Polaris Inc (PII) 2004 Q3 法說會逐字稿

Good morning. My name is April and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Third 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, Director of Investor Relations. Please go ahead, sir.

Thank you, April. And good morning and thank you for joining us for our third 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 this morning. As before during this presentation, we will be discussing certain topics including product demand and shipment, sales and margin trends, income and profitability levels, and other matters including more specific guidance on 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 risk 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 the Polaris 2003 annual reports and in the 2003 Form 10-K, which are on file with the SEC. Now, I will turn it over to Tom.

Thanks, Richard. Good morning everyone and thanks for being on the call. We are pleased to report increased sales and earnings per share for the 26th consecutive quarter. The third quarter earnings were $1 per share, up 8% from last year and 15% sales growth. This was the best quarter in the history of our Company and our first quarter where sales exceeded $500m. In short, things are going well at Polaris. The quarter slightly exceeded our expectations driven by a strong performance across most of the Company. As a result, we’re raising and narrowing our expectations for the balance of 2004 and just to be clear, the numbers that I'll refer to throughout my remarks will refer to the continuing operations of the Company, in other words after removing the discontinued Marine division. As such for the full year, we're narrowing the earnings per share guidance to a range of $2.97 to $3.01 per share, up 12% to 13% from one year ago on revenue growth of a 11% to 13%.

The lower end of the earnings range has been increased by $0.07 per share from 90 days ago, while the upper end has been increased by $0.03 per share. Not only with the third quarter, our best quarter ever, it was a very active one as well. In July, we hosted our largest event ever the Polaris 50th Anniversary Celebration, where we thanked over 25,000 customers and introduced more new products than we ever had before. We had an awesome quarter for retail sales. We exited the marine business and laid out a strategic plan for the next 5 years. I'll touch briefly on each of these subjects throughout my remarks, and as we usually do with the third quarter call, we'll give you some early qualitative thoughts about 2005. And with that overview, let's turn to the individual business segment starting with the Watercraft division.

Of course, one of the big decisions we announced during the quarter was our exit of the marine business. I'm sure many of you were on that conference call. But, if you want in a nutshell we withdrew from the marine business because we were not making money in the business, and we couldn't figure out any reasonable set of steps to make that business profitable. I would say that the marine exit is going smoothly, while we'll be continuing to wind down the operations over the coming months. So far, there had been no surprises. We are working with all the groups involved - consumers, dealers, employees, and suppliers, and so far the process has gone according to plan.

Victory Motorcycles. We had another good quarter in Victory Motorcycles with shipments up more than double of last year's small third quarter base. Victory continues to build solid momentum quarter by quarter. The brand is gaining appeal, the dealer network is growing and gaining strength, the product line is expanding, and the cost and quality are getting better. Victory's news during the quarter was very positive.

At this year's dealer meeting, we introduced some exciting new models including a value-price model called the 8-Ball and all new motorcycle called the Hammer and two limited-edition models - Ness Signature Series edition. These new models broaden the range of potential customers that Victory can now reach. Just a couple of years ago, our products were clustered together in a narrow band between $13,000 and $15,000 at retail. Today our dealers can offer products from $13,000 to over $20,000. The Hammer which appeals to the growing power cruiser segment has created considerable interest among our customers, and the Hammer will begin shipping in the first quarter of next year. One very interesting thing that took place during the 50th anniversary celebration was the largest customer ride of Victory motorcycles ever. We had about 800 customers travel the same path and the event provided terrific face-to-face feedback on how owners feel about the brand and their bikes. The feedback was overwhelmingly positive and continues to boost our confidence in growing the new American motorcycle. For 2005, we expect Victory to continue to grow faster than the rest of the Company, as we gradually expand distribution, introduce even more new models, and continue to build the Victory brand name.

Snowmobiles. The early Snowmobile season has gotten off to a decent start. Retail sales of the industry through September were about 10% ahead of a year ago, although we are a bit behind the industry pace. But it remains very early, just over 10% of the way through the retail-selling season and we just now starting to enter the heart of the retail season. Late in the quarter we began initial shipments of our new fusion model, which is an all-new chassis. Significantly more units of the fusion along the all-new RMK will ship in the fourth quarter. As it is each year the fourth quarter will be an important quarter for the snowmobile business, as the weather turns colder, we will carefully monitor wheeler traffic in retail sales, particularly of our new models. If this year brings normal snowfall and our new products are well received, it's quite likely that 2005 could provide another lift to our oldest business.

ATV. We had a great quarter in our largest business with shipments up 18% versus last year. The ATV business was extremely strong and the trends appeared to be favorable. Industry retail sales strengthened somewhat during the quarter and were 5% ahead of last year's record pace for the third quarter. Polaris had a very strong quarter at retail and substantially outpaced the industry. Primarily driven by our Factory Authorized clearance event. Similar to what the auto companies do, our Factory Authorized clearance was designed to transition dealer inventory from Model year '04 machines to the new '05's, which were introduced during the quarter and began shipping. Our '05 line up includes some very strong new models. Over 60% of the ATV line is new, including our best selling Sportsman family. We introduced several all-new models including the world's largest and most powerful ATV, the Sportsman 800 EFI, the world's toughest ATV the Sportsman MV, which is a consumer version of the model we sell to the US military. We strengthened the lower end of the ATV line with the all-new Phoenix, a value priced machine designed to appeal to the first time buyers and introduced a new sport model, the Predator Troy Lee addition which has already been named Sport ATV of the year.

The RANGER line of utility vehicles is continuing to grow very nicely with strong increases in both retail sales and wholesale shipments. From Model year '05 we redesigned the RANGER Chassis to improve quality, operator comfort and performance and we've also added a larger 700cc engine. The dealer reaction to the entire line of 2005 products was quite positive and their orders reflected that enthusiasm. 2005 should be another good year for ATV's. I would expect the North American ATV industry to grow modestly and for Polaris to outpace the growth of the industry based on the strength of our 2005 model line. We also expect rapid international growth of ATV's to continue.

Parts, Garments, and Accessories. We had another very solid quarter in our highest margin business, which grew 20% driven by growth in Snowmobile and ATV related items. Along with a great 2005 machines, we also introduced some innovative ATV accessories designed to make it easier to use for the customer and more profitable for the dealer to sell. PG&A has had a nice run over the last 6 quarters and we anticipate 2005 to hold more the same.

International. Our international business continued to its stellar performance this year with another very strong third quarter. International sales were up 60%, as we continue to benefit from our investments in new distribution channels and growing markets outside of North America. During the quarter, we introduced 3 models of ATV's specifically designed for both on and off road use in Europe, so-called Quadricycles, which is the first time we have produced unique products for the international ATV market. Needless to say, we expect international sales to grow faster than the overall Company for the remainder of the decade. And finally in the good news department, as Michael discussed, our balance sheet and cash flow for the quarter were awesome. Both factory and dealer inventory were well below last year's level, despite 15% topline gross margins.

So with all this good news accelerating sales, rising markets, and in most cases increasing market share, what are the issues, the concerns at Polaris right now. I say, in the short term there are 2 things we're watching. First, I'd point to rising commodity cost, particularly steel and oil related cost. While our gross margin percentage for the year is higher than 2003, and we expect them to remain higher for the full year. It was down for the quarter compared to a year ago. Mike is going to elaborate on this more in his section, but it is a fact that we use steel in our vehicles and fuel to transport them. And the price of both of these key commodities is sharply higher than it was a year ago. But longer term investors should also recognize that while we may bounce around for a quarter or two as the price of commodities fluctuate, we expect over the long term to continue our trend of expanding gross margins, and I'll have little more on this latter.

Secondly, we are investing a significant amount of money in new product research and development and improving our dealer network. These investments are paying off, but they're not free, and we must execute well on our new product launches to continue to drive the future success and growth that we expect. As we approach the end of 2004, all indications are, that it will turn out that our 50th year in business will be our best year yet, and the 23rd consecutive record year for Polaris. Looking forward, I remain optimistic for 2005 and beyond. We are seeing nice topline growth and our product introductions are strong. ATVs and utility vehicles, the core of the Company have never looked better. Victory and International should drive fast growth and snowmobiles, if the weather cooperates, should continue a modestly positive trend.

Longer term, as we approach the second half of the decade, we set some ambitious goals. First, we want to continue to grow the Company and I have set a target of $3b of sales for 2009, up from last year's $1.6b. Secondly, we expect margins to expand and I have set a net margin target of 9%, up from last year's roughly 7% level. Finally, we expect to lead the industry in product quality and have a substantially stronger dealer network to build a dominant brand. In the coming months, we are going to lay out specific plans on how we expect to achieve these objectives. But we are serious about reaching them.

In short, we believe that future in this Company is bright, not just now, now just next year, but for the next several years. And as usually the case, we'll give you specific quantitative guidance for 2005 during the fourth quarter call. With that, I'll turn it over to Michael Malone, our Chief Financial Officer.

Thanks Tom. As Tom stated, this quarter represents our 26th consecutive quarter of sales and earnings growth. We are very pleased with our record third quarter results. In fact, our 15% increase in sales is the largest quarterly percent increase in nearly 5 years. As we previously reported, during the third quarter we made the decision to cease manufacturing of marine products. As a result of this decision, we have recorded a loss on disposal of discontinued operation of $35.6m before tax or $23.9m after-tax during the third quarter. This represents a $0.53 per diluted share, one-time nonrecurring charge. In addition, for the third quarter 2004, we recorded a loss from discontinued operations of the marine products division of $2.1m net of tax or a loss of $0.05 per diluted share.

For accounting presentation purposes, each of these loss has been separately presented below the line. The operating results of all the other ongoing businesses of Polaris are presented as continuing operation. For consistency purposes, all prior periods of the income statement, balance sheet, and cash flow statements have been reclassified to separate the operating results of the discontinued operation. I must otherwise note that the remaining comments that I will talk about today related only to the results from continuing operations of the Company. Fourth quarter 2004 sales are expected to increase 9% to 14 % with earnings per share from continuing operations growing in the range of $0.98 to $1.02 per share, an increase of 13% to 17% over the $0.87 generated from continuing operations in the fourth quarter year ago.

Let me give you some additional qualitative comments for each of our businesses. Sales of ATV's in 2004 full year are expected to continue to grow driven by the new products introduced at the 50th anniversary celebration in mid-July and ongoing modest growth in the overall ATV industry. As Tom mentioned, the factory authorized clearance promotional events was very successful in driving retail sales in the third quarter. In addition, our RANGER and international businesses continue to grow faster than the overall industry. We now expect full-year 2004 ATV sales to increase around 10%, which is somewhat stronger than what we had anticipated 3 months ago as we capitalized on the momentum generated. This guidance reflect the anticipated success of our new model introduction; a modestly growing market place, a continued competitive, but stabilized promotional environment; and lower dealer inventory levels than at this time a year ago.

Victory Motorcycles are expected to continue the trend that we've seen for the first 9 months of the year. Both award-winning models the Vegas and Kingpin continued to gain share in the custom cruiser segment and the new Hammer, an April model, introduced from model year '05 has been very well received as reflected in the dealer orders. Additionally, our dealer network continues to improve and the overall heavyweight cruiser market remains healthy. We are increasing our previously issued guidance and now expect Victory sales growth in the upper 20% range for the full-year 2004.

For snowmobile, we are confident in our expectation for snowmobile sales for the full year to increase in the low 20% range, a slight increase from previously issued guidance and a significant change in trend from the last couple of years. The 2% decrease in snowmobile sales for the third quarter 2004 was due to planned timing shipments of our new snowmobile model. As I mentioned in my comments during our last quarterly call, the majority of our new 2005 Fusion 900 and 900 RMK models will be shifted to the dealers in the fourth quarter.

Parts, garments and accessory sales are expected to approximately equal the growth rate of the overall company for the full-year 2004. Increase innovation and driving industry leading products and service quality continues to be the primary goal for the PG&A business. During the quarter, PG&A introduced the new innovative lock and ride system, which makes installation of our ATV accessories faster than before, which is a benefit for our dealers and more convenient for our consumer who can make accessory changes to their vehicles in just minutes.

Now moving down the income statement. In the third quarter, our gross margin percentage was lower than a year-ago by 60 basis points. As I mentioned in our last earnings conference call, we expected to see higher commodity cost pressures in the second half of this year, and that's happened. The decline in the gross margin percentage is entirely the result of the continued escalation of select raw material cost, particularly steel, aluminum, plastic, and fuel cost as well as the added start-up cost associated with the manufacturing of our new 2005 model across each of our product lines.

For instance, the price of steel has increased over a 100% in the last 12 months, and as you know, we use a fair amount of steel in each of our products. Aluminum and plastic have seen increases as well, although at a lower rate of increase. For reference purposes steel, aluminum, and plastic currently represent about 10% of total cost of goods sold.

During the third quarter, the promotional environment, particularly in ATVs, remain stable compared to the first and second quarters of the year and we anticipate this trend to continue for the remainder of 2004. Our guidance takes into account the above-mentioned commodity cost increases and a stable promotional environment for the balance of '04. On a consolidated basis, we continue to expect gross profit for the full year to show improvement on a percentage of sales basis.

However, the improvement will be slightly lower than previously guided. We now expect gross profit margin to improve 10 to 30 basis points for the full-year 2004. And as we always do, we'll continue to work hard at ways to offset these commodity cost pressures through productivity, efficiency, and quality improvements. We'll keep you updated with any changes and direction of these costs as it develops.

Operating expenses are expected to increase 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, during the third quarter, you'll remember that we absorbed the non-recurring, one-time cost of $2.8m associated with the 50th Anniversary celebration in July. During the fourth quarter however, we expect operating expenses to be lower than the fourth quarter of last year on a percentage of sales basis. We'll continue to concentrate on lowering our operating expenses as a percent of sales to help offset some of the commodity pressures we are experiencing in gross margins.

Income from financial services grew 2% in the third quarter over the prior year quarter. As I mentioned in our last conference call, we expected the growth rate of financial services to moderate in the second half of the year as the retail credit penetration rate has stabilized. The household retail credit portfolio balance at the end of September was approximately $618m, up from $469m a year ago, and up from $540m at the end of June 2004. We experienced high retail credit volume in the third quarter this year from the success of the integration of retail credit offerings in the factory-authorized clearance promotion. This positions us well for an increase in fourth quarter income from retail credit financial services over last year's fourth quarter.

For the year-to-date period ended September, we've financed approximately 34% of our products sold to consumers in the United States through the household retail credit relationship, which is about equal to the first 9 months of last year. Receivable losses in this retail credit portfolio have remained stable, averaging a little more than 3% of the portfolio in line of our expectations. At the end of September, the wholesale portfolio related to floor plan financing for our dealers in the United States was approximately $615m, up from last year's third quarter balance of $573m. Even though the dollar amount financed by Polaris Acceptance has increased somewhat, it's important to note that the total number of all good units in dealer inventory is down from a year ago. In addition, the $615m portfolio includes PG&A sales, which increased 20% during the third quarter. Credit losses in this dealer portfolio remain minimal, averaging less than 1% of the portfolio. 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.

Now, let me give an update on the impact of currency fluctuations in the quarter. As stated before, our foreign currency hedging strategy is to protect the downside risk, yet preserve some upside opportunity if economically feasible. For the third quarter 2004, the currency fluctuation of the Canadian dollar and the euro have each had a positive impact on sales and gross margins, while the Japanese yen has had a negative impact on gross margin, when compared to the third quarter a year ago.

These currency movements roughly netted out and had a minimal impact on our gross margin percent for the third quarter. We currently have currency hedges in place for the reminder of 2004 for the Japanese yen at an average of about yen 108 to the dollar, and in addition we've hedged the Canadian dollar through the second quarter of next year at an average rate of about $0.76. We currently do not have any euro currency hedging contracts in place for future periods. Based on these hedges that 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 currencies in the fourth quarter, compared to last year, while the Japanese yen is expected to continue to have a negative impact on margins in the fourth quarter. Our current expectation is that net-net for all currencies combined, the impact on profit for the fourth quarter will be a negligible impact when compared to last year.

Some balance sheet and cash flow information for the year-to-date period ended September '04 is as follows. We ended the quarter with $106.6m of cash on the balance sheet, up significantly from $38.3m in the third quarter a year ago. This represents the first time we have reported greater than $100m in cash balances. During the third quarter, we repurchased 265,000 shares at a cost of $12.6m under our stock buyback program. We currently have approximately 3.3m shares remaining under our current board authorization, and expect to continue to repurchase activity.

Cash flow has improved significantly during 2004. Our net cash flow provided by operating activities of continuing operations of $137.6m for the year-to-date period '04, represents an increase of 61% compared to the net cash flow provided by operating activities of continuing operations of $85.4m a year ago. The significant improvement in cash flow is primarily due to Polaris inventory levels that are lower than a year ago, and higher accounts payable balances at the end of September '04 compared to the prior year period. We continue to expect our operating cash flow from continuing operations to increase significantly for the full year '04 finishing the year at a level above $200m. Full year 2004 capital expenditures from continuing operations are expected to be in the range of $85m to $90m as we continue to invest in new product tooling and engine and technology projects. In addition to an incremental funding for new development facility in Wyoming, Minnesota, which is on schedule to open in the first half of 2005. We expect depreciation from continuing operations for the full year 2004 to be in the range of $60m to $65m. Receivables at September 30, '04 were $77.3m a 7% increase compared to $72.5m in the third quarter a year ago. Inventories at the end of September '04 were a $198.4m, which is down 6% from the $211.2m at the end of the third quarter last year. As you know, we've made a conscious effort to reduce our factory inventories, and we have seen the results for that effort over the last few quarters.

Finally, adjusted total capital was just 5% at the end of September '04 compared to 6% a year ago. In summary, for the full year 2004, we are increasing our sales guidance, as we continue to expect growth across our product lines of the Company with total Company sales from continuing operations increasing in the 11% to 13% range, and we are increasing and narrowing our full year 2004 earnings per share from continuing operations guidance to $2.97 to $3.01 an increase of 12% to 13% over the $2.66 per share from continuing operations earned last year. Fourth quarter 2004 sales from continuing operations are expected to increase in the range of 9% to 14% with earnings per share from continuing operations expected to be in the $0.98 to $1.02 per share range a 13% to 17% increase over the $0.87 on last fourth quarter. At this time, we would like to take any questions that the analysts may have. April would you please open up the line for questions?

Yes sir. 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'll pause for just a moment to compile the Q&A roster.

Hi April. Go ahead.

Your first question comes from the line of Tony Gikas of Piper Jaffrey.

Good morning. This is Steffwood for Tony Gikas. I have three questions all relating to Victory motorcycles. First I believe it was Mike who mentioned the expected growth in the upper 20% for this year 2004. Can you rationalize that figure relative to your 35% growth rate year to date? Maybe more specifically, are you seeing some sales fasteners in early October or is this offset due purely to fourth quarter seasonality?

No. This is Tom. We are very happy with the way Victory has gone from a retail end wholesale perspective. From a retail perspective, we are continuing to grow very nicely, build the brand. I mentioned that we have expanded the product line a little bit. And I'd say, interest at the consumer level is at an all-time high for Victory. From a wholesale perspective, I think the dealers are quite pleased with the new model line up, the breadth of it, and we are in fact adding dealers. So, our motorcycle business we're such a small part of the total in that business. I think that what happens to the overall industry and the overall economy probably affects our motorcycle business less than what we do in terms of products, and models, and pricing, and those kinds of thing. So I think motorcycles are doing real well.

You actually touched, sort of, my second question. How do you view the overall growth potential of the market? Are you positioning Victory to be added into the market or is it taking share from its competitors?

Well, I guess it's only a 100% market share in the market. So, as we grow, we obviously take share from somebody but the whole idea behind us entering the motorcycle market is, it is a market that's growing tremendously over the last 10 years and we believe with a demographic trends and lifestyle trends of baby boomers, we expect that growth to continue certainly through the end of decade and so, what Victory really needs to do is to capture a portion of that growth but obviously, if there is a 100% market share and we grow, it comes at somebody's expense but the key point is that market is growing, and I think that makes it easier for a new brand to come in.

All right. Thank you.

Your next question comes from the line of Carol Buyers with RBC Capital Markets.

Hi, good morning gentlemen, and congratulations. A few questions first. Did you say that the ATV market grew 5% for the quarter?

For the third quarter, that's right.

Okay, and then 10% was some of your growth through September?

Yes, a little above that. I think I said low-double digit. I don't remember exactly, Carol, but right around 10%.

Okay, because I know that it was kind of a difficult comparison last year, I think it was like 11% comparison last year. And now, in similar way, have you seen any competitive response, maybe specifically from Honda on -- in response to your Factory Authorized Clearance?

No. I wouldn't say that we've seen -- no, I would say that the promotional environment in ATVs, pretty much throughout the year, has been pretty stable. We have seen throughout the year different companies enjoy success at different times, in other words, it's been kind of sporadic, where one company will get on roll for a couple of months and share gets traded back and forth and so forth, maybe a little bit more than had happened in previous years, but I would say that promotional efforts across the market, I would say, I would describe it as pretty stable level with last year's levels, and we are very pleased with how our ATV business has performed.

Okay, and you mentioned that obviously you are growing faster than the industry in the quarter at retail. Can you quantify that?

I would just say substantially faster, significantly faster, way faster but not a number.

Okay, and then can you specifically talk about the number of dealerships you added for Victory this quarter?

I don't have that right at my fingertips, Carol. We'll see if we can get it and get the answer for you by the end of the call here.

Okay, and then one more question just on ATV growth internationally. ATV growth internationally as a -- I mean, what was ATVs as a percentage of the total sales internationally?

ATVs as a percentage of the overall international sales.

Or as a percentage of ATV sales?

For the quarter, it's about two-thirds.

Okay.

It's similar to our overall --

But what's -- the point I was trying to make in my prepared remarks, Carol, is we've seen terrific growth internationally for several quarters now and that's come in primarily from ATVs, primarily in Europe.

Okay.

The ATV market in Europe is really growing and we are benefiting from that, and in terms of units now, in Europe, ATVs are about the same size as the worldwide snowmobile market, right? And it's growing just leaps and bounds. So, I am really glad that we've committed the resources that we have and positioned ourselves to capture that growth going forward and I think that's sustainable through the end of the decade.

And just to clarify, what was if it is a percentage of overall sales just for the quarter international? If you don't have .

You can get it here. Hold on. Just got it. We are actually having a power out at here, at our office. So, we got to get our calculators out here. Just under 11%, 10.5%.

Got you. Okay.

And again, longer term that -- that number if you went back 3 years ago, that would have been about 6% for the year.

All right. Great. Thanks a lot.

To answer your question for Victory dealerships, I don't have the quarter numbers but I do have the year-to-date numbers and we have added about 30 Victory dealers this year.

Your next question comes from Asius with Wasserman Associates.

Good morning gentlemen, congratulations on a very good quarter. I have a couple of questions. First of all, looking at the longer term view, the Phoenix model and the Quadricycle sold in Europe have a negative impact on growth margins and, the second question relates to your dealer network, but what specifically those dealers who were carrying the BWC line and that accounted for a significant percentage of their sales. Have you seen any impact over the past month and a half from the discontinuance of this line?

Sure. Maybe I will take the watercraft question. Mike, you take the margin question. In terms of the watercraft exit, I think things have gone quite smoothly. It's never easy to exit a business. It's a tough process of course. But just to give you a sense of the few numbers. We have about 2000 dealers in North America and of those 2000 dealers; about 500 of them carried watercraft. Now for us, watercraft was about 3% of our business, and I say for the vast majority of our dealers, it would be a similar percentage, a small part of their total business. So for the vast majority of those 500 dealers, let's say, 475 getting out of the watercraft business while it was a change, it was an event. It was not a difficult experience. There were about 25 key dealers, very important dealers that were significantly impacted by our watercraft decision. These are people that, perhaps the marine segment of their business is a much bigger part than would typically be for a Polaris dealer. And we are working with those dealers on a one-on-one basis to try to find ways to help grow their business with other Polaris products, whether that would be RANGER utility vehicles, or Victory motorcycles. It depends on the specifics of those dealers. I would expect that a handful of those 25 probably will pick up a competitive watercraft line. I mean, if their main business is marines and they sell other boats and those kinds of things. motorcycles is not logical for them but it would be a quite small number, maybe a 10 or somewhere in that range out of 2000 dealers. So I think that the impact has been very manageable and the whole process, I think, has gone quite smoothly.

And of those 25 dealers, Tom, were they exclusive for Polaris?

Again, it varies all over the place. Some of them were single-line dealers, Polaris-only dealers, others were multi-line.

Your other question related particularly to the Phoenix model and our margins on that. That particular model is, as you know, new for us. It is an entry-level model that is priced at retail rate of around $3000. However, we have been able to maintain our percentage margin on that new model at, pretty close to the average rate of our ATV business. So even though it is a lower price entry-level model, the percentage margin is still attractive. When we sell in Europe, particularly through our subsidiary operations, it is similar in nature to what we do here in North America because we are direct to the dealer and likewise, our margins are similar in Europe as they are here in North America. So the introduction of the Phoenix and the Quadricycle in Europe will not necessarily have an impact on our percentage for that particular unit because it is the lower price unit. It will have an impact on our average selling price. Our ASP will be impacted by that, hopefully, if that business grows and becomes a bigger piece of our overall mix. So it will have a little bit of a mix impact but we are pleased with the margins that we are generating on that new product introduction.

Oh, I think that, if on a percentage basis you can maintain a growth margin that is similar to the company averages. I think it will be fine with average selling price coming down if this business does well. Let me ask one followup and that is more with figures of the competitive positions. Bombardier made some significant strides during the last snow model year and gained market share. From where you are standing today, and I know it is too early in the winter season but do you believe you will be able to get the number one spot again in terms of normal deals?

Yes. This is Tom. Certainly our objective is to regain a number one market share position in Snowmobiles. I think that is not likely to happen this year given the inventory situation that our dealers are coming into the year with. You'll recall, last year we were cut back shipments of Snowmobiles significantly. So there is simply not the product in the dealerships to go for a very strong market share gain. We want to gain back this number one position with innovative products and I think that it is very important this year to us that the Fusion and RMK are successful. So that chasse can be demonstrated to be the best chasse in the business. That is going to be the key path. So don't expect number one market share this year but as we go forward, that is an important objective for us to attain.

So, you would expect to pretty much hold the same market share that you had during the last model year?

Yes, I would say that's reasonable.

Okay.

I mean, perhaps gained some, but not all way to number 1 yet.

Okay, Tom and Mike, thank you for answering my questions.

Thank you.

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

Good morning and congratulations on a very strong quarter.

Thanks Bob.

Thank you Bob.

Can you -- you want to follow up the international little bit more. I mean, can you give us a little bit more color in terms of -- I mean realizing that overall market is strong and growing, but what is going on from your distribution base there. Looking, just for a little more color in terms of what is driving things. Is there a -- all of sudden a shift to a particular product segment, just looking for little more color on the growth there?

Okay. I wouldn't describe it as something that happened suddenly, Bob. I think, you followed the Company for a long time, you are well aware that several years ago we made a decision that we were going to try to grow the Company aggressively outside of North America and I guess back in the '99 kind of timeframe, started to bring the people on board to make that happen. In 2001 or so, we started with acquiring distributors, we now have people -- Polaris people on the ground in important ATV markets, places like Australia, New Zealand, United Kingdom, France, and Scandinavia. And so we put the people in place and those folks have helped strengthen our dealer network and our brand in those markets. And so we made those investments, you know 3 years ago -- 2 years ago and they continue. That in combination with product that is more designed for the international market, and all competitors seeing the opportunity for Europe to grow to be substantially larger than what it is today. I think all those factors have come together. But I wouldn't say it is one product, it is one market. We are seeing terrific growth throughout Europe, I would say, about 80% of the sales are in Europe and that seems to be where the market is doing the best.

If you are going to kind of equate it to the US market looking back in time, would you kind of equate this to the US market, kind of back in mid 90s?

Let's say early 90s?

Okay.

When you look at the growth rates, I don't know that the ATV market is going to -- in Europe it is going to ever get to the size of the North American market. There is simply not the land, there is not the space, but there are important differences still. One of the things that you can do with an ATV in Europe that you can't do in North America is ride on the roads the same way you might ride a scooter or a motorcycle here in the US, and most of those folks are using a country road or a back road to get to a trail to ride the ATV for recreational use or a farmer might be crossing a road. That is an important advantage and I think we see the opportunity, other manufacturers see that opportunity and the market is growing much like it did again in the early 90s here in North America.

Okay, and as relates to the ATV market, are the ATV numbers that you have for Q3 in terms of sell through -- is it fair to say that, kind of ballpark in line with what your wholesale shipments would be -- does this retail approximate wholesale?

No, I would say they were a quite a bit stronger than that, Bob.

Okay. And --

Just to remind you that ATV dealer inventory is lower.

Right.

-- right now than it was a year ago. And total inventory is substantially lower than it was last year and 2 years ago. So, that the business is growing. Our factory inventory is coming down and our dealer inventory is coming down, which is 3 pretty good things.

Okay, can you give us any quantification year over year in terms of what ATV inventories have come over?

Yes, they are down.

Okay.

I love you Bob.

I hear you. And last question, you mentioned commodity prices as a concern, I realize you haven't given '05 guidance, but if you kind of look from a qualitative standpoint, I mean, you know as we look to '05, is it optimistic to say gross margin is kind of flattish, given the commodity environment at best or how do you -- can you give us little more color there?

You know, we were not ready to give '05 margin guidance yet. We're seeing, I think the same thing everybody else is seeing hen they pick up the newspaper every morning, which is oil going crazy. If you can predict where oil is going to go that would be very helpful for us to give you margin predictions. I simply am not sure right now. It is very volatile. And I think the year-ago oil was around $30 a barrel and I don't know where it is this morning, but $53, $54 a barrel and given the political uncertainty in Iraq and elections and all the other stuff that influences the price of oil, we are not just not sure where that is going to be at Bob, and if we see a similar thing, are as much less visible in the newspaper, we are seeing similar things with steel which is even more important to us from a input cost as China -- China's economy seems like it is consuming a good part of the world's steel production. It has just driven prices crazy. So I think it is probably better that we kind of see how things settle out; we will have a pretty good chance as we usually do where the snowmobile businesses in mid to late December and we can give you guys a number of that, in fact, will be more credible, I think, in the next quarter call than can could now. We simply don't know.

Okay, fair enough, thank you.

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

Thank you. First of all, let me also offer my congratulation on a great quarter and great execution.

Thank you. Tim.

Thank you, Tim.

On the market share, I think the previous question, we don't have a problem with -- we are not going for market share. We liked that you focus first on profitability for yourself and your dealers and market share secondly. So don't change that formula and it's necessarily go for market share. It is somewhat from Bob's question with raw material. Can you walk us through as to how you lock-in your raw materials for an outgoing year? I mean do you buy evenly throughout the year? Do you lock-in prices for 6 months to 12 months and when do you do that on major raw materials for resins or steel and the aluminum. That's question number one. And then Tom, a couple of clarifications on your long-term goals - the 9% net margin, can you put a timeframe on that and then your sales of $3b, will that require acquisition?

Let me take the -- first the market share comment. Tim, I would not interpret from any of my comments or response to the question, if there is any change in the way that we will run the Company; same guys, pretty much same philosophy. We try to gain market share not with bonsai pricing or crazy promotional programs. We gain market share historically in this company through innovative products, and there is a big difference in terms of profitability of the shareholder whether you achieve growth through pricing up any below cost and drive the volume or you come out with the widget that customers just going to have no real fad and that's kind of been our program and will continue to be a program. So don't interpret any changes from either my comments or anything with regard to what we are going to do in terms of balancing profitability and share, nothing change there.

Great that's what we thought. We just wanted to reaffirm that.

Though in terms of the long-term objective, all it might take the raw materials. In terms of the long-term objective, the net margin percentage -- it would be a similar time frame to the growth number, 09. If we can do it sooner, obviously, we are going to try to do it sooner, but I think, the short-term issue is you got these commodities fluctuating and who knows what's going to happen with the Iraq and elections and all that sort of stuff. Over the long haul, I think, the basic recipe that we have had here, which is driving the quality and productivity expansion in a continuous way, will continue to be a successful recipe going forward. The suggested $3b, we do not anticipate any acquisitions to reach that level.

Thanks.

I will answer your question on the raw materials. Generally speaking, our objective historically has been to the extent we can lock-in the costs of our production when we get dealers. As you know, we build the order and when we get those orders, we generally like to look ahead 6 months or so and to the extent we can lock in some of the issues. So as you know, we do that recurrently and generally, we go, if it is appropriate, 3 to 6 months or so out and lock-in our exposure on currencies. In the past, we have done that with some of the commodities as well, specifically aluminum, because there is a very good aluminum market to hedge in and make commitments. So we have done some of that in the past. Right now, we don't have any commitments going forward on any of these commodities because the market is way too volatile. I am not even sure you can do it because the market is so up and down. So at this point, we are exposed, I would say, we have no commitments but our sense is that it is just as likely that these markets will come down a little bit than it is to go up a little bit. So as the market tend to stabilize a little bit, we will once again look to make more longer term commitments.

Okay. And then, just to revisit the issue maybe a little different way, could you comment on the third quarter, your ATV growth versus the international growth, both on a wholesale and a retail basis?

Wholesale and retail, ATVs -- I think what I said Tim was that we grew -- the ATV industry in North America grew by about 5% in the third quarter. We grew substantially; perhaps there are significantly -- perhaps they are way faster than the industry for the third quarter in North America. And internationally, we do not have good industry data. We get it once a year. It's retrospective as opposed to North America where we have once a month of very good information. That information is simply not available from an international perspective. But the qualitative comments that we have back from the market indicate that the market is growing very rapidly, and we grew in ATVs in the neighborhood of 60% internationally.

And at retail or wholesale?

Both.

Okay. Great, thank you.

Okay April, with that we are out of time. 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 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 we'll talk to you in next quarter, goodbye.

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