Polaris Inc (PII) 2006 Q1 法說會逐字稿

Good morning, my name is Latwinda, and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris Industries first-quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS). Mr. Edwards, you may begin your conference.

Good morning everyone, and thank you for joining us for our first-quarter 2006 earnings conference call. Mike Malone our Chief Financial Officer and Tom Tiller our Chief Executive Officer will be participating in this call. Mr. Bennett Morgan our President and Chief Operating Officer is also here and is available to answer questions. Today 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 risk 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' 2005 annual report and in the 2005 form 10-K which are on file with the SEC. Now I will turn it over to Tom.

Good morning, everyone and thank you for your interest in Polaris. Earlier this morning we reported financial results for the first quarter; for the quarter earnings were $0.26 per share, down from $0.40 last year on a 7% decline in sales. The results for the quarter met our expectations given our targeted reduction in ATV shipments and the challenges that we are facing in the competitive environment, particularly with our snowmobile business, which is significantly weaker than we had anticipated 90 days ago.

Because of the weakness in snowmobiles, for the full year we are reducing our guidance range from $3.23 to $3.38, down to $3.08 to $3.20. This is a difficult but necessary step given the current business environment. Both Mike and I will more fully describe the reason for these changes and the impact on the second quarter. With that overview let's turn to the individual business segments starting with all-terrain vehicles.

The ATV division had a decent first quarter; the business performed as planned with an 8% decline in revenue. From a positive perspective the ATV industry in North America performed slightly better than we had anticipated. Retail sales for the industry for the first quarter were about flat versus the first quarter of 2005. You will recall that for the full year 2005 the North American ATV industry reported a decline in unit retail sales of 4%, so flat is not so bad.

Also from a positive perspective we were successful in reducing factory inventory of ATV's versus the same period a year ago and we expect progress in inventory reduction to continue over time. The range of business continues to be very strong at retail with solid double-digit year-over-year gains. And finally our new products like the Hawkeye, the X2, the Outlaw and the RANGER EFI are all performing well.

From a negative perspective we saw the promotional environment for ATVs in the first quarter get a little more aggressive than it was a year ago. The international business for ATVs was softer than we expected it to be, particularly in southern Europe which I will expand on later. And finally we're starting to see gasoline prices creep back up which is probably not a helpful trend. All in though, I would say we are off to an okay start in ATVs and haven't changed our full year view on our largest and most important business.

Snowmobiles. On the other hand our snowmobile business is performing poorly. To remind you at the fourth-quarter call in January we told you that we thought that while it was still early the snowmobile business would be down double-digits for the full year 2006. The situation is worse than we thought it was previously. We currently expect snowmobile revenues to be down 30 to 40% versus a year ago. So what is going on? Essentially we believe there are three factors. First, once again warmer weather occurred across the Upper Midwest in the heart of the riding season. January 2006 was the warmest January on record and melted much of the snow across the Midwest and the East. That meant retail sales slowed dramatically and season-ending dealer inventory remains very high for the entire industry, including Polaris. Unfortunately we know this situation well as this scenario has occurred for six out of the last seven years. Collectively what it resulted in was a 9% decline in North American industry retail sales for the season.

The second and perhaps most important factor is that many dealers are financially challenged with and discouraged about the snowmobile business. As a result of the poor weather for the last several years some dealers have simply given up on snowmobiles. The ones that remain are being much more conservative about taking sales risk and inventory risk. We believe that this attitude is consistent across the industry. Finally, we have had our own set of execution issues. We had product quality problems on two important new model introductions and that has caused us to lose market share. So what are we doing about it?

First, we are working cooperatively with our dealers to assist them with the cost to carry their inventory into next season. This has helped us keep nearly all Polaris dealers in the snowmobile business at least at a minimal level. Secondly, we are dramatically reducing our production and order requests to attempt to get dealer inventory back in line and restore profitability to the dealers' side of the business. If last year's pattern of a 9% decline in industry retail sales repeats next year we should be in relatively good shape from a dealer inventory standpoint 12 months from now. In other words we should be clean.

Finally, we are focusing our product lineup and working diligently on the product quality issues and cost reduction efforts. Our 2007 model lineup has 50% fewer models and more proven technology than the 2005 or 2006 introductions. In summary we are faced with a tough goal in the snowmobile business right now but it is a business that we know very well and we love. We are fully committed to the snowmobile business for the long haul. We will get back on our feet here but it is going to take some time and snowfall for that to happen.

Victory motorcycles. Victory motorcycles are doing very well. The progress of the last few years has continued into 2006. The business is showing strength in product quality, product appeal, retail sales, dealer network improvement and brand momentum. In short, the Victory train is rolling. Shipments of victory motorcycles were up 8% for the quarter; more importantly retail sales were up over 30% and that comes up against a strong first-quarter 2005 comparison. The U.S. motorcycle industry as a whole is also growing and is up about 7% season to date. This significantly outperforming the industry and are carrying solid momentum into the heart of the riding and selling season. We continue to add quality new Victory dealers with 15 new dealers added in the first quarter. We have the strongest marketing communications campaign in Victory's history now underway combining television, magazine and Internet generating more than 125 million impressions. Victory product quality and appeal continues to increase according to every measure, and we believe we now have the highest customer satisfaction in the motorcycle industry.

Our lower warranty costs and added volume has helped expand gross margins for Victory motorcycles. We are maintaining our Victory sales guidance for the year but if the early momentum holds, we may see more upside later in the year. Longer term we continue to see Victory and motorcycles generally as a significant growth engine for the Company.

Parts, garments and accessories. The PG&A division had a decent first quarter given the snow situation. Typically the first quarter of PG&A is pretty dependent on snowfall which drives snowmobile riding and snowmobile parts sales. Given the lack of snow and poor snowmobile retail sales it is not surprising that snow related parts, garments and accessories were down substantially. The remainder of the business performed relatively well enough to generate a 1% sales gain. We continue to expect sales of PG&A to grow a little faster than the overall company.

International. International sales were up single digits for the quarter which given the environment was acceptable performance. As I mentioned we saw a slowdown of ATV sales in southern Europe, particularly in Spain which is an issue that we are watching closely. This appears to be caused primarily by some competitive pricing actions. Despite the difficulties in the North American snowmobile business our Scandinavian snowmobile business is relatively good. Orders there met our expectations and we are gaining market share in some selected markets.

KTM. The KTM relationship and joint projects continued to progress as planned. Our teams are working and there have been no significant surprises. Relationships are growing and you can expect to see some early results from the projects this summer. One project that we have already made some substantial progress on is the European distribution project. In early March KTM assumed responsibility for distributing Polaris products in Germany and is off to a good start. Separately the KTM base business continues to perform well.

Before I turn it over to Mike I would just like to summarize my remarks. We had as expected a pretty tough first quarter and we expect the second quarter will also be down, primarily because of a weaker than expected snowmobile business and reduced ATV shipments. We expect the second half results to be better. And we now expect the full year earnings per share to be about flat or hopefully a little better than last year.

I want all of you as shareholders to know that we are not happy with these results. Polaris has a 24-year track record of delivering record earnings results each and every year. And we are going to work very, very hard to make this the 25th. But given the current business conditions these are the best most realistic expectations I can give you. I want you to understand we remain committed to running this business to deliver substantial shareholder value over the long run. And with that I will turn it over to Mike Malone.

Thanks, Tom. Good morning to everyone. As before my comments and guidance today relate only to the results from continuing operations of the company unless otherwise noted. The exit of the personal watercraft business that we announced nearly a year and a half ago is substantially complete. In 2006 we will have some minor charges related to the watercraft exit to finish cleaning up a few remaining open items. Our current expectation is that the loss from discontinued operation which was $0.02 per diluted share last year will be about $0.01 per diluted share for the full year 2006.

The other item to note is that starting in the first quarter of this year we began expensing stock options in accordance with the statement of financial accounting standard, FAS 123R. In connection with the adoption of this new accounting standard we have recorded on the income statement in the first quarter a onetime cumulative effect of the accounting change in an amount of an after-tax benefit of $0.4 million, or $400,000 or about $0.01 per share.

Assuming that the Company had adopted this new standard for last year the adjusted actual diluted earnings per share from continuing operations would have been reduced by $0.14 per share to $3.15. For the second of last year the adjusted earnings per share would have been reduced by $0.02 to $0.66 per share, so the guidance that we issue for the 2006 periods should be compared against these adjusted EPS numbers for the prior year periods.

In addition to expensing of stock options certain other stock-based compensation expenses are being treated differently in 2006. Beginning in the first quarter we have reclassified our other stock-based compensation expenses which were previously reported in general and administrative expenses, into cost of goods sold and the other operating expense lines on the P&L which is consistent with the methodology prescribed by the new accounting standard. On January 26th of this year we filed a form 8-K that includes the 2005 quarterly income statements, adjusted for the impacts of this new accounting standard as well as the allocation of these other compensation expenses into the appropriate lines on the P&L. In addition there have been some reclassifications made to the prior year balance sheets and cash flow statements related to the new accounting standard.

So with that I will now review our overall guidance for the full year and the second-quarter 2006 and comment on certain aspects of our first-quarter results. As described in our press release and further discussed earlier by Tom, we are disappointed to report that our snowmobile business is not performing to the expectations that we had earlier this year. The overall market performed poorly this past season and we have had certain execution issues. The combination of these events has resulted in an increase in dealer carryover snowmobile inventories and weakening overall dealer confidence. As a result this spring the dealers have reacted by ordering significantly less new model 2007 snowmobiles than our original expectations, resulting in much lower snowmobile revenue than originally anticipated.

We now expect revenues from snowmobiles for the full year 2006 to be down in the range of 30 to 40% compared to 2005 sales levels. This change has also had an impact on our overall company guidance for 2006. For the full year we now expect total company sales to be in the range of down 1% to down 3%. Diluted earnings per share from continuing operations is now expected to be in the range of $3.08 to $3.20 which is up 2% to down 2% range when compared to the adjusted $3.15 per share earned for full year 2005.

Second-quarter 2006 total company sales are expected to decrease 9 to 12% from 2005 with earnings expected to be in the range of $0.50 to $0.54 per diluted share, compared to the adjusted earnings per diluted share of $0.66 in the second quarter of last year. Sales of Polaris ATVs for the full year 2006 are expected to continue to grow slightly driven by the factors Tom talked about, the continued acceleration of our new products introduced last year, the continued growth in our utility and international business and an increase in the average selling price of units sold due to mix and pricing changes.

We continue to expect to reduce shipments of our based North American full-size ATVs for 2006 in response to the heavier dealer inventory situation. For the full year of 2006 Polaris ATV wholesale sales to dealers are expected to increase in the 1% to 3% range which is unchanged from our previous guidance.

Sales for Victory motorcycles are expected to grow in the 15% to 20% range for the full year, unchanged from our previous guidance. The Hammer and Vegas Jackpot models are gaining share along with increasing sales for the improved Kingpin and Vegas models that now have the powerful 100 cu. in. engine and the six speed transmission. Additionally as Tom mentioned our dealer network continues to expand and gain strength.

Parts, garments and accessories sales are expected to grow at a slightly better rate than the overall company. We continue to expect strong growth from our lock and ride accessories for ATVs and RANGERs and increased garments and accessories sales for Victory motorcycles. These will be offset by the lower snowmobile PG&A sales given the difficulty of that business.

Moving down the income statement, our reduced snowmobile production volume has tempered somewhat our expectation for gross margin expansion this year. On a consolidated basis we now expect the gross profit to improve in the 70 to 100 basis point range for the full year 2006 over the adjusted 2005 gross margin percentage of 22.0%. While we continue to expect benefits from cost reduction efforts, some selected pricing adjustments and efficiency improvement initiatives, we also expect that certain commodity costs which increased dramatically throughout 2005 to continue at higher levels for much of 2006, particularly aluminum, plastic and diesel fuel costs. In addition we expect increased floor plan financing costs in 2006 due to higher interest rates and lower snowmobile gross margins from the reduced sales volume and higher snowmobile warranty expense.

Moving onto operating expenses, operating expenses are expected to be slightly higher as a percentage of sales for the full year 2006 as we will continue to invest in research and development efforts to drive future growth through new products including a full year of expense related to our new research and development facility which we opened up the middle of last year. Income from financial services for the full year 2006 is expected to be approximately flat with last year reflecting the overall sales growth environment and our planned inventory reduction.

For retail credit in the first quarter of 2006 we financed through our HSBC relationship about 36% of our products sold to consumers in the United States similar to the 37% penetration in the first quarter last year. The volume of revolving credit contracts written in the first quarter of this year was $119 million, which is a 16% increase over the first quarter last year. That is better than our expectations due in large part to the success of a new offering to dealers to finance their used and non Polaris product through our HSBC relationship. At the end of March the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $722 million, which is up from the $619 million at the end of the first quarter last year but it is less than the $796 million as of the end of the year 2005. Credit losses in the dealer portfolio remain very reasonable averaging less and 1%.

Our equity and income of manufacturing affiliates totaled 1.2 million for the first quarter of the year, nearly all of which relates to our investment in KTM. For the full year 2006 we expect a financial benefit of our ATM investment to approximately double last year's income given that we will have our ownership position for the entire calendar year in 2006.

The income tax provision was recorded at a rate of approximately 32.0% of pre-tax income for the first quarter of '06, down from 33.5% recorded in the first quarter last year due to favorable income tax events. For the full year 2006 our expectation continues to be that the income tax provision rate will be in the range of 33 to 34% of pre-tax income.

Let me take a moment to update you on the expected impact of currency fluctuations on our 2006 results. As you know our foreign currency hedging strategy is to protect the downside risk yet preserve some upside opportunity if economically feasible. For the first quarter of '06 the currency fluctuation of the Canadian dollar and the Japanese yen had a somewhat positive impact on sales, gross margins and net income. We currently have foreign currency hedges in place through the third quarter of 2006 for both the yen and the Canadian dollar which averaged approximately 112 yen to the dollar and about $0.85 for the Canadian dollar. We currently do not have euro currency hedging contracts as we are approximating a natural hedge in that currency. Based on the hedges that we have in place and the current exchange rates of each of the currencies we expect a positive impact on profits from the Canadian dollar and the yen currencies for the full year of '06 compared to last year.

Now let's take a look at some balance sheet and cash flow information. We ended the quarter with 11 million of cash on the balance sheet, down from 41 million at the end of the first quarter last year. The borrowings on our bank line are 80 million compared to 18 million at the end of the first quarter last year. The lower cash and the higher borrowings are the results of the KTM investment and increased share repurchases made during last year.

During the first quarter we repurchased 326,000 shares under our share repurchase program at a cost of $16.4 million, and we also paid cash dividends of $12.8 million during the quarter. We expect to continue to repurchase shares during 2006 under our existing board authorization which has approximately 4.3 million shares remaining. During the quarter we made appropriate investments in the business through capital expenditures totaling 14 million. Full year 2006 capital expenditures are now expected to be in the range of 65 to $70 million which is a bit lower than our previously issued products. We continue to expect depreciation for the full year to be in the range of 70 to $75 million.

Net cash flow used by continuing operating activities was $43.1 million for the first quarter 2006 which is an improvement of $27 million compared to the SFAS 123R adjusted $70 million used in the prior year first-quarter period. This improvement in cash flow used relates primarily to lower factory inventories at quarter end compared to last year's first quarter.

Inventories on Polaris' books at the end of March '06 were 220 million compared to 229 million a year ago, a decrease of 4%. Debt to total capital was 18% at the end of March 2006 and EBITDA from continuing operations was 32.1 million for the first quarter, down from 40.2 million for the same period a year ago.

So to recap for the full year 2006 we now expect total sales to be in the range of down 1% to down 3% with earnings per share in the range of $3.08 to $3.20 compared to $3.15 per share last year. Second-quarter 2006 sales are expected to decrease 9 to 12% with earnings per share expected to be in the range of $0.50 to $0.54 per share compared to $0.66 per share in 2005.

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

Ed Aaron, RBC Capital Markets.

Few questions, first of all just trying to understand how the earnings break out by quarter; I was a little bit surprised given the commentary on snowmobiles that we wouldn't see more of the contraction in the back half of the year since that is where snowmobiles are more heavily weighted in terms of timing. Can you just comment on that maybe?

We have significantly reduced our expected snowmobile shipments in the second quarter; that is one of the primary reasons that our sales are guided down as much as they are and the earnings are down as much as they are. So we have definitely planned for a later seasonality of our snowmobile business given the departure of the plan. Much of that is impacted in the second quarter, there is obviously some impact in the third and fourth also.

Okay. Then on the ATV side you commented about factory inventories being lower, can you maybe comment on any changes that took place at the retail level?

Retail inventory, retail sales?

Yes, retail inventory.

Dealer inventory as we expected it would be in absolute dollars is higher than it was a year ago. We always build inventory in the first quarter to prepare for the spring selling season for people that are newer to Polaris; there is two big ATV selling seasons, one in the spring and one in the fall. So we always build some dealer inventory in the first quarter. We grew that inventory less in the first quarter of this year than we did in the first quarter of last year. And as I mentioned the factory inventory came down as well; so we have reduced production, retail sales are about where we want them to be, so the total inventory total system inventory is coming down. And we expect that is going to continue to come down in the second quarter. If retail goes the way we expect it to go and production plans don't change we expect to see that to continue to trend down.

Okay. And then on your 2009 goals that you talked about in the press release, a little over a year ago I think you broke out where you see all the different parts of your businesses from a revenue perspective out in 2009. I understand that you're sticking with the overall goal but has the composition changed at all on a category by category basis?

No, not really, Ed. This year 2006 is a relatively tough year as we try to get ATV inventory kind of rebalanced and we've obviously had a very difficult year in the snowmobile business, but we continue to believe that there is growth in this Company. The primary things that will drive that growth are the growth in Victory motorcycles, the growth in utility vehicles, international growth and the KTM partnership. ATV's business will grow but at a modest rate, and in total if we are successful in executing phase two of the KTM deal we believe those goals are realistic.

Thank you.

Craig Kennison, Robert W. Baird.

Could you elaborate on the weakness in Spain and whether the price competition in that market could spread to other markets?

Sure. We saw the international business was a little softer in the first quarter than we expected it to be. And internationally generally has been a tremendous growth driver for the Company for the last several years. We expected that the growth rates would come down somewhat in 2006 but it was a little weaker particularly in southern Europe than we expected to see in the first quarter. There are two markets that we're watching in particular, one is Spain, the other is France, really different dynamics driving those two markets. In Spain we have seen one competitor which traditionally has when they have had excess production in Europe they have essentially dumped product in there at very aggressive prices. And that has occurred in the first quarter. I don't anticipate that spreading to other markets. At least historically we haven't seen that. That is a practice of this particular competitor and I don't know exactly why they do that but they choose to take non current product to one particular market and kind of saturate that.

A second issue we are seeing in France is some regulatory issues that we are watching, not unlike regulatory issues that we see in the United States from time to time. So that is where we are seeing some softness. On a currency adjusted basis the international business grew low double-digits, so it is still growing pretty nicely. Northern Europe is fine; so we are kind of watching and seeing what is going on in Spain and southern Europe right now.

Okay, thanks. With respect to KTM especially in Germany, first do you expect KTM dealers in Germany to accumulate inventory thus resulting in a bump in your ATV sales in this upcoming quarters? Second, what is KTM, what Polaris products is KTM selling in Germany? And third, what KTM products are your Polaris dealers selling here in the U.S.? Thank you.

I will take them in reverse order. Polaris dealers are not selling KTM products in North America generally speaking. During phase one of the relationship the distribution networks remained separate, so Polaris dealers sell Polaris products and KTM dealers sell KTM products. Now of course we have about 100 joint dealers so those dealers obviously represent both brands but generally speaking we haven't combined the dealer networks nor do we intend to.

In Europe, in Germany particularly, we turned over distribution of Polaris products to KTM; previously we had an independent distributor. KTM is taking over some of those former Polaris dealers and then offering Polaris products to some of their current motorcycle dealers where that is appropriate to do, if it is a fit for their products. The primary product that they are selling in Germany is ATVs. There is not a snowmobile market there. We don't distribute Victory motorcycles there and RANGER business is relatively small in that market. So KTM will assume some of our dealers and some of their existing distribution there with a dedicated Polaris salesforce. Was there one other question I missed or forgot there or did get those?

Just a question as to whether you expect any bump in sales as KTM fills with that channel?

Sure. Of the existing Polaris dealers that they take over they have inventory already but of the new previous KTM motorcycle dealers they will take some inventory there but the numbers will be relatively modest. Germany is a significant market but we had 2% marketshare there, Craig. So realistically can we get it to 5, 6% in the first year, that would be a very successful performance. But the numbers are not big, huge numbers.

Okay, thank you.

Greg Badishkanian, Smith Barney Citigroup.

My question just when you look at the snow market, have you looked at maybe some markets where you have had one or two seasons of decent snow versus those maybe where you have had very poor snow? Just to see what the factor -- obviously snow has an impact on your business, but just to see what the magnitude is? And then if we see strong snow this season what would the impact look -- what is the lag time? Would you need to see two seasons in a row or would it be one, then dealers start building up and then consumers remember that and then start purchasing for the upcoming season?

I guess from a commonsense perspective you obviously need snow to sell snowmobiles. And the snowmobile business, the snowmobile industry has had a substantial decline over the last ten years. In fact each of the last ten years the industry has been down; this year as I mentioned being down 9%. There is a pretty significant confidence issue on the part of the dealers and there is consumers that have plenty of snowmobiles out there with low mileage. You see that really in all the markets. And some markets you had, a couple of years of good snowfall in there, others you've had three or four, but generally speaking it has been tough for six out of the last seven years in terms of snowfall.

In terms of what is it going to take to rebound in the situation, we have -- with a 30 to 40% reduction in shipments, we have dramatically reduced well below this season's retail levels our shipments for the upcoming season. So if the current trend continues and say we had a repeat of tough snow, another 9% decline which is probably the most likely scenario, we will have significantly reduced dealer inventory. I would expect just based on that factor that for 2007, we will see relative growth in the snowmobile business because we are making such a dramatic cut this year.

In terms of rebuilding the business and getting back confidence in the longer-term issue, it is going to take a couple of seasons before we see structural growth in the snowmobile business, but it will come back. We have been in this business for 52 years, okay, and there has been extended periods of poor snowfall. I would remind you if you went back to the 1970s, for example, the industry went from 500,000 units to 100,000 units, an 80% decline driven by some of the same factors that we are seeing now, high-energy prices, poor snowfall, other things that people can do. And Polaris went through that. At that time it was our only product line, and we survived that. It wasn't particularly pretty, but we survive that.

We are going to get through this situation. It's going to snow in Minnesota in the wintertime here at some point, and the snowmobile business will come back. The key thing we have to do, obviously, in the interim is fix our execution issues.

On the inventory moving over to ATVs, would you expect the inventories to be cleared out by '07, or do you think a little bit excess inventories will continue into '07, if you were to look at it now?

I would expect that, yes.

So the problem should be fixed in '06, and you'll be at normal inventory levels by '07?

I would expect so.

Thank you.

Bob Evans, Craig-Hallum.

Good morning, everyone. Can you elaborate a little bit more on the ATV promotional environment -- I'm sorry if I missed that -- in terms of exactly what you are seeing?

Yes. As I mentioned from a positive perspective, the industry was a little stronger than we expected it to be. We expected it to be down a couple of percent, and it was flattish, so that is a little bit better. The promotional environment was a little worse than we expected, not dramatically worse but a little more aggressive, particularly on some non-current programs by some of the competitors. I would characterize it as a modest change, Bob, not a major change but it is promotional spending, is up a little bit in the first quarter of 2006 versus 2005. Throughout 2005 it has been relatively stable so that is something that has occurred and we are monitoring that situation.

And can you also comment on the, I just want to make sure I understand the cash flow dynamics -- I think Mike you said cash flow from operations was -43, and we don't have all the detail. I am just wondering from the detail we do have I don't see where the working capital needs are coming from.

The cash flow was 43 compared to 70 last year so we improved 27 million. Your question is where it's coming from?

If I look sequentially I think your receivables is up which is typical from a seasonality standpoint -- I am sorry your inventory is up, your receivables are down -- and I am just wondering there must be a bigger jump there somewhere and it is not in all the detail.

Our accruals are significantly less at the end of March which is very normal, very seasonal. That is over $70 million of change in accruals.

Okay, so that is where it is coming from?

Yes, that is traditionally what happens in the quarter.

Okay. Then from a use of cash flow quarter buyback standpoint I know you bought in the quarter -- does your buyback thinking remain the same despite some of the seasonal cash flow dynamics or what your thought is as it relates to the buyback?

I don't think our thinking has changed at all on the buyback from what we've historically performed at.

Okay. And finally, as it relates to the snowmobile industry you have commented on your -- what your shipments are going to be. What would you expect as a whole from an industry standpoint?

I think I would expect that the dealers' sentiments are not unique to Polaris. I think just based on the multiline dealers that we have talked to it didn't snow for all the manufacturers, the warm weather and so forth. I think different competitors are probably affected differently. I doubt that you will see anybody take as dramatic a step as we have taken in terms of production cuts. I don't know, they don't send me those memos Bob, but I think directionally you will see everybody down. The question is to what degree. I think just based on the comments we have had with the multiline dealers, guys are discouraged, they are not making money. These are small businesses, our dealers, and they're not making money in the snowmobile business and they haven't made money for a few years and they are discouraged about that. And we are working closely with them. We are helping them in terms of carryover systems and I think the positive thing that has occurred out of this is that we have been able to hold onto the vast majority of our snowmobile dealers. We would not have been surprised to see 20% of the snowmobile dealer network throw in the towel. Which when the business does come back could have a devastating consequence on the long-term distribution of Polaris product. We didn't see that. Guys reduced their order, in some cases placed very minimal orders, but remain committed to the snowmobile business. And so that is a very positive sign and hopefully as we get the dealer inventory down and they can build back up a little bit they may make a little bit of money on reduced volume.

Okay, thank you.

Tim Conder, AG Edwards.

A few questions, gentlemen. Related to your comment about increased warranty expense on snowmobiles, I know you had some catch-up warranty issues last year. How much would you term somewhat more than normal did you do, was flowthrough the first quarter?

That is pretty hard to quantify, Tim. Let me give you some specifics on the warranty accrual and the changes that occurred during the first quarter, maybe that can shed a little bit of light on it for you. Our ending balance in the warranty reserve at the end of last year 2005 was about 28.2 million. To that we charged to expense on the P&L 9 million in the first quarter, that is up from 5.5 million in the first quarter last year. We paid claims during the first quarter of 2006 of 14.4 million which is up from about 11 million a year ago. So our ending warranty reserve at the end of the first quarter is now 22.8 which is up from 21.7 at the end of the first quarter a year ago.

If you look at that data the warranty claims that we paid during the first quarter are always much higher than what gets charged to our expense and that is due to the seasonality of our snowmobile usage. That is very normal. The warranty claims paid were an increase of 31% during the quarter, much of which, nearly all of which increases due to our snowmobile quality issues.

Thanks, Mike, that helps. It sounds like gentlemen and just perceptually here if you could clarify, the ATV clearance in the U.S. and what we have heard in our dealers' survey maybe is gone a little bit slower than expectations, do you anticipate extending some promotional activities that you have in ATVs? And also given the slightly higher promo environment side, do you anticipate extending that past their expiration in May, I believe when a lot of the programs expire?

I would not agree with the characterization that things are going a little slower than we expected. I am reasonably happy with how the ATV business is performing compared to our plan. Okay? Now it would be great if the ATV business were growing 15%; but in comparison with what we expected for the business it is doing decent, it is doing okay. It is doing about what we expected it to do. The industry is a little better, promotional environment is a little higher. I tried to present the balancing factors in the prepared remarks I guess. In terms of what we might do in terms of future promotional programs I guess that is something from a competitive point of view, Tim, I am not going to announce here in this call. We will monitor the retail situations and see what other people are doing and we will communicate that to our dealers first as we traditionally do.

So at this point --

But Tim I think from a financial point of view, which is probably 99% of people on this call care about, we have maintained our guidance with the ATV business. And I think that is hopefully a pretty clear indication and overall we think things are going about like we expected them to go.

Okay, okay. You had mentioned that RANGER was up double digits and I think it had been sort of tracking in the neighborhood of up 15 to 20%. Is that range still fair for what you're seeing in RANGER year-over-year growth?

It is higher than that. RANGERs are doing great. I think I used strong double digits. RANGERs continue to do great.

And from a competitive standpoint not only for yourselves but Artic, and Honda, Yamaha, Suzuki, Kawasaki -- the Taiwanese and the Koreans appear to be starting to move into the 3 to 500 cc area; I know it is early and it takes them a while to get their technology up. They have only really been competing under 250, what kind of if you could give us an updated view there as it relates to the established manufacturers in ATVs versus what you're seeing from the new Asian manufacturers so to speak?

I think just generally speaking with the new Asians again for folks that may not be quite as familiar with Polaris and the competitive environment, we face the new Asian companies like [Kimco] and E-Ton and [Sim] and Dinli. In Europe now for the last several years, the last four or five years, and I think competed reasonably well against them. You are right, they started with basically used type products and have grown steadily in terms of displacement. Now you're seeing several of them with a 500 type displacement, things that would be roughly similar to the products we introduced maybe 10, 12 years ago, something like that.

In terms of North America though we do not see at least at this point a significant presence of new Asian entrants into the North American market. They are going to try, but there are some fairly important differences between the two markets in terms of distribution, in terms of product liability. It is relatively tough to come into the North American ATV market in a significant way. I guess as evidence for that I would point to companies that have tried in recent years. Bombardier which is a very well-capitalized, very well-developed company that understands the power sports business in North America as well as anybody has been at this now for I think eight years. And has about 3% market share. A couple of years ago John Deere was going to be the entrant that was going to turn the ATV industry upside-down with one of the strongest, most powerful brands in the world which it obviously is. And they are well less than 1% market share, and I think it is fair to say struggling in the North American ATV industry.

So I fully expect the Asians, the new Asians, the Taiwanese, the Chinese and the Koreans to try to enter the market. But I would characterize it similar to the Chinese companies coming to the North American auto market. It may happen but it probably will take a long time to establish the brand, the distribution, pass the safety standards -- all those types of things which generally are present in North America and generally are much less present in Europe.

Thanks. What are you gentlemen at this point expecting for the equity interest contribution from KTM for the year at this point?

As I said in my prepared comments our expectation is that it would be about double what it was in 2005 for the full year 2006.

Double in absolute terms or double on what you sell in '05 on an annualized basis?

Double in absolute terms.

And then finally you recently started a program with GE on the retail side, could you maybe expand on the logic or the reasoning behind that given what you already have with HSBC? If I understand it right I think one is maybe an installment program, the HSBC is a revolving credit program?

Yes. That is exactly right. So to refresh everybody's memory we have a very -- we are very happy with our relationship with HSBC. We restructured that agreement last fall and we are very happy with how that program works. That is a revolving credit facility. They also handle our installment loan portfolio but the installment loans was very, very small; way less than 10% of the total portfolio. And frankly HSBC was struggling a little bit with their offering on installment. So we chose to move that piece of the portfolio to GE earlier this spring. Our retail revolving is going very well with Household, everything is just fine there. Our view is that we can capture more of the consumer financing market with an improved product offering through GE on the installment credit. That is particularly important to higher price product that we sell and as we are getting more penetration in motorcycles and utility vehicles with higher price product, the enhanced installment offering should be helpful for us.

And just one request or suggestion if I may, would it be possible in the future to get a full balance sheet and cash-flow statement? A couple of the other companies that we cover I think Brunswick and so forth -- Harley, do that. And if in the future you guys could do that, maybe avoid a couple of questions and are routinely asked?

Yes. We will consider that. As you know we do that at year end to help and we will take that under consideration.

Great, thank you.

Joe Hovorka, Raymond James.

Couple of questions. How many Victory dealers do you have now and kind of what is your goal by the end of this year, maybe the end of next? Also you said retail sales for the industry was flat in the quarter; what was it for Polaris retail sales? Maybe if you could answer the same question for snowmobiles, I think you said down 9 for the industry? And then finally RANGERs, what percentage of your total ATV business is that making up now? That is it.

Some of those questions we will answer and some we won't. (multiple speakers) Victory dealers we have exactly 327 Victory dealers now. We expect to have at year-end between 350 and 375. So we should see continued growth in Victory. We don't break out retail sales exactly, Joe. So I can give you general indications of each of the product lines. In ATVs we were about at the same pace as the overall industry. In Victory we were substantially higher than the overall industry. In snowmobiles we were weaker than the overall industry. So about maintain market share in ATVs, gaining in motorcycles, losing in snowmobiles. Overall that is 15 to 20%; I won't be more specific than that.

Fair enough, thank you.

We have time for one more question.

David Anders, Merrill Lynch.

Tom, maybe you can give us a little bit more color on your commentary with respect to your relationship with the dealers, (indiscernible) between the lines, it sounds like this relationship is a little more tenuous. Is it because you have been asking them to take a lot of inventory and now sales are slowing? Or is it the snowmobile issue of quality or am I just misreading your comments?

I am not so sure it is relationship driven as it is quite so much as financially driven. We have got 1700 dealers so to paint the picture with just one brush probably would be a little misleading but let me break it into a few buckets with you. I would say that our snowmobile dealers generally speaking are pretty miserable right now. Snowmobiles, while it may be a relatively small part of the dealership income, most guys started in the snowmobile business. It is a huge part of -- most of them started as snowmobile riders, it is a huge part of their psyche, and just like it is for us and our snowmobile business is down, their snowmobile business is down. They are frustrated and there's not a whole lot of other people they can blame besides us. Some of the factors are our issues. The quality issues are our issues and we have to fix those issues and that is certainly our responsibility. The snowfall and other issues are factors that impact their business and we're trying to help there but obviously we don't control that. I would say snowmobile dealers are down. I do think though from the message that we had at the dealer meeting was look, we have got some issues but we are way better off working together than we are fighting each other. And I think that for most dealers they responded to that message and we have seen evidence of that in the orders; they may not be ordering as much as we would like but they are not bailing out. So that is good.

ATV dealers I would say is a little more mixed; some are positive, some aren't. Typically the ones with higher inventory are a little grumpier than the ones that are selling through but that is kind of similar to I suppose most every year. I would say Victory dealers are thrilled. Most of them that I see are making money hand over fist and like that very, very much. The people that see potential in KTM relationship are pretty upbeat. So all in, I would say that the things that we have to do are fix the issues in the snowmobile business and get the inventories down in ATVs. That is what we are working on and as that situation progresses and the financials improve for the dealers, I think that dealer attitudes as you characterize them will get better.

Thank you.

That is all the time we have this morning. 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. We will talk to you next quarter. Goodbye.

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