Polaris Inc (PII) 2005 Q1 法說會逐字稿

Good day and welcome to the Polaris first quarter 2005 earnings call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Richard Edwards. Please go ahead, sir.

Thank you, Debbie. Good morning and thank you for joining us for our first quarter 2005 earnings conference call. Mike Malone, our Chief Financial Officer, and Tom Tiller, our Chief Executive Officer, will be participating in the call. As before, during this presentation we will be discussing certain topics including product demand and shipments, sales and margin trends, income and profitability levels and other matters, including more specific guidance on our expectations for future periods, which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statement, 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 Polaris' 2004 annual report and in the 2004 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 are pleased to report increased sales and earnings per share for the 28th consecutive quarter. The quarter earnings were $0.42 per share, up 11% from last year on 9% sales growth. This was a record first quarter for Polaris. These results met our expectations and were driven by good performances from ATV's, Victory, RANGER and International Division. In aggregate, our expectations for the remainder of 2005 remain unchanged from 90 days ago. We expect for the full-year earnings per share growth of 8 to 13% or $3.28 per share to $3.42 per share on revenue growth of 7 to 10%. While the totals are unchanged, we are making some adjustments to the individual businesses as we see things evolve. Both Mike and I will describe those changes in our prepared remarks.

With that overview, let's turn to the individual business segments starting with ATV's. The All Terrain Vehicle Division had a good first quarter with 12% revenue growth. The ATV industry in North America has performed about as we anticipated. The fist quarter was about flat and we continue to expect year-over-year growth in low single-digits. But first quarter provided the toughest quarterly comparables to last year. Polaris ATV revenue growth was driven by four factors, very strong RANGER sales, continued good international growth, strong acceptance of our newer products and positive mix. RANGERs continue to grow at a rate well above the rest of our domestic ATV business. The new 2005 model year RANGER line has been very well received with retail sales growth well in excess of 25%.

As I mentioned before, RANGERs account for between 15 and 20% of our total ATV business. Our international sales of ATV's were up about the same percentage as RANGERs and International sales accounts for between 10 and 15% of the ATV total. Our new products performed well, in particular, the new Sportsman 800 EFI, the Troy leaf predator and new value-priced Phoenix. Finally, about half the dollar growth we saw was from increases in average selling prices driven by both the richer sales mix and modest price adjustments. The total number of units of Polaris products in dealer inventory is higher than it was at this time last year, but it's at essentially the same level it was two years ago. Of course, over the last few years our Company has grown by about 20%. So, I would describe dealer inventory in much the same way as I did 90 days ago, a little high but not unmanageable.

The promotional environment for ATV's is also at about the same place it was 90 days ago, pretty stable. All in, I would say we're off to a pretty good start in ATV's and perhaps we're a little more positive than we were 90 days ago. As Mike will discuss in more detail, we'll be raising our ATV guidance for the year just a little bit. In snowmobiles, on the other hand, we're a little more conservative than we were 90 days ago. To refresh your memory, I told you in January that while we weren't certain, we expected we would be able to increase our snowmobile sales somewhat in 2005 compared to 2004. Today I would tell you that my current expectation is that snowmobile revenue will be flat to down somewhat in 2005 compared to 2004. The reason we're still not yet certain is that we don't have complete snow check data and we're still wrapping up dealer orders.

Retail sales of snowmobiles in North America for this past winter were fairly weak and the total industry was down about 7%. As we reported in our January call, we lost to market share this season. As you may know, we introduced a number of new snowmobile models last month. The reaction to the new line has been positive but not overwhelmingly so. In total, we expect snow checks will be about the same as last year. In those areas where's there was decent snow, snow checks are up strongly. But in other areas we have been disappointed with the reaction. Dealer inventory of snowmobiles is higher than it was a year ago but well below the level of two years ago. In fact, just about in the middle of those two numbers. My sense is that the other snowmobile manufacturers, to one degree or another, are seeing a similar pattern to what we're seeing. So until we see meaningful snow across the midwest, perhaps for a couple of seasons, we will continue to fight a tough competitive battle in our flagship business.

Victory motorcycles. Victory motorcycles are doing great. The progress of the last dozen or so quarters continues. The business is showing strength and product quality, product appeal, retail sales, dealer network improvement and brand momentum. In short, the Victory train is rolling. The driver for the current good news can be summed up in one word, Hammer. This new model has really caught the industry by storm. Over the winter the Hammer was featured on several motorcycle magazine covers and in many motorcycle shows. The strong buzz built all winter and is now translating into retail sales, not just for Hammer, but for the whole Victory line. Dealers are reporting very strong floor traffic and everyone wants to see the Hammer.

Shipments of Victory motorcycles were up 12%, as we only began shipping the Hammers very late in the quarter. More importantly, retail sales were up over 30% and that comes up against a very, very strong first quarter '04 comparison. We're significantly outperforming the industry and are carrying solid momentum into the heart of the riding and selling season. As a result, we're modestly raising our Victory guidance for the year. If the early momentum holds, we might see some more upside later in the year. Longer term, we continue to see Victory as a significant growth engine for the entire Company. Parts, garments and accessories. We had another strong quarter in PG&A with 8% sales growth. We saw double-digit growth in our ATV and Victory related items with accessories providing the strongest list. The PG&A performance was also strong considering the fact that snowmobile related PG&A items was down and that traditionally accounts for much of the first quarter PG&A sales.

International. International sales remain very good and were up 24% for the quarter. We had nice growth in both ATV's and PG&A. International continues to be a great story for the Company and we're executing very well outside of North America. The usage of ATV's, particularly in Europe, continues to increase for both off-road and on-road applications. For this quarter, international sales of all products represented almost 15% of the total Company sales. Also want to talk a little bit about a couple longer term items. The first of which are some management changes we announced earlier in the week. In case you missed it, earlier this week we announced a number of important management changes here at Polaris. A couple folks have called me asking what's going on, so I thought I'd take this opportunity to explain in a little bit more detail what we announced in the press release.

The most significant of these moves was naming Bennett Morgan as the President and Chief Operating Officer of the Company. As a result of Bennett moves, there were a number of subsequent moves as well. As a shareholder, I believe these changes represent really positive news for investors. We have a strong management team, as evidenced by both our track record and the fact that all of these moves were internal. Keeping great leaders means we have to grow, develop and stretch them. And these changes will help accomplish all of these objectives. Maybe most importantly, Bennett is a proven winner and a known commodity both inside and outside of Polaris. In fact, much of the success that Mike and I have had the pleasure of reporting on over the last several years, really was driven by Bennett and his ATV team. Longer term, restructuring the management team was necessary as we look towards achieving the five-year goals we laid out last year. As the Company grows, globalizes and becomes more complex, it was clear to me that we could do a better job running the Company with two people running the show than I could by myself and that's why we made these moves.

Another positive long-term development is the opening of the new R&D center in Wyoming, Minnesota. Just in the last couple of weeks, we began moving into the new facility which will be essential for developing innovative new products over the next 20 years. Product innovation is what has grown the Company over the last 25 years from a $12 million Company to close to a $2 billion Company. The R&D project has proceeded very well and is on plan in terms of both budget and timing. Let me summarize. Before I turn it over to Mike, I'd just like to wrap up with a few summary comments. We had a good first quarter. There are definite challenges out there. Rising oil prices, rising interest rates, the commodity pressure and a disappointing snow environment. And there's also significant opportunities in International, RANGER, Victory and ATV's.

We see the risks and opportunities that lie ahead as about balanced. For to us achieve our targets, in a nutshell, we must execute flawlessly. And based on our 23-year track record, we've demonstrated an ability to adapt quickly to dynamic environments and execute well. So, we're therefore confirming our full-year guidance. With that, I'd like to turn it over to our Chief Financial Officer, Mike Malone.

Thanks, Tom. As Tom mentioned, the first quarter was our 28th consecutive quarter of earnings per share and sales growth. Although the environment will be challenging going forward, I remain confident we can generate another solid year in 2005. Let me begin my comments with the review of our overall guidance for the full-year and more specific guidance for the second quarter and comment on certain aspects of our first quarter results. As during the past several conference calls, my comments and guidance today relate only to the results from continuing operations of the Company unless otherwise noted. The exit of the personal autocraft business, that we announced in September of last year, is proceeding on plan and should be substantially completed by the end of 2005.

Our current expectation is that the loss from discontinued operations, which was $0.19 per diluted share for the full-year 2004, will be about $0.02 per share for the full-year 2005. For the first quarter 2005, the loss on discontinued operations was $275,000 or about $0.005 impact to EPS. The other item to note is that the expectations and guidance provided today for 2005 does not reflect any change in accounting rules for the expensing of stock options. We had previously expected to be implementing this change in the third quarter. However, there now appears to be some uncertainty as to when these new rules will be required to be implemented. In the meantime, we will continue to disclose the impact of expensing options in our footnotes. For the full-year 2005, our guidance remains unchanged as we continue to expect total sales to increase in the 7 to 10% range. EPS guidance also remains unchanged, as we expect EPS to grow in the range of $3.28 to $3.42, an increase of 8 to 13% when compared to the $3.04 per share earned in 2005.

Second quarter 2005 sales are expected to increase 7 to 10% with earnings per share growing to be in the range of $0.65 to $0.68 per diluted share, an increase of 7 to 11% over the $0.61 earned in the second quarter of last year. Sales of ATV's for the full-year 2005 are expected to continue to grow driven by the factors Tom talked about, acceleration in new product introductions, continued rapid growth in our utility and international businesses and an increase in the average selling price of units sold due to mix and modest pricing changes. For the full-year 2005, we are increasing our ATV sales guidance slightly and now expect Polaris ATV sales to increase in the mid to upper single-digit range. Victory motorcycles are expected to grow significantly and deliver another strong year as both the Vegas and Kingpin continue to gain share in the custom cruiser segment. Additionally, the Hammer has been very well received, as Tom talked about, and will help drive sales growth in motorcycles this year along with the new model, the Vegas 8 ball.

Our dealer network continues to improve and we remain confident that the overall heavyweight cruiser market will continue to expand. We now expect Victory sales for the full-year 2005 to grow about 25%, a slight increase from previously issued guidance. For snowmobiles, as Tom said, we have not completely finished the dealer and snow check order taking process. So at this point in time, it's still unclear where snowmobile sales will end up for the full-year 2005. We do expect our average selling price of the sleds to increase in the mid single-digits range as a result of mix changes driven primarily from the introduction of our new higher priced four-stroke models. Given what we know today, we now expect snowmobile revenues for the full-year 2005 to be flat to slightly lower than last year. Parts, garments and accessory sales are expected to increase at a similar rate as the overall Company in 2005, with strong growth coming from our new lock and ride accessories for ATVs and RANGERs and increased garments and accessory sales for motorcycles.

Moving now on the income statement. On a consolidated basis the gross profit guidance for the full-year 2005 is also unchanged. While we continue to expect benefits from cost reduction efforts, some select pricing adjustments, efficiency improvement initiatives and savings from more effective sourcing of component parts, we also expect pressure from the commodity, fuel and transportation costs, which have increased dramatically throughout last year, to continue at these higher levels throughout this year. In addition, we expect increased floor plan financing costs in 2005 due to the higher interest rates. Given all of these anticipated factors, our guidance for the gross margin percentage for 2005 is to be flat to a slight improvement over the 2004 gross margin, in the range of 0 to 20 basis points, unchanged from our previously issued guidance. Operating expenses for the full-year 2005 are expected to improve as a percentage of sales as we begin to achieve operating leverage from our higher sales growth. In the first quarter this year, we realized a 20 basis point leverage in operating expenses, all of which was generated in selling and marketing expenses. At the same time, we continue to invest in research and development efforts to drive growth through new products. In total, operating expenses are expected to be slightly lower as a percentage of sales for the full-year 2005, unchanged from our guidance previously issued.

Income from financial services for the full-year 2005 is expected to grow in the mid single-digit range, most all of which will come from the wholesale portfolio. This more moderate growth rate reflects the maturing of the retail credit portfolio and the impact of rising interest rates on that retail portfolio. For the first quarter of 2005, we financed about 37% of our products sold to consumers in the United States, up from 34% for the full-year last year. The household retail credit portfolio balance at the end of the quarter was approximately $658 million, up from $522 million a year ago, and down slightly from $665 million at the end of the year 2004. As we discussed in the last conference call, as expected in a maturing portfolio, receivable losses in this retail credit portfolio have been increasing and now average about 4% of the portfolio but remain in line with our expectations and household's experience with portfolios similar in nature and maturity.

At the end of the quarter, the wholesale portfolio, related to floor plan financing for dealers in the United States, was approximately $616 million up from $524 million at the end of the first quarter last year. Credit losses in this dealer portfolio remain very reasonable, averaging well less than 1% of the portfolio balance. Let me take a moment to update you on the expected impact of currency fluctuations on our operating results for 2005. As we expected, for the first quarter of 2005, the currency fluctuation of the Canadian dollar and Euro had a positive impact on sales and gross margins. This was somewhat offset by the Japanese yen, which had a negative impact on gross margins when compared to the first quarter of a year ago. We currently have foreign currency hedges in place through the third quarter of this year for both the Japanese yen and the Canadian dollar, which averaged to approximately 105 yen to the dollar and approximately $0.79 for the Canadian dollar. We currently do not have any Euro currency hedging contracts in place.

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 for the full-year 2005 compared to last year while the Japanese yen is expected to have a negative impact on gross margins for the full-year. Our current expectation is that net/net for all of the currencies combined, the impact on profit for the full-year 2005 will have somewhat of an offsetting impact resulting in a slight positive variation year-over-year. Now let's take a look at some balance sheet and cash flow information for the first quarter. We ended the quarter with 41 million in cash on the balance sheet, which is up 57% from last year at this time. During the first quarter 2005, we repurchased 304,000 shares at a cost of $21 million and paid cash dividends of 11.8 million during the quarter, as well as making the appropriate investments in the business through capital expenditures totaling $26 million. The full-year 2005 capital expenditures are expected to be similar to last year in the range of 85 to $95 million as we complete the investment in the new product development facility in Wyoming, Minnesota 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. Net cash flow used by continuing operating activities was $58.7 million for the quarter ended March 31, compared to $24.3 million in the prior year first quarter. This increase in cash flow used relates primarily to higher factory inventories at quarter end compared to the prior year's first quarter. We expect to continue to repurchase shares during 2005 under our existing board authorization, which has approximately 2.7 million shares remaining. We currently expect the repurchase activity in dollars to be similar to last year's levels. Inventories at the end of March were $229 million compared to 186 million last year at the end of the first quarter, an increase of 23% off a tough comparable in the first quarter last year. This inventory increase was planned and is actually a little less than our internal budget at the end of march. Much of the inventory increase relates to ATV's and international operations and, to a lesser extent, raw material inventory at the factory. Debt to total capital was just 5% at the end of March, down from 7% in the first quarter last year. EBITDA from continuing operations was $42 million for the first quarter, up 9% from a year ago.

So to recap, our full-year 2005 guidance remains unchanged with total sales expected to increase in the 7 to 10% range and EPS growing to $3.28 to $3.42 for the full-year 2005, an increase of 8 to 13% over last year. Second quarter 2005 sales are expected to increase 7 to 10% with earnings per share expected to be in the $0.65 to $0.68 per share range. At this time, we'd like to take any questions that the analysts may have. Debbie, would you please open the line for questions?

Thank you, gentlemen. Ladies and gentlemen, today's question and answer session will be conducted electronically. If you have a question, you may ask it by pressing the star key followed by the digit one on your touch-tone phone. If using a speakerphone, please disengage your mute function to allow your signal to reach our equipment. Again, star, one. We'll pause just a moment to assemble the roster. And, ladies and gentlemen, we will take our first question today from Gregory at Smith Barney.

Greg Badishkanian, nice results today. Had just two questions for you. First, I might have missed it, did you disclose -- I know you don't disclose Polaris MIC data, just the industry data, but did you talk about that at all?

You're talking about ATV's, Greg?

Yes, correct.

I think what I said was the industry was about what we expected it to be for the first quarter, which was about flat. We can't be more specific than that because the data will be disclosed publicly later.

Right.

For the full-year, we expect the industry to be up low single-digits. You may recall that in terms of the industry comparisons, the first quarter would provide the toughest comparison. It was actually up 7.9%, I believe, in the U.S. in the first quarter last year versus the industry being up a couple percent for the total year. About what we expected in the first quarter.

Right. So when you look at that, maybe a two year -- flat would be a two-year average would be around four -- fourish percent on a two-year average basis in the first quarter, if it were flat, right?

Sure.

Okay. Second, just with respect to your RANGER Utility Division, clearly that's your star-performing group. Is there a way to cross pollinate the techniques used by the group to your broader ATV business, particularly in the sales marketing area of your Utility Division?

It's actually gone the other way, I think, Greg, if you look at the success of RANGER, it really came out of ATV's. It was a -- basically some of the things that we did in the early and mid 90s with the development of the Sportsman 500 originally, which was the largest, most powerful ATV in the world at the time we introduced it and captured kind of the super premium segment of the ATV market, which remains our strong hold today with the Sportsman 500 and the 700 and the 800 EFI and so forth. We've done the same thing -- we took that basic recipe into the utility vehicle market where people were competing with vehicles that were basically lower performance vehicles, some driven off from golf cart type technology. So I think the ATVs are the parent and the RANGER's the kid. The kid's doing well right now, we agree with that.

It's doing very well. Good. Thank you very much.

Thank you.

We'll take our next question from Bob Evans at Craig-Hallum Capital Group.

Good morning, guys. Can you comment on the promotional environment? I know you did briefly, Tom. There's been chatter out there on Honda. Can you kind of clarify where that's at?

Yes, there's been a lot of chatter on a lot of things, Bob. I guess, as probably about everybody on the call is aware. I think regarding the promotional environment, we look at it in an aggregate basis on kind of a dollars per unit basis for all of the manufacturers. And we have what I believe to be is very good data. I think we understand what competitive programs look like from everyone. We would describe that overall environment as pretty stable when you look at it on a dollar per unit basis. There was -- on some of the dealer surveys that have been floating around, there was some comments on Honda. I think Honda has done some pretty aggressive programs on some noncurrent products, even some '04 products. That's a relatively small total of their overall offering, ATV offering. So you see that from time to time.

Individual models might get heavy and a company will be very aggressive on a particular mode. But when we look at the environment in total, we do not see significant changes. I think if you go back through the track record here over the last few years, there have been times where the promotional environment has changed very rapidly. I think we've been pretty good about communicating that and letting people know what we're going to do about it. But we see programs right now as pretty stable.

Okay. So this is now what happened, whatever, two, three years ago. This is just more selected programs that you do not see much change in the environment?

That's correct.

Okay. You also comment gross margins were stable, relatively speaking, given -- although commodity prices were up, I mean, is that -- I mean, is that -- your confidence level, either Mike or Tom, in terms of going forward gross margins relative to commodity pricing?

Maybe I can start it. Mike, you can finish it up. I feel pretty good about where the gross margins are for the Company given the commodity pressure. To the extent that we see reasonable commodity pressure, I think we can offset it. I'm pretty confident about that, Bob. If we get wild, wild fluctuations, there's a limit. You read stuff -- I don't know if you saw the Goldman report here a couple weeks ago that oil was going to go to $110 a barrel or something like that. That's not in the game plan.

If that happens that would alter that. But I think given what we reasonably would expect to see in terms of a commodities and our business in total, I feel pretty good about the margins where they are and also what we've got forecasted. I don't know, Mike, do you want to add to that?

The only thing I'd add is that as we've done before, we're focusing on cost reduction efforts, efficiency improvements and better sourcing of parts. We've been after that a while and we're going to continue after it very aggressively to help offset some of these pressures that we see.

Okay. And final question, obviously your comment on inventories being up. Should we -- as we see -- what should we expect going forward in terms of, should we see that trend kind of one, seasonally down, but two, what should we expect in terms of trend there?

Let's talk a little bit about inventories, Bob. If you look at inventories, I think you kind of look at it in aggregate, but I think it might be useful to kind of look at the individual, at least the big businesses in aggregate. Snowmobile inventories are up on a year-over-year basis. We're not happy about that. As I mentioned, the inventory is about in the middle of where it was in the last two seasons. At the end of the last year it was quite low. Two years ago, it was quite high. Right now, we're right in the middle of those two numbers, almost exactly in the middle of those two numbers. So it's higher than we'd like but not at a -- we obviously made it through the situation we had a couple years ago. Because the snowmobile inventory is a little higher than we'd like it to see, that's why we're taking production down a little bit, okay? And we'll respond to that, you know that one of our real strengthens is our ability to respond quickly to changing markets.

So that's what we're doing on the snowmobile side. On the ATV side, they're a little high. On a scale from one to ten, I'd say six, six and a half, something like that. It's about at the same place it was at the end of the fourth quarter. We're watching that closely. I guess if there's a time where you'd like to have a little more dealer inventory it's coming into the selling season, right? We're coming into the pretty big spring selling season, so we'll watch retail, we'll see how things go and if we've got to make adjustments, we'll make adjustments. But I feel pretty comfortable about where we are in both those businesses. In the rest of the businesses, there's no issues. Victory, RANGER, International, I got no concerns there.

Okay, thank you.

We'll take our next question from Assia Georgieva at Infinity Research.

Good morning, gentlemen. I have a couple of quick questions. First of all, on snowmobiles, have you been able to pinpoint a couple of reasons for the less than enthusiastic reaction or less than expected reaction? And why you have lost some market share? And if you can comment, among your three other competitors who has been more aggressive or more successful?

Sure. The reason the snowmobile industry down is that six out of the last seven winters, we've not had sort of normal, steady snowfall, particularly across the upper midwestern parts of the country. It's not unusual that you have one year or two years, but we've had a pretty systemic decline, and that has an impact on both dealers and consumers on a longer term basis. I think the reaction to the snowmobiles qualitatively was very good. I think many of you were out at the dealer meeting. The dealers liked the snowmobiles. It's just that they're concerned about the economics of the snowmobile business. If they were going to buy a snowmobile, they'd be happy to buy that one. But they're concerned about taking risk in the snowmobile business.

I think the company that's been the most significant thorn in our side in terms of market share growth has been Bombardier. They've done a nice job in their snowmobile business. I think we've probably concentrated more of our efforts on the Victory side and on the ATV side. I think, again, relative to their performance certainly on the ATV side, I feel comfortable. So they've done a nice job in snowmobiles and you've got to give them credit for that.

Tom, given that we've all known that winters have been unpredictable and obviously we haven't had a steady even snowfall, which I think has been one of the issues, again, it seems or it sounds like you're somewhat disappointed having known the history of weather you're still somewhat disappointed with the dealer reaction.

Yeah, I'm a little disappointed. We had a lot of new products there and I was hoping that we might see some upside, frankly, beyond the numbers that we had guided driven by snowmobiles. It's pretty clear to me at this point we're not going to see that. We've dealt with weak snowmobile businesses before. Obviously, the last 28 quarters in the last seven years have been pretty strong around here. We've done that with six out of the seven years being weak in snowmobiles. I don't think it's a situation that we can't work our way through and handle, but it is disappointing that we didn't see a little stronger reaction to it. There's no question about that.

You mentioned Bombardier on the snow side. They've also gone direct in France on the ATV side. Do you think there could be the positive of a more rational pricing environment there or then again the negative of more competition?

No, I would not anticipate a big change in France as a result of Bombardier's decision to go direct. At least to this point, they are a pretty minor player in the French market. That may change but I think that would probably take some time to evolve. We have other competitors which are substantially larger there and, actually, we're growing very strongly. You may be aware that we went dealer direct in France -- four years ago now, I think, was the date. So it's interesting to see them make that decision. I guess they liked what we did.

Good for you. And last question, do you have plans to build engines in house to a greater extent and what is sort of the time frame on this?

Well, we -- as you may be aware, we buy about two-thirds of our engines, I guess, today, and we manufacturer about a third of our own engines. We are investing a significant amount of money in this new R&D center and a big piece of that investment is around power trains, engines, transmissions, that kind of thing, kind of the heart of the vehicle. So, you can look for us to be pretty influential in the technology of the design. Where we manufacturer it we're going to be pretty open. So, that ratio may go up a little bit. I wouldn't expect it's going to change tremendously overnight, but may gradually expand a little bit depending on the decisions we make around product development.

Okay. Thank you very much, Tom.

Sure.

We'll take our next question from Tim Condor at A.G. Edwards.

Good morning and congrats on the quarter, gentlemen.

Thanks, Tim.

Couple of things. Tom, can you clarify the promo environment as one of the previous questions? Where comments in general for wholesale and retail or was that specific to one or the other?

I'd say that was in general across the board, particularly with retail. We don't see -- I've seen some of the dealer surveys. It's not a thing you put out, Tim. There's been, I don't know, three or four dealer surveys, I think, floating around. And some of the -- many of the conclusions we agree with. Some of the conclusions we're just maybe getting different data than you guys are getting. We see retail programs as very steady. There were some comments in some of the dealer survey, and I apologize, I can't remember exactly which one it was that had competitive ranks of programs that I thought were quite a ways off. So some of the program stuff we're seeing different data than what some of the people that are surveying the dealers are.

I'm not saying that what they are doing is wrong or whatever, but we're just seeing things a little differently. I'd say there has been a little more volatility on the wholesale side. Again, Honda had some reasonably aggressive wholesale programs, some regional things. But, again, in aggregate, Tim, as you described, the overall promotion program and certainly the stuff we saw 18 months or two years ago, where we were seeing major changes in programs on sort of a monthly or quarterly basis. We're just not seeing that at this point. So, maybe it'll come down the road. We generally don't get that information in advance. If we do, we'll share it, but we're not seeing big changes at this point.

Okay. Great. Couple of other questions. Were there any other management changes at Polaris besides the one with Bennett that you mentioned? And then you talked about the R&D facility, were there any other senior level management changes recently? We'd heard a few things through the industry that there might have been. And then, Mike, can you maybe elaborate a little bit and just remind us if you have to start expensing options in the back half of the year, what that number would be for the back half of the year? And then maybe just give us a little bit more color? You said that there could be some additional pushbacks or delays or there's some things that have evolved here recently and just a little bit of color on that. A then final question, gentlemen, if you could just give us an update on the warranty reserve trends year-over-year.

Okay. What was the first question? You got about twelve questions.

Any other senior management changes?

This is like the White House reporters, here. So, amusement changes. I mentioned in my speech, Tim, I don't know if you saw the press release that we put out earlier in the week. There's probably a few people on the call that didn't. But, basically, the changes were Bennett is moving from general manager of ATV's, which he's run that division for the last four years, to be the President and Chief Operating Officer. The main reason for doing that is to help me as we try to take the Company from kind of in the $2 billion range up to the $3 billion range. That's a very proven commodity here. He's got a terrific track record. I just couldn't be more happy that we got somebody in here that -- it's not bringing somebody from the outside that we don't know what the heck's going to go on.

I think it's going to be pretty seamless. With Bennett moving out of ATV's, we moved Mike Dougherty into the ATV job. Mike's been here for almost seven years now. His previous job was running International. You probably are aware of all the success we've had in International. Mike's done a terrific job there. Ken Sobasky has decided to leave, to resign. Ken came here - part of the reason he came to Polaris was the idea to run the Company as the President and Chief Operating Officer. Obviously, we decided to go in a different direction, go with Bennett. To fill the sales and marketing job, Mike Jonakis(ph), who's been here for a number of years. Mike was running the RANGER business. He's going to go over and run sales and marketing. And Tim DeYoung, who's a long time fixture here at the Company, Tim's going to run the RANGER business. So, we've got a little bit of a musical chairs type thing.

I think it's all good in the sense that we have proven leaders that are going to get stretched and grown and developed and all that sort of stuff and that's what makes our management team even better. The one hole, if you will, the one part of the organization that we don't have a permanent replacement for yet is International. I've asked John Corness to on an interim basis to oversee that. A lot of confidence in John's ability to do that. He probably has as much International experience as anybody in our Company. You may be aware John worked at G.E. with me for a number of years and had a lot of global experience there. So we're going to probably go outside. We're not certain, but we'll probably go outside to fill that job. So those are basically the changes.

Okay.

Next question was on expensing options. I referred to maybe some uncertainty. Yesterday in the Wall Street there was an article that speculated that the SEC would come out with a decision, perhaps as early as in a week or so, that would in effect push back the effective date of the stock option expensing rule changes for six months. In essence, moving it to the new calendar year starting January of '06. So, our decision has been that we're not going to expense options until the rules change, so we'll expense options whenever the rules say we're to do that. In the meantime, we have disclosures in the footnotes that shows what it will be. For the full-year last year that was $0.07 a share. Additional dilution, which is relatively modest, dilution from options expensing. I don't have a specific number for what we would expect this year to be. My sense is that with the stock price quite a bit higher this year than it was at this time a year ago, that that $0.07 would probably be a little bit higher.

But I don't have any specific numbers or guidance that I'm prepared to give. From a warranty perspective, Tim, the warranty reserve balance at the end of March of this year is approximately $21.7 million. And at March a year ago it was $23.9 million. I'll refresh your memory that during the first quarter of the year, there are -- historically, it's very normal for us to have a reduction in the warranty reserve over what it was at the end of the calendar year because in the first quarter we've got a lot of claim activity going on on snowmobiles, because that's when people ride snowmobiles and that's when they need to have the warranty work done. On the other hand, we sell very few snowmobiles on our P&L to generate the reserve during the first quarter. So it's very normal for the reserve balance to come down in the first quarter. That's what's happened historically. That's what's happened this year. And, Mike, just to clarify the 23.9 was 12/31? No that's March 31 of '04.

Okay. And, gentlemen, if I may one last question. I apologize. Could you give us some update on -- obviously you are closer today than you were yesterday. Are you feeling any sense of anything coming on the radar screen from an acquisition standpoint or from something being developed internally? I think, Tom, you referred to you're looking for 100 million or so opportunity sort of in or offshoot of an existing business, or something, in story(ph) that you could either acquire or develop off of something you have internally? Could you maybe just give us any type of an update there?

Direction hasn't changed. We continue to work on it. Nothing we're prepared to announce this morning, Tim.

Okay.

Is that all for you, Tim?

Yes, that'll be it. Thank you very much.

Next question comes from Craig Kennison at Robert W. Baird.

We ought to start charging for these questions.

Hi, everyone. Hi, Craig. Just getting back to the topic of inventory. We're part of that dealer survey chatter, but the dealers that we've talked to seemed much more concerned that you -- much more concerned than you with respect to the level of inventory they are being asked to carry. Can you just comment on that dealer attitude that we've picked up on?

I read your survey, or at least skimmed most of it, Craig. I think you got 2,000 dealers out there, and you can -- I think to paint them all with the same brush might be a little bit of a mistake. I think that the snowmobile dealers are more concerned than the non-snowmobile dealers. I think snowmobile inventory generally is an area of high concern to snowmobile dealers. They see the inventory higher than it was a year ago, six out of seven years of lack of snow and there's concern there. There's no question about that. I think in the non-snow dealers, I think it's significantly less of an issue, total inventory. I would also mention that we are, as we've mentioned over several calls now, in the middle of a process of upgrading our distribution network.

Last year we terminated, or they resigned, about 150 dealers. This year we're going to do about another 150 or so dealers as we work to try to improve the quality of our dealer network. That process does cause friction, okay, for sure? That doesn't make -- if somebody's going to be terminated as a dealer, that's not an easy conversation, Craig. So, I guess that would be the only thing I would add to what you have to say. We look at the numbers. We look at them over a longer period of time. We feel pretty comfortable with where inventory is. I won't repeat the explanation that I went through with Bob, but that's where we view things to be.

And then the final question, just changing directions, Tom, how do you think your day-to-day wall or activities will change with the addition of Bennett to COO.

You're getting a little ahead of yourself, there. Maybe Bennett -- Bennett, maybe you want to comment on that one. Bennett and I have a great relationship. We've had since I've been here. I think there is a very high level of trust between the two of us. I guess, you can look for me to focus on the things that are going to drive the Company strategically, particular the growth stuff. So, basically, how do we get the Company from 2 billion to 3 billion and how do we globalize the Company? How do we get the motorcycle business growing even faster, the technology development? The outside stuff of the Company, the -- certainly the investor relations and dealers and sort of the external face. The strategic stuff of the Company.

Bennett's going to be focussed on the operational side of the Company, making sure that the factories are operating properly, suppliers are working correctly, that we got the right execution types of things. It's going to be pretty seamless, we're not a huge Company. We're not a $20 billion Company. We sit 10 feet away. So, we're going to help each other try to run this Company well and I think that that will work very well. The internal reaction, for whatever that's worth, is very positive. People know Bennett and like Bennett. And don't expect a dramatic change in direction for the Company.

Okay, thank you.

We'll take our next question from Ed Aaron at RBC Capital Markets.

Thanks. Good morning, everyone. Congratulations to Bennett on the promotion. Couple questions. First, we seem to have, at least, some decent visibility into how this year's going to end up in terms of growth in the total ATV market. I was wondering if you could give us some perspective on how you see the longer term growth curve shaping up there. It's obviously flattened out a bit. Do you think it will stay at those flattish levels for a reasonable period of time beyond this year?

Obviously, there's things that are difficult to predict, Ed, in terms of terrorism and commodity things and all that sort of stuff, but if you look at demographics, which are sort of like the tide coming in and out, the demographics in this sector continue to look positive for the next seven, eight years, okay. And the use for the products continues to expand as the vehicles become larger and more capable. There's more opportunity for them. Certainly, we see global growth. ATV's are primarily a North American vehicle, even today. We're starting to see some opportunity in Europe over the last few years. That's been exciting. There's other parts of the world that over the long run can develop. So, I would expect that ATV's will continue to grow but at a relatively modest rate in North America.

Okay. And then maybe just to piggyback off the last question about how your dealers' level of comfort with the amount of product that they're taking. If you were to look at the margins that your dealers are earning on selling your product in comparison to the margins that the dealers are earning on selling your competitors product, do you think there would be much of a difference?

In aggregate, no. I think that they are pretty similar with the obvious exception of Harley. Harley's margins -- dealer margins are substantially higher than the rest of the power sports industry. It varies a little bit by segment and whether you're talking snowmobiles or ATV's and who's got the hot product one year or another. But, in general, they're pretty similar. The dealer margins are pretty similar to the Japanese manufacturers, us and Arctic and Skidoo.

Okay. One last question, actually, on Victory. Obviously the product seems to be received very well and the brand is growing. With regard to price sensitivity relative to Harley. Harley's retail prices have been drifting down and I know that part of the attraction of Victory, in addition to just the features of the product, is that it's at a discount to what Harley sells for. How much sensitivity is there if Harley's prices at retail are drifting lower?

I think that Victory is -- well, Harley does have -- can have an impact on Victory, okay? If Harley drops prices by 20%, that'll have an impact on Victory. I think if they change a percent or two or that kind of thing, I don't see a dramatic impact on Victory. Victory is a new product and a very small part of the overall industry and will be for several more years. So what happens in the market, the overall industry, when you're 1.7 points a share of the heavy weight cruisers, or whatever the number is, has less of an effect than it would in a business like ATV's where we have a big share position, right? So if Harley did -- made a major price adjustment, it would have an effect on us. A modest price adjustment, I don't see a significant impact. I mean, right now, it's really good in Victory in terms of retail sales. I mentioned the first quarter. The second quarter's doing even better. I mean, it's early but doing even better.

And there's just a ton of momentum right now. So, most of the successes and failures, I think, that Victory will experience over the next three, four years probably are going to be determined by us to a large extent. Did we come out with the right products, did we advertise right, did we put the right imagery around the products, do we take care of the customers that are out there, do we create a positive word of mouth? It's very, very early still in building that durable. So what the competitors do have less of an effect, not no effect, but less of an effect in a rapidly growing small business than it might in a more mature business.

Thank you.

Debbie, we have time for one more question.

Thank you. Ladies and gentlemen, we will take our final question today from David Anders at Merrill Lynch.

Hi, guys, one quick question. How much more cushion do you have on motorcycles to take that number up even beyond your advised projections today?

We'll tell you if that happens, David. I think what we're trying to indicate is we're pretty pleased with how things are going but it's very, very early in the season, right? We're here in the middle of April. As we get further into the year and positive momentum continues, we'll be back to you. On the other hand, sometimes things get worse. If the price of oil goes to $70 a barrel, that will have a negative impact on us. So, we'll let the comments speak for themselves for now. And as things evolve, maybe we can do a little better.

Right. Just from an assembly perspective or manufacturing, from a capacity perspective.

From a capacity perspective, we got no issues from a capacity perspective.

Okay, thank you.

Okay. We're 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 statements. Thanks again for listening this morning. We'll talk to you next quarter. Bye.

Ladies and gentlemen, thank you so much for your participation in our conference today. This does conclude the call. And you may now disconnect.