comes from the line of Assia Georgieva with Sanford Group.

Good morning, gentlemen. Congratulations. This is Assia with a couple of quick questions.

First of all, on the ATV side, does this year's anniversary celebration delay the launch relative to the past? And make it more, you know, all at the same time?

My second question was on Victory motorcycles. Have you been able to track any of the Indian dealers that we've discussed in the past, and convert them to Victory?

And the third question is more on snowmobiles. Relative to Bombardier, do you think you are gaining market share and establishing your number one position again? And what does the promotional environment look for snowmobile overall? Thank you.

Okay. I'll answer the second and third questions. I'm sorry I didn't understand the first question and I will have to ask you to repeat that.

Okay.

Let me get the number two and three and then maybe we can come back to the ATV question.

The Victory question was, are we - - have we been successful in signing Indian dealers? We have. About 20 Indian dealers are now Victory dealers. India, many people probably are aware went into the motorcycle business about the same time Polaris did. And I would say the thing that they did the best is kind of the front end of the business. The branding, the styling, advertising, dealer network, that kind of thing. They had a lot more difficulty, I think on the product and the manufacturing and purchasing and that kind of thing. So we were very successful there in converting, as I said, a little over 20 of those Indian dealers in some very key markets. And I feel very good about that.

Is Polaris gaining market share against Bombardier? No, we did not gain market share against Bombardier this year. They are number one and we are number two in snowmobiles. That is an annoying but true fact in our life right now, although, you know, we continue to be very aggressive in trying to regain that. The promotional effort I would say in snowmobiles is pretty stable.

Inventory - - in snowmobiles we do see industry inventory situations, and I don't see anybody -- everybody has, you know, basically the same kind of trend that we have, which is, had high dealer inventory a year ago, everybody was pretty good this year in terms of improving the sell-through and reducing inventory. And so I would not expect major changes in snowmobile promotions.

If you could repeat the ATV question, I'd be glad to answer that.

Sure, and I apologize for the confusing way I asked it.

Relative, for example, to last year, the new product introductions which we expect next week, could they come on later on in the year?

Last year, I can answer part of that. I can't answer all of it because I don't want to announce the specific products that we're going to introduce.

But last year we actually went through two new product introductions. In the February time frame we introduced the upper end of the ATV line, what we call the Sportsman line, and that was done in February. And then the other model year changes were done in the summer time. This year we did not do any kind of half-year model change so everything has taken place this year. The timing relative to being in the summer is about the same. It may be off a couple of weeks or something. The changes this year are much more significant than they were a year ago in terms of number of models and factory changes and that kind of thing.

So in terms of the impact on the full year, it is fair to assume, excuse me, that innovation will more than make up for the slightly later launch?

Yeah, we feel really, really good about the ATVs that we're going to introduce this year. You know I - - I'm not sure I understand, again, specifically the question that you're asking.

Are you going to sell in six months as many ATVs as you sold in twelve months last year? No, we won't. But the improvements are significantly more dramatic this year than they were a year ago last year. You may remember, and this is probably at a level of detail that's way beyond most people, but two years ago we had a really big new product introduction down in Orlando where we introduced Victory Vegas, the MSX personal watercraft, and the Predator ATV, it was at the time the biggest introduction. Last year was relatively minor changes. This year will be another big change.

Okay. Well, I will certainly look forward to next week. Thank you.

Okay. Thank you.

April, I will think we are about out of time here, I want to thank everyone for participating in today's call. Please remember that our presentation and responses to your questions contain certain statements that could be considered forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, and that actual results could differ materially from those projected in any forward-looking statements. Thank you again for listening, and we hope to see you next week at the 50th anniversary. Goodbye.

This concludes today's conference call. You may now disconnect.