Polaris Inc (PII) 2004 Q4 法說會逐字稿

Good morning. My name is Lisa and I will be your conference facilitator today. At this time, I would like to would everyone to the Q4 and Year-End 2004 Earnings Results Conference Call. (Caller Instructions)

Thank you, Mr. Edwards, you may begin your conference.

Thank you, Lisa, and good morning and thank you for joining us for our fourth quarter and year-end 2004 earnings conference call. Mike Malone, our CFO, and Tom Tiller, our President and CEO will be participating in this call this morning.

During this presentation, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, and other matters including more specific guidance on our expectations for future periods, which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements, which by their nature involve risks and uncertainties. There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning a number of these factors can be found in our Polaris 2003 Annual Report and in the 2003 Form 10-K, which are on file with the SEC.

Now I’ll turn it over to Tom. Tom?

Thanks Richard. Good morning, everyone, and thank you for your interest in Polaris.

We’re pleased to report increased sales and earnings per share (EPS) for the 27th consecutive quarter or nearly 7 straight years. The fourth quarter earnings were $1.05 per share, up 21% from last year on 18% sales growth. For clarity, all of the numbers and references that I’ll make in my remarks will refer to the continuing operations of the Company, in other words not including the results of the discontinued Marine division.

For the full year 2004 EPS were $3.04 per share, up 14% on 14% sales growth and this was the 23rd consecutive year that EPS have increased at Polaris. The quarter and full year results exceeded our expectations and were driven by a strong, balanced performance across much of the Company.

The fourth quarter was the best quarter in the history of Polaris and it was our second consecutive quarter with more than $500 million of sales.

We accomplished quite a bit in 2004. We executed the operating plan that we had laid out at the beginning of the year and delivered balanced growth. Each of our businesses increased sales at a double-digit rate. We’ve continued to demonstrate outstanding consistency, we expanded our margins and our returns, and we thanked our customers for a wonderful first 50 years in business.

We introduced more new products in 2004 than ever before and we continue to make significant investments in R&D to drive future growth. Our dealer network got stronger and we grew internationally. We decided to exit the personal watercraft business.

The Polaris balance sheet has never been stronger than it was at the end of December and the cash flow in 2004 was simply awesome, as Mike will detail in a couple of minutes. And as a result of all of these factors, our shareholders enjoyed a 55% total return, which was the highest in our history. So there was a lot of good news and a lot to be proud of.

There were also some disappointments, of course. First, we didn’t do a great job managing our costs, particularly our overhead costs. We didn’t deliver operating leverage in 2004 and we’re going to try to do a better job in that area in 2005.

Also, while factory inventory is in good shape, dealer inventory is a little bit higher than it was at the end of 2003 and it’s at about the same level it was at the end of 2002. While the mix of that inventory is better - fewer snowmobiles, more current models and so forth - it’s a little higher than we would have liked.

But, all in, I’d say 2004 was a very good year for Polaris. Our 2004 results were achieved in an environment that presented several real challenges, including rapidly rising commodity costs, a slowing rate of growth for the North American ATV business, and increasing interest rates.

Most of these same challenges will remain in 2005 and I’m sure there’ll be some new ones as well. But we terrific momentum as a Company and a great team of people who have delivered consistently for 23 straight years. As a result, I’m confident that we can again outperform in this tougher environment and outperforming in a tough environment will be key, not just for 2005 but for the longer-term as well.

Speaking of the longer run, during 2004 we laid out a strategic roadmap for the Company, which sets three ambitious goals for the second half of the decade --

* Growing sales to $3.0 billion by the 2009 or an average of 12% a year.

* Expanding net margins to at least 9.0%, which means delivering 15% compounded annual growth in EPS

* Building the best products and dealer network in the industry.

I’m confident that it is possible to find another level of performance for our Company and 2005 will be the first demonstration of that potential.

With that overview, let’s turn to the individual business segments, starting with --

ATVs

The ATV Division, representing 65% of the revenue of the Company, had a good fourth quarter to cap another strong year. ATV shipments were up 15% for the quarter and 11% for the year, with very strong growth in both Ranger utility vehicles and in international sales.

Many of you are aware that the North American ATV industry has slowed its rate of growth over the last few years. For 2004 in the United States, retail sales of ATVs were at an all-time high of 817,000 units.

While the industry sales are at an all-time high and retail sales ATVs have increased each year for more than 10 straight years, the rate of growth is declining and in 2004 the industry increased about 2.0%. You may recall that in 2003 ATV industry sales in the U.S. grew by about 4.0%.

For Polaris, we had a solid year in 2004 and we’re confident for 2005. Part of what drove the success in 2004 was the number of great new products, including the all new Sportsman 800 EFI, the largest ATV on the planet, the new Phoenix, which is a value leader in its segment and the new Ranger XP, the worlds best utility vehicle.

New products have been and will remain the lifeblood of success and our growth here at Polaris, both in the ATV Division and across the Company.

While for North America ATV growth was solid, we enjoyed higher growth in two categories outside the core North American ATV business, specifically Ranger utility vehicles and international sales. Rangers make up about 15% of our ATV business and grew in 2004 in excess of 20%.

Sales of ATVs outside of North America are now more than 10% of the total ATV business and grew by almost 50%. Neither of these categories - utility vehicles or international sales - is included in the industry data that is widely published.

Promotions in ATVs continue to be at a high level but are fairly stable, for the most part. While a year ago there were several people particularly concerned about the entry of John Deere into the ATV category, that does not seem to have had a negative impact on our business, at least to this point.

In terms of 2005, we expect more of the same. We see low single-digit growth in the industry and a tough but winnable fight. We expect to outperform the industry in North America and we expect fast growth in Rangers and international to continue.

Snowmobiles

The Snowmobile Division had a better year in 2004 than in 2003. Shipments were up 39% for the fourth quarter and 26% for the year, up from what was a pretty small base. You will recall that in 2003 we significantly reduced the build of snowmobiles to reduce field inventory, so the comparisons in ‘04 were, frankly, relatively easy.

I would say that the ‘04 season has been mixed so far, from a positive perspective. We launched our new Fusion and 900 RMK, which were built on the all-new IQ chassis. Snowfall has been decent, but not great. I’d say that the West has been sporadically great. The Midwest has been decent in the riding locations, but the snow came later than we would have hoped and east has had mostly poor riding conditions.

Retail sales for the snowmobile industry through December were down slightly, low single-digits, from a year ago. We’ve lost a little bit of market share, which was not unexpected given our relatively conservative build and total dealer inventory of snowmobiles remains quite manageable, although like every year, there will be particular geographies that’ll be a little heavy.

We will be introducing a lot of new products in snowmobiles next month at our dealer meeting. We can’t be certain until we see the dealer and consumer reactions, but I would expect that we will increase our snowmobile sales in 2005 versus 2004. Snow checks will be an important barometer this spring, which we’ll watch carefully.

In the next quarterly conference call following the end of the riding season and after our annual dealer meeting, we’ll be more specific about both the new products and our future guidance in snowmobiles.

Victory Motorcycles

A good fourth quarter closed what was another strong year for the Victory Motorcycle Division. Victory shipments were up 18% for the quarter, off a tough comparable. Victory sales increased 113% in the fourth quarter of 2003 and Victory sales were 29% higher for the full year.

Consumer and dealer interest in Victory Motorcycles continues to grow rapidly, as we’ve seen throughout the fall and winter motorcycle shows.

The heavyweight Cruiser and Touring segments - both part of the motorcycle industry that we participate in - had a good year in 2004, with an 8.0% increase in U.S. retail registration. Victory dramatically outperformed the industry and we expect that performance to continue for several more years.

Compared to a couple of year ago, we’ve made real progress in the Motorcycle Division. The bikes are better looking, more reliable, and cover a broader range of price points. The Victory brand is staring to become fairly well known among motorcyclists.

Victory dealerships are improving and the quality of dealers expressing interest in carrying the Victory brand is much stronger than when we first started.

And perhaps most importantly, the feedback that we’ve been getting from Victory customers in our own annual buyer survey is very, very positive and improving. Our customer satisfaction scores have increased dramatically in recent years and now are at or near the top of the motorcycle industry in virtually every key area - styling, performance, comfort and reliability.

This customer satisfaction translates into very valuable word-of-mouth referrals, which are critical to growing any new business, but particularly important in a high-ticket discretionary category like heavyweight cruisers.

The new Victory models that we introduced for 2005 appear to have generated strong consumer interest. The all-new Victory Hammer has graced the cover of a number of key motorcycle magazines and the more value-prices Vegas 8-Ball model has drawn the interest of many first-time Victory buyers.

2005 should bring more good news for Victory. We’re going to build on the strong momentum and help grow this business into a solid part of Polaris.

Parts, Garments and Accessories

We had a good close to the year in PG&A with solid 13% growth for the year. This business is operating well for us and we expect more of the same in 2005.

In ‘04 we achieved double-digit growth in Parts, Accessories, and Apparel and across all product lines. We also received two industry awards for innovation, one for our new Glacier Snowplow and the other for the new family of Lock & Ride ATV accessories.

International

International had another fantastic year in 2004 and delivered 40% growth, driven by strong increases in ATVs.

We continue to be helped by three major factors --

* Volume gains driven by new products

* A better dealer direct distribution model

* Favorable currency changes.

ATVs, particularly in Europe, are enjoying very rapid growth, similar to the trends in North America in the early-to-mid 1990’s.

To capitalize on this growth opportunity, for the first time we’re selling products that were specifically designed for the key international markets and we expect international sales to grow faster than North America for the remainder of the decade.

The Dealer Network

As we’ve discussed in prior calls, we’re working hard on improving our North American dealer network, with today consists of about 2,000 dealers.

As we go forward, we want to partner with outstanding retailers. In most cases, that means improving the relationship with our existing dollars, but in some cases that may mean terminating a relationship and starting fresh.

In 2004 the quality of the dealer network increased with the addition of 156 new dealers, 44 of which were Victory dealers. We also turned over 175 dealers. The initial orders of the new dealers were four times greater than the 12-month wholesale performance of the dealers we terminated.

Before I turn it over to Mike, let summarize our expectations for 2005 --

* 2005 is going to be stronger than ‘04.

* Revenue growth will be solid, up in the mid-to-high single-digit range and balanced across the Company rather than being concentrated in a single division.

* We expect every business to grow. The environment is going to remain tough.

* I expect us to outperform our competitors.

* Earnings should grow 8.0 to 13% or in a range of $3.28 to $3.42 per share.

I’m confident that with the plans we have in place, 2005 should be another record year for Polaris, our 24th in a row. At this time, I’ll turn it over to our CFO, Mike Malone.

Thanks, Tom.

As Tom mentioned, 2004 was our 23rd consecutive year of EPS growth one of our best years ever. We are very proud of these results and although the environment may be difficult looking forward, I remain confident that we can generate another solid year in 2005.

Let me begin by given you some details regarding our overall guidance for 2005 and comment on current aspects of our fourth quarter and full year 2004 results. My comments and guidance today relate only to the results from continuing operations of the Company unless otherwise noted.

The exit of the Personal Autograph business that we announced in September is proceeding on plan and should be substantially complete by the end of 2005. Our current expectation is that the loss from discontinued operations, which was $0.19 per diluted share in 2004, will be at $0.02 per share loss in 2005.

The other item to note is that the expectations and guidance provided today for 2005 do not reflect any change in accounting rules for expensing of stock options, which is expected to be implemented in the third quarter of 2005.

For the full year 2005, we’re expecting total sales to increase in the 7.0 to 10% range, driven by sales increases across each of our product lines. We expect EPS to grow to be in the range of $3.28 to $3.42 per share, an increase of 8.0 to 13% when compared to the $3.04 per share earned in 2004.

The first quarter 2005 sales are expected to increase 5.0 to 7.0% with EPS growing to be in the range of $0.40 to $0.42 per share, an increase of 5.0 to 11% over the $0.38 per share earned in the first quarter of 2004.

Now let me give you some qualitative comments on why we feel confident in delivering these full year 2005 results, beginning with ATVs.

Sales of ATVs in 2005 are expected to continue to grow, driven by the continued acceleration of new product introductions, continued rapid growth in our utility and international business, and the expected modest growth in the overall North American ATV industry.

For the full year 2005, Polaris ATV sales are expected to increase in the mid single-digit range.

Victory motorcycles are expected to grow significantly and have another strong year, as the Vegas and Kingpin continue to gain share and the new Vegas 8-Ball and Hammer enter the market this spring.

Additionally, the Dealer Network will continue to expand and gain strength and we expect the overall heavyweight cruiser market will continue to expand.

Sales for Victory are expected to grow in the range of mid-to-high teens percent for the full year 2005.

As always, at this point in the year, it is too early to tell what the dealer orders for snowmobiles will look like for the next season. But given what we know today we’re expecting growth from snowmobiles in 2005, building off the success of our new IQ chassis that we introduced last year.

With dealer inventories at reasonable levels and the upcoming introduction of several new models this spring, our current expectation is that snowmobile sales will be higher in 2005 than they were in 2004.

PG&A sales are expected to increase at a similar pace of the overall Company for 2005, with balanced growth across all product lines for the second year in a row.

Moving down the income statement, on a consolidated basis gross profit for the full year 2005 is expected to be up slightly over the 2004 gross profit on a percentage of sales basis and a tougher overall environment.

While we anticipate continued benefits from cost reduction efforts, efficiency improvement initiatives, and savings for more effective sourcing of component parts, we also expect the community, fuel, and transportation costs, which increased dramatically in 2004, to continue at these higher levels throughout 2005.

In addition, we expect increased floor plan financing costs in 2005, due to higher interest rates and at this time we do not expect to get a positive lift on the gross margin percentage in 2005 from any net currency movements.

And although always difficult to project at this early date, we expect the promotional environment to remain stable and possibly moderate somewhat as we go throughout 2005.

Given all of these anticipated factors, our expectation is that our gross margin percentage will expand slightly for the full year 2005, in the range of 0 to 20 BP.

With regard to operating expenses, in 2005 we expect to begin to realize operating leverage from the investments made over the past several years, particularly in sales, service, and R&D. Additionally, we will not have the $2.8 million expense related to our 50th anniversary celebrated last year.

Operating expenses are expected to be slightly lower as a percentage of sales for the full year 2005. Income from financial services for the full year 2005 is expected to grow at a pace similar to the overall Company.

As expected, this more moderate rate of increase reflects the maturing of the retail credit portfolio. For the full year 2004 we financed about 34% of our products sold to consumers in the United States, up slightly from the 32% last year.

The household retail credit portfolio balance at the end of 2004 was approximately $656 million, up from $517 million at the end of last year and up sequentially from $618 million at the end of the third quarter of ‘04.

As is expected in a maturing portfolio, receivable losses in the retail credit portfolio have increased slightly, averaging about 4.0% of the portfolio but remain inline with our expectations and our partner household’s experience with portfolios of similar nature and maturity.

At the end of the year the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $669 million, up from $581 million at the end of last year. Credit losses in this dealer portfolio continue to be very reasonable, averaging well less than 1.0% of the portfolio over the life of the partnership.

Let me take a moment to talk about the impact of currency fluctuations on the operating results.

For the full year 2004, our currency hedging strategy performed well for us. We protected the downside risk yet preserved some upside opportunity. For 2004, the currency fluctuation of the Canadian dollar and Euro had a positive impact on both sales and gross margins, while the Japanese yen had a negative impact on gross margins.

The gains and losses from our hedging activity are recorded in Other Non-Operating Expense. The weak U.S. dollar and the resulting impact on our Canadian dollar hedging transactions generated the $4.7 million expense in the fourth quarter 2004 P&L.

For 2005, we have foreign currency hedges in place at this time for the first three quarters of the year, for the Canadian dollar, at an average exchange rate of about $0.79 and at this point have no hedges in place for the Euro or the Japanese yen for 2005.

For the full year 2005, based on the hedges that we have in place and the current exchange rates, at this point, we expect a slightly positive impact on gross margins from the Canadian dollar, really no impact from the Euro currencies. And a slight negative impact from the Japanese yen on gross margins in 2005 compared to 2004.

So, when you add it all up, our current expectation is that net-net the total currency impact on profits for the full year 2005 will be nominal change year-over-year.

Now let’s take a look at some balance sheet and cash flow information for the full year. You’ll note that we filed with our press release this morning, in addition to the income statement we filed, a balance sheet and cash flow information. So I’ll make my comments brief.

We entered the year with $138 million of cash, which is up 67%, significantly from where we were a year ago. We were able to generate this level of cash after returning a significant portion of the profits to the shareholders through both our share repurchases of 1.4 million shares and $67 million during 2004, as well as paying cash dividends of $39 million during the year.

We made appropriate investments in the business through capital expenditures, which totaled $89 million for 2004, which included $17 million incremental for our new R&D center.

For the full year 2005, CapEx are expected to be similar to 2004, in the range of $85 to $95 million as we complete the investments in our R&D facility and continue to invest aggressively in new product tooling and engine and technology projects.

We expect depreciation for the full year 2005 to be in the range of $65 to $70 million dollars.

Net cash flow provided by continuing operating activities was $245 million for the year ended 2004, a 46% increase when compared to $168 million in the prior period. The significant increases in cash flow from continuing operations results primarily from higher accounts payable and accrued expenses at year-end, most of which is due to timing and less cash required to fund factory inventory levels in 2004.

We expect to continue to repurchase shares during 2005, under our existing Board authorization, which has approximately 3.0 million shares remaining. We expect the repurchase activity in dollars spend in 2005 to be similar to 2004 levels.

Receivables on our books at the end of the year were $71 million, up from $51 million last year, primarily due to the higher sales from our rapidly growing international business during the year.

Inventories on our books were $174 million, compared to $167 million last year, an increase of only 4.0%.

Debt to total capital was just 5.0% at the end of the year 2004, equal to last year.

And EBITDA from continuing operations was $266 million for the full year 2004, up 14% from a year ago.

And as you recall, a week ago we announced the increase of our regular quarterly dividends by 22% to total $0.28 per share effective with the first quarter dividend, representing our 10th consecutive year of increasing the dividend.

Now let me recap our 2005 guidance --

* Sales for the year are expected to increase across each product line, resulting in a total sales increase in the 7 to 10% range, with full year EPS growing to $3.28 to $3.42, an increase of 8.o to 13% over 2004.

* First quarter 2005 sales are expected to increase 5.0 to 7.0%, with EPS expected to be in the $0.40 to $0.42 per share range.

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

(Caller Instructions) Rob Brown.

Hi guys, great job on the quarter. I wanted to just get a little bit more information on your dealer upgrade efforts. Do you plan to accelerate those in ‘05? I wasn’t clear from your comments whether that was an acceleration or just a continuation of your efforts.

Thanks, Rob. Yes, we’re going to continue working hard on improving our dealer network. I mentioned in my prepared remarks that we have kind of a strategic plan that we’ve laid out for the next 5 years and a big element of that, Rob, is creating a slightly leaner, stronger, more profitable dealer network. So I think that number, 5 years from now, is somewhere in the 1500 to 1700 range, down from 2,000 or so that we have today.

So that would mean, over the next several years, that we would gradually reduce the number of dealers and try to strengthen our business with those dealers that remain. So I would expect that you’ll see continued efforts to do that. And I won’t update those numbers for every call, but probably once a year or so we’ll try to give you guys a quantitative snapshot into how we’re doing there.

All right. Thank you.

Assia Gorgeva (ph), Infinity Research.

Good morning and congratulations on an excellent quarter and a very good year. I have one question on domestic ATV growth. Can you quantify the retail sales rule for Polaris versus the industry?

Yes. I think what I said was that the industry was up low single-digits, about 2.0% for the year and I think I characterized our growth as strong. So we won’t, for competitive reasons, talk about the specific number, but I think with the added information that I provided in terms of Rangers and international sales, I think you can pretty well back into the numbers that you’re looking for.

All right. Thank you.

David Anders, Merrill Lynch.

Great. Actually, I have two questions. First, I missed the number of dealers that exited the system this year, Tom. Was it 134?

Let me just go back and read that section again, David. Hold on. So, what I said was, in 2004 the quality of the dealer network increased with an addition of 156 new dealers, 44 of which were Victory dealers and we also turned over 175 dealers. The initial orders of the new dealers, in aggregate, were four times greater than the 12-month wholesale performance of the dealers we terminated.

Okay and then Mike, maybe you could comment a little bit more on the expensing of options. A lot of companies are giving guidance right now kind of -- is that because it’s unclear what the compensation structure will be in ‘05 or you’re waiting until we get to the third quarter to calculate the effects?

We considered whether we should give guidance on with or without options and I just think, for apples-to-apples comparison, it’s a little early right now to be projecting out that far. So at this point, we just felt much more comfortable going with the historically apples-to-apples guidance and then when the rules change in the third quarter we’ll incorporate the new rules and more than likely restate the prior periods. And we’ll freshen up all the historical numbers and give the revised guidance for the future periods.

Tom, maybe I can have just a follow-up question to that? Do you think the Board will change dramatically the compensation structure that we saw over the last several years, I mean, as far as you guys and the options?

I don’t know that we’ll see any dramatic changes. No I wouldn’t anticipate that.

Okay. Thank you.

Gregory Badishkanian, Smith Barney.

Congratulations, guys, and just a few quick questions with respect to utility. You said its not captured by MIC data and how would you typify like your new products and also, what do you think are the key reasons why you’re gaining share in that market? And maybe if you could talk a little bit about how quickly you think that market is actually growing?

Well, the utility business is one that we entered 1998 or 1999, somewhere in that timeframe. Really, it was an existing business, kind of a pretty sleepy industry, I would say, that kind of dominated by the golf cart companies and also John Deere and Kawasaki and it was not something, I don’t think, anybody - dealers, manufacturers, anybody - was really devoting a lot of resources to.

When we came in with the Ranger, it was a product that nothing like it existed. It was much higher performance, in terms of its capability, off-road capability, kind of super utility vehicle and that business has been built steadily and its grown for a number of years. We’ve gone from number 7 out 7, to number 5, to number 3 and I don’t know exactly where we are now but probably close to number 2 in that category.

We’ve driven an awful lot of the growth in it and we’ve done it primarily with just outstanding product. I mean, most of the growth in the category was generated because of the strength of the Ranger product. And in the last 18 months the number of companies who’ve come in to the utility vehicle business - Yamaha has come in, Kubota has come in - and we thought maybe a year ago the rate of growth the Rangers could moderate some because of the new entrants. But we really didn’t see that.

In the 2005 dealer meeting that we conducted in the summer of ‘04, we introduced an all-new version of the Ranger, which has just been a home run. People love it. It’s got an even better suspension system. We improved the cab systems and we expanded the model linen now to include a 700cc electronically fuel injected engine and that’s been just -- we can’t make them fast enough.

So all of those things have just given us a lot of confidence here. Not for one year, but for several years in a row we’ve seen nice growth.

I can’t answer your question specifically about industry growth rates and the share I’m a little not as clear in market share as perhaps we are in some of the other businesses, only because there’s not industry data in utility vehicles. We make our best guess there and there’s some outside consultants that guess. But there’s not hard data like there is, for example, in ATVs.

So Rangers are a home run. They have been. I think they’re going to continue to be and it’s primarily a product story.

Great and just with respect to you provided EPS growth FY05, basically, of $3.28 to $3.42, implying 8.0 to 13% growth. But your long-term EPS growth rate is 15% and I’m just wondering if some of the benefits are maybe more back end loaded or if you’re just being conservative like you normally are till you get a little bit better visibility as the year progresses?

Yes. I think that we’ll see how the year unfolds. It’s early, obviously, and I think if you check our track record we try very hard to not disappoint investors. We try very hard to do what we say we’re going to do and if we can do a little better than that, that’s terrific. You’ll probably recall that last year, in 2004, our initial guidance was 8.0 to 13% earnings growth and we wound up doing 14%. So that worked out pretty good.

This year, you know we’ve got the challenges that I talked about on the call with the commodity costs and the ATV industry in North America being only up a couple percent and we don’t know where the fuel prices are going. And I’d say within our business snowmobiles are probably the thing that we’re not -- we think it’s going to be up. We’re not sure how much and so it’s probably going to be a while.

I think I have a lot of confidence that we can be somewhere in that 8.0 to 13% range. Can we be better? I hope so, but I would not provide guidance at that point until we get further down the road. So I’d say we’re being consistent with our previous behavior.

Right. Great.

Mike, if you want to add to that or--?

No. That was said very well.

Good, thanks and congratulations again.

Thank you.

Tim Conder, A. G. Edwards.

Gentlemen also, let me offer my congratulations on your unbelievable consistency.

Thanks, Tim.

A couple of items here. Mike, in the quarter, just for kind of housekeeping purposes, can you just detail out the 4x benefit on sales, gross margin, operating margin, and EPS?

Well, as you know, Tim, we don’t get real specific there. What I would tell you is that for the fourth quarter the net impact of the currency movements of all the currencies that impact us, there was a positive impact on sales. There was a positive but less positive impact on gross margins since we have a lot of purchases in foreign denominated currencies.

So our margins were helped but to a much lesser degree than top line sales and as you work your way down the P&L, the operating expenses are impacted negatively with the currency movements and then we had a rather large Other Expense item related to currency. So as you work your way down the P&L the benefit dissipates somewhat and bottom line there was a modest benefit to currencies.

Okay. Just again on the inventory management, very good. In the AR you mentioned that it was primary the year-over-year increases related to international and some timing of shipments. Was there a lot of international shipped late in the quarter? I know that maybe you’ve got a little bit longer terms there. So if you could maybe refresh us on the terms AR international versus domestic and just a little bit of additional color on the timing?

Sure. As you know, almost all our North American sales are sold through our Polaris Acceptance joint venture and we maintain very little receivables there because we get paid very quickly.

So, generally, most of our receivables that are on our books relate to our international business and the international business has grown rapidly, up 40% for the year. It’s up significantly in the fourth quarter and the terms of those sales to our distributors, internationally, generally are 90 to 150 days or so, to allow the product to get overseas and sold through the distributor. So they’ll have a longer-term.

And then the subsidiaries, the international subsidiary sales to their dealers generally don’t have the attractive financing, the wholesale financing that we have here domestically, so those dealer sales, internationally, are generally a little bit longer-termed as well. So the growth, from $50 to $70 million in receivables is totally related to our international growth.

Okay.

So I guess revenues up 40% and receivables are up 40%, Tim.

Okay. The other thing, gentlemen, you’d mentioned that the promo environment from your perspective remains kind of comparable year-over-year and potentially, if I heard you right, Mike, and please correct me if I’m misspeaking here, you thought it could even potentially get a little bit better.

If you maybe kind of reconcile that, are you worried in any way or have you had any planned promos on the sled side yet, at this point? And then, I guess to the larger degree, domestically with the ATVs and what you’re seeing and your comments regarding the domestic market?

Let me try that, Mike, and maybe you’ll want to add some comments afterwards. I guess, in terms of sleds, Tim, I don’t see, in terms of promotions, the sleds -- the primary thing that affects promotions of sleds is inventory. And we got a pretty good -- we know exactly where our inventory is and our field inventory and that’s a pretty manageable number, okay.

I’m not at all concerned about in aggregate Polaris dealer inventory. Now there’ll be individual dealers or individual regions that might be, but that’s true, frankly, every year. And we have some estimates of where the competition in terms of sell through and so forth and when I look at where our new products are going to be, the strength of our new products and a much higher ratio of current to non-current than in previous years. There’ll be some promotions in snowmobiles, but I don’t see anything that’s a cause for concern for us, and as best I can see, for the competition.

Just let me add to that, that to the extent that there are promotions running or will be promotions running for the balance of the season or even to next year to help liquidate whatever inventories there are, those are all recorded in 2004 anyway.

Right.

We make an estimate of those every year and that’s all in our reported numbers.

Okay.

With regard to ATVs, it kind of depends on expectations of really seven companies and any one of which can kind of throw a wrench in the monkey works here. But my sense is that most of the competitors have probably figured out by now that the industry is going to grow single-digits and you’re not going to promote your way into growing it 40% or 50% or that kind of thing.

So maybe he industry’s kind of adjusted to that to some degree. Now that’s looking out the windshield here. In other words that’s looking into the future and we could be wrong about that, Tim, but that’s my expectation. And when I look at the strength, again, of our new products, which of course tend to be promoted less than non-currents and that kind of thing, I’d say that again we’re probably -- if there’s a direction I’d say it would be perhaps down a little bit.

What I don’t see for sure is the environment that we saw a couple years ago, which was quarter-over-quarter, over quarter, over-quarter of just continued escalation. We’re at a high level of promotions, but it seems fairly stable.

Okay and then as a result of the inventories and the ATVs, you feel pretty comfortable, again just to reiterate what you said earlier, for yourselves and the industry?

Yes. As best we can see that data. Now, I think we have better visibility into other manufacturer’s field inventory of snowmobiles and their production plans, because there’s fewer of them. We don’t know what everybody in the ATV industry is. There’s seven now and eight manufacturers and it’s harder to get all that data competitively.

But, again, I don’t see the signs of anybody being completely out of whack, as has happened sometimes over the last several years, and we’ll see. It’s a projection like any other projection, but our sense is that it should be flat or could be down a little bit.

Last question on ATVs, Tom. Just to maybe give us any more color that you have on John Deere’s success or their sell through. I mean, it looked pretty anemic back in the fall and just any additional color you might want to offer there?

Well, I guess I’m not sure I can speak too much for John Deere. But I think, as I said in my prepared remarks, you know a year ago there were a number of people that were writing that this was going to be the end of the Polaris ATV business. And major impact as John Deere, which is a very strong brand, was coming into this category.

And I guess a year later -- you know we said let’s give this a little bit of time here before we fold up the tent and I guess a year later I’d say that the impact of John Deere has been quite minimal, certainly to our business. It has not had a major impact.

I would not say that we’re discounting them in any way. They’re a strong company, but I think we also are a pretty strong Company when it comes to ATVs and we’re number 2 and their number 8 and our business is 40-50 times the size of their ATV business.

So it’ll take a while, I think, for them to get going in there in the same way it took Arctic Cat a long time. It took us a long time. It took Arctic Cat a long time. It’s taken Bombardier a number of years. It’s just you don’t just come into a category and immediately change the dynamics. It takes time in the durable category.

Great. Thank you.

Ed Aaron, RBC Capital Markets.

Thanks. Great job on the quarter and the year.

Thanks, Ed.

Thanks, Ed.

I wanted to just piggyback off of Greg’s question about the ‘05 guidance relative to the 5-year plan. You talked a lot about a “big idea” that’s on the horizon. To what extent might that cause an acceleration beyond 2005 and can you give us some idea of when we might hear something more specific about that idea?

Well, let me try to answer that. When we kind of laid out this new strategic plan, what we call The Chart, which again it might have been an overarching view as to where you can expect us to go over the next several years, just as we did when I got to Polaris in 1998.

We said we thought we could get the $3.0 billion by 2009 and coming off from a 2003 base that means we had to grow the top line by 12% and the bottom line by 15%. So in 2004 we did a little better on the top line. We were 14% versus the 12% target and we were slightly below the 15% target. We were at 14%.

And I think I said in my prepared remarks if there was something I was disappointed in, I think we could have done a better job managing our costs, frankly. We’ve done a better job in previous years and we’re going to try to do a better job in 2005. I don’t know if we’ve completely forgotten how to manage costs around here, but we’re going to have little renewed focus on that.

So I’d say the first year of it, in terms of getting to that new vision in ‘04, was pretty successful. In terms of ‘05, the initial guidance we got is 7.0 to 10% and 8% to 13% and as I said earlier, we’re going to try to do better than that, but that’s the guidance that we got out there. And we also are cognizant that we got to grow over these several year periods 12% in a year top line and 15% a year bottom line.

So, I don’t think there’s really a big disconnect. It wouldn’t surprise me if you see some fluctuation, either above or below, in terms of sales or earnings in any one individual year. But I think the main point, the main point that I want to get to people is there is another level of performance in this Company, okay. We can see it. We can get it. We can drive it.

The big idea that you referred to, what we think is that there’s an opportunity to grow the Company about $3.0 billion by 2009. We would guess about $100 million of that would come from an opportunity that would be derived from our existing technology and $100 million of that $3.0 billion by 2009 would come there.

I would tell you it would be similar to a couple ideas we’ve done in the past. I’d say entry into the youth business was an example of the new market where we used existing technology. The utility vehicle business was an example of entry into a new market using the existing technology.

Don’t look for us to go in the space shuttle business, okay. We’re not going into something that’s widely divergent. But we do think that there are other areas of the industry that we can compete in and I guess that would be about as much as I’d say about it. In terms of when and specifically what, that’s just not something I’m prepared to answer, at this point, Ed.

Okay and then but the wholesale portfolio is up about 15%. Is that a pretty good proxy for the year-over-year growth in dealer inventory levels?

Well, I’d characterize the dollars in the wholesale portfolio in the United States, which is the 15% that you’re talking about - that’s dollars in the United States - that’s a higher percent than our unit dealer inventory is up.

There’s mix implications there, as our Victory business and Ranger business accelerates faster than our overall business, that has an impact on the dollar mix, as well as PG&A. PG&A is included in those dollars that are financed and they’re not in the units, obviously. So that’s a higher percent than our inventories are up.

Okay and I have one question on the international front.

And Ed, if I could just jump in that. I’d say about half of that - maybe not quite half - is due to higher average selling prices, okay, more Victory’s, Rangers’, 900 RMK’s, richer mix stuff and also some of the modest price increases that we’ve been able to pass through, as we’ve seen some of the commodity costs.

If you look at it in terms of units, I think, as I mentioned in my prepared remarks, it is higher than it was at the end of 2003. But, again, at about the same level it was at the end of 2002 and the business has grown 20% since then. So it’s a little higher than I’d like it to be, but I wouldn’t characterize it as way out of whack.

Okay, fair enough and just one last question just on the international front. Tom, you had equated the European ATV business as being like the U.S. ATV business back in the early-to-mid 90’s. Is that similar in terms of units and growth rate?

Yes it is. It’s a little bigger now than the worldwide snowmobile industry. The ATV industry in Europe is slightly larger than the worldwide snowmobile industry right now, so it’s a big opportunity, a couple hundred-thousand-unit opportunity and it’s growing very, very rapidly. It varies year-to-year, but 30 to 50%.

Okay.

So it’s a real nice growth opportunity like ATVs were in North America in the early 90’s.

Great. Thank you very much.

Romney F.L. Nisi (ph), JP Morgan

Hi, just a few questions. First, could you just talk on the other expense line that big, $2.0 million swing there? I think it was commented that most of it was FX, but if I’m missing something there. Secondly, PG&A looked like it came in a little bit lower than expected. Could you make comments on that? And then lastly, talking about this year, 2005, and sort of your guidance for gross margin expansion of 0 to 20 BP. Do you see that more so, the expansion, coming in the back half of the year and sort of maybe deterioration in the front half just do to sort of the comps of the commodity pricing? Thanks.

Okay. First question was the $4.7 million of other expense in the first question. That’s almost totally related to, as I said in my comments, it’s foreign exchange hedging contracts on the Canadian dollar. That’s an expense on that line, but we got the favorability of the movement in the dollar up above in the P&L. So it’s kind of an offset.

PG&A being lower in the fourth quarter, you’re probably referring to the 4.0% sales growth in the fourth quarter versus the 13% for the year, probably related to late snow in much of the East and late snow in the Midwest had an impact on fourth quarter.

I’m trying to pull the fourth quarter ‘03 PG&A number and I’m trying to remember, but it was a relatively strong quarter, if my memory serves me correctly, at 13-14% quarter. So I think the comp was reasonably decent.

That was a difficult comp. It was 17%.

17%, okay, thanks. But overall PG&A business is doing just great. We’re seeing real nice growth in accessories with some of the innovation that we’re doing. The parts business is strong. The apparel business is strong. So I got - hate to say zero - concerns, but I feel real good about PG&A. So I’m not concerned about 4.0% in the fourth quarter at all.

Okay, but do you think actually that sort of Mike’s comments about possibly a delayed effect of late snow you’ll see a bigger pick up in Q1?

Sure. Sure. We had almost no snow in the Midwest in the riding areas by Christmas, okay. And we did have decent snow in the East. That’s pretty much gone and it’s going to bounce around a little bit and the parts business is very sensitive, obviously, to snowfall and riding conditions. So I guess that’d be my only comment.

And then for the gross margin, sort of timing of 2005?

Yes, I think -- I don’t know that I want to give a lot of specific guidance, at this point, on gross margins by quarter, as we go throughout the year. I think I gave some qualitative comments on the impacts that will help and will hurt for the full year.

The commodity charges, obviously the comps for that are more difficult, as you said, in the first half of the year so we have to absorb those, but we’ve also been able to pass along some of that with some pricing that should be helpful to offset some of that. So I don’t know that there’s going to be any huge, wild fluctuations in our margin trend throughout the year and as I said, for the year we expect to gain modestly 0 to 20 BP.

Okay. Thank you very much.

Lisa, we have time for a couple more questions, so we’ll do the next two.

Okay, sir. John Moran, Orion Bank.

Hey, thanks guys, just a quick couple of quick questions. You’d mentioned that you lost some market share in the snow business. I’m wondering if you could sort of disclose who you lost that share to?

Yes. I think Skidoo picked up a little bit of share this year and again, a lot of that is function of build. We’ve been pretty conservative with the build, as we’ve been on our old chassis and as we introduce the newer chassis I would expect that the dealer and consumer reaction to that to be pretty positive.

Skidoo, of course, if you follow the snowmobile industry, it’s kind of a constant battle of whose got the latest, greatest sled. But a couple of years ago Skidoo introduced a very competitive sled called the Rev and it’s taken quite a bit of market share and a little bit this year. Not something that I’d be particularly concerned about, at this point, but I’d say Skidoo was the primary winner. And Yamaha has had a good year with their 4-stroke snowmobiles also, but again a relatively small player.

Okay, thanks. The other question is I know that you guys are going dealer-direct in a handful of countries over in Europe. Are there other opportunities over there to sort of go direct and where do you stand on some of the key markets over there?

Thanks. Yes, we have gone dealer-direct and I’d say in terms of what’s really driven the benefit structurally -- we’ve benefited from the currencies. That wasn’t anything that we dreamed up, of course and you can never bet on currencies.

But several years ago, in ’98, ’99 kind of timeframe, we said that we were going to grow this business internationally and we began by putting people on the ground in all the major countries. And we’ve added about one new market a year. So now we’re dealer-direct in Australia, New Zealand, UK, France, and Sweden and Norway. Did I miss anybody? I think I got everybody.

And as we look forward, there may be additional opportunities. It’s a fairly big undertaking for us. We can do maybe one a year and to do it well and we’re looking at those opportunities going forward. We’re happy with our distributors. Our business today is about half through our guys, our dealer-direct operations, which tend to be the larger countries, and half through our international distributors and I think that that’s working well.

But we may, over time, see other opportunities as the market continues to grow. There has to be a certain scale to justify putting in the infrastructure necessary to put a Polaris team on the ground there. If it’s a small market and it’s going to remain a small market, we’re better off with a distributor. If it’s a large market or it’s likely to become a large market soon, then its worth the time and attention to have a dedicated team there.

Okay and then just one last quick question, on the ATV side of the business. What percentage of sales in the quarter were from newer products? I don’t know if you got that.

I don’t have that number off the top of my head. I apologize.

Okay. Thanks a lot.

Okay, Lisa, one more question.

Okay, sir. Godfrey Birckhead, SBK Brooks.

In the sales increase that you mentioned for the year of 7.0 to 10%, Tom, how much of that is price?

I wouldn’t anticipate-- in those numbers there’s a lot of price, I don’t know, a percent or so, maybe. We’re not anticipating having a lot of success in passing through big price increases, but pure price, okay. So, in other words, a 500cc ATV that you sold last year for $6000, can you sell it for $6,200, may be a half a percent to a percent of pure price.

What we have been successful in, and I think we talk a little bit about it when we talked about inventory, is mix, okay. In other words, selling, if you look at the basket of products, selling relatively more higher end products, products like our 900 RMK’s and 900 Fusions, which are top of the line more expensive snowmobiles, and selling relatively fewer kind of entry level models and so that might be. The mix could be another couple of points, I’d say.

Can you talk just generally about the pricing environment? Are the competitors doing the same thing or is this is a concern you would have in terms of your gross margins? That historically you’ve talked in the past, as I remember, about increasing your gross margin by as much as maybe 50 BP a year and you’re talking about 0 to 20%. Is that a reflection of the pricing environment and the price of steel and so forth now?

Well, I’d say a couple things there. You know the dramatic run up in commodity costs in 2004, I think, to a certain extent, caught us by surprise and maybe others. I don’t know. The price of oil going from roughly $30 to $50 a barrel (multiple speakers) --

And steel doubled and so forth. Right.

And steel and aluminum and the transportation costs --

Copper and (multiple speakers) --

And plastics and everything else. In that environment, we increased our gross margins by 55 BP. That’s not so bad, okay, I think the actual results. As we look forward we don’t know what’s going to happen in the price of oil but we’re a lot better off at $30 a barrel than we are $50 a barrel. We know that. Kind of what we’ve got in the plan right now is for pretty high prices to remain and even with pretty high prices maybe we can squeak out a little bit of margin expansion.

As you look at it structurally, over a several-year period, I got a lot of confidence in our ability to expand margins. I mean, we’re going to take our net margin from 7.0 to 8.0%, wherever it is, to 9.0% and that’s going to take gross margin expansion to do that. And that comes through platform redesign, its efficiencies, as you share engines over broader groups of products, those kinds of structural productivity things that we’ve been very successful doing.

So you may see some bouncing around quarter-to-quarter, year-to-year, in terms of margin expansion. I wouldn’t get real excited about that in either direction. But what the key this is, is that we can drive long-term productivity, continue to drive long-term productivity and we’re focused very strongly on that.

Okay, a housekeeping question for Mike. The tax rate for this year is estimated at?

Well, the rate for 2004 was 33% and our expectation is that it will maintain around 33.0%.

Okay and R&D, you talked, Tom, a lot about the R&D and you’ve increased that and last year, if my math is correct, you spent 3.4% of sales on R&D. Is that going to go up as a percentage of sales in 2005?

It may go up modestly. I don’t expect it to go up at the rate that it’s gone up in the last couple of years, but we made a structural change, I think, in our R&D department starting 2-3 years ago. We brought in a lot of new, very competent engineers and we’re seeing the results of that with the quality of our new products and we’re making some big investments in terms of facilities and so forth.

I think we have about the right number of people and once we finish the Wyoming R&D facility we’re not going to need another one. But I’d say that probably that percentage would stay relatively constant, perhaps up modestly, but not at the rate of increase that we’ve seen in the last couple of years.

Okay. Then finally, the $0.02 charge on the boating business, when will that fall during the year, in which quarter?

I think it should be pretty gradual throughout the year. As I said, our expectation is it’ll be a couple pennies for the full year. This will gradually --

So a half a penny per quarter or something?

Yes. I mean, for modeling purposes that’s probably close enough.

Okay and then in your 5-year plan - and then I’ll shut up, because I know you want to go - through 2009, is there any thought being given to a foreign plant, given the fact that your foreign business, your international business, is growing so rapidly?

I’d say that’s a possibility. It’s an idea that we’re exploring. I wouldn’t look for anything to happen in the next quarter or two, but as our business internationally achieves enough scale, we would look to try to improve the efficiency of our operations.

Right.

Not a plant like Rosa or primary plant, but maybe kind of a light assembly plant, not a huge capital investment. But there are some potential savings in terms of logistics and duty and freight, those type things that the numbers look reasonably attractive. So we’re kind of exploring that, I’d say.

Okay. Thank you very much.

Thanks, Godfrey. And I want to thank everyone for participating in the call today. Please remember that our presentation and responses to your questions contain certain statements that could be considered forward-looking for the purposes of the Private Securities Reform Act of 1995 and that actual results could differ materially from those contained in any forward-looking statements.

Thank you again for listening and we’ll talk to you next quarter. Goodbye.

This concludes today’s fourth quarter and year-end 2004 earnings results conference call. You may now disconnect. 16