Polaris Inc (PII) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Polaris 2007 first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Edwards, you may begin your conference.

Thank you, Monica. Good morning and thank you for joining us for our first-quarter 2007 earnings conference call. Mike Malone, our Chief Financial Officer, and Tom Tiller, our Chief Executive Officer, will be participating in the call. Bennett Morgan, our President and Chief Operating Officer, is also here and is available to answer questions.

We will be discussing certain topics including product demands 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's 2006 annual report and in the 2006 Form 10-K, which are on file with the SEC. Now I will turn it over to Tom. Tom?

Thank you, Richard. 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 $0.34 per share, up from $0.26 per share last year, on a 5% decline in sales.

The first-quarter results were solid and give us a good start for the year. Each of the businesses is executing at or above plan; and we are encouraged with the early momentum. Compared to a year ago, retail sales were stronger than last year, and dealer inventory is much lower.

We saw excellent performances from our RANGER product line, financial services business, and Victory motorcycles division. But nearly all the Company performed to plan.

As a result, we're confirming our guidance for the full year of $2.91 to $3.03 earnings per share.

With that overview, let's turn to the individual business segments, starting with the all-terrain vehicle division. The ATV division had a good first quarter. As expected, shipments were down, as we continued to assist our dealers in reducing their inventory. Revenue was 9% lower than last year.

From a positive perspective, Polaris's retail sales of core North American ATVs were essentially flat with the same period a year ago. We gained market share for the quarter, and have significantly reduced inventory compared to the same time a year ago. We remain on plan for reaching our inventory reduction targets by midyear.

Products that showed particular strength included Hawkeye, the new Outlaw 525, and Sportsmen X2 models. The ATV industry promotional environment for core ATVs was about as we anticipated.

As has been the case for the last several years, our RANGER side-by-side business continues to be very strong, with retail sales significantly higher than a year ago. Dealer inventory of RANGERs remains in great shape. The most exciting news of the quarter was the introduction of the new RANGER RZR, a new high-performance side-by-side vehicle. This vehicle competes in a new segment for us, the recreational side-by-side segment, whereas the base RANGER was primarily a work or utility vehicle, the RZR is all about high-performance fun. This recreational segment of the market grew by about 45% last year.

The reaction to the RZR has been great. It's been very well received by the press, dealers, and consumers. The vehicle, due to its class-leading performance characteristics, has had a lot of positive press, been on the cover of many industry magazines, and generated lots of buzz from consumers. Dealers have also expressed strong interest and initial orders have been strong. We have recently begun production, and the RZR units will begin to ship in limited quantities in the second quarter. We expect demand to exceed supply for RZRs for a number of quarters.

From a challenge perspective, the core North American ATV industry remain sluggish, down high single digits, which is a little bit softer than what we expected going into the year. But all-in, I am pleased with the start from our largest business.

Snowmobiles. The snowmobile business has remained challenging, but has improved relative to where we were a year ago. The riding season has largely come to a close. It was generally another disappointing year for snowfall, although significant snowfall did occur in much of North America late in the season. You may recall that 90 days ago the industry had been down double digits. Industry retail sales for the season ending March 31 finished down mid single digits from a year ago. So February and March were relatively strong months.

From a positive perspective, the fundamentals of our snowmobile business continue to get better. Our dealer inventory is much, much lower today than it was a year ago. Our product quality and product appeal is better. Our dealer network, despite 10 consecutive years of industry decline, remains largely intact.

We recently introduced our model year 2008 lineup to dealers, and their reaction met our expectation. The new products include an 800cc mountain machine, a new Race Replica 600, and some value-oriented machines.

From a negative perspective, our market share declined about 0.5 for the full year. The industry was down again, and dealer inventory of competitive brands remains much too high. That will mean that the promotions will remain elevated as competitors seek to clear their channel inventory. While we are not yet complete with dealer orders, we expect snowmobile sales to be somewhat lower in 2007 than last year, down in the mid single digits.

Victory motorcycles. Victory motorcycles continue to do very well. The progress of the last few years has continued into early 2007. The business is showing strength in product quality, product appeal, retail sales, dealer network development, and brand momentum. Shipments of Victory motorcycles were up 5% for the quarter. More importantly, retail sales were up over 20%, and that comes up against a strong first-quarter '06 comparison.

As the fastest-growing brand, we are significantly outperforming the overall industry and are carrying solid momentum into the heart of the riding and selling season. Certainly the most exciting news of the quarter and one of the most important product development efforts in our history was the introduction of the Victory Vision. This new motorcycle competes in the luxury touring segment and was introduced at the New York International Motorcycle Show in January. It will be available this fall. We have been very, very pleased with the early press, dealer, and consumer reaction to the bike.

We continue to work on the final development and are getting ready for production. This summer, we will showcase the Victory Vision at events around the country. Dealers have already been receiving deposits for the first few units. We expect the visibility and success of the flagship Victory Vision models will help enhance the entire Victory brand even further.

Victory product quality and appeal continue to increase according to every measure we see, and we believe we now have the highest customer satisfaction in the motorcycle industry. The lower warranty costs and added volume have helped gross margins expand.

From a negative perspective, the overall motorcycle market was sluggish in the first quarter. Industry retail sales were down mid single digits. While the first quarter is not a big quarter for motorcycle sales and weather was a negative factor, we will continue to watch the industry performance closely.

As a result, we are maintaining our sales guidance for another strong year from Victory. If the early momentum holds, we may see more upside later in the year. But longer-term, we continue to see Victory and motorcycle generally as a significant growth engine for the Company.

Part, Garments, and Accessories. The PG&A division had a good first quarter with a 6% increase in sales. For the full year, we continue to expect PG&A to continue to grow about as fast as the overall Company. The growth was balanced across the businesses and product lines, with particular strength in RANGER-related accessories, including the new RANGER Cab Systems. The innovation of our accessory offerings has generated consistent growth for a number of years; and given the in RANGERs we expect to continue that to benefit our PG&A division.

International. Total international sales were up single digits for the quarter, which given the environment was good performance. As you may know, Europe accounts for about 80% of our international sales. The pattern there remains consistent from prior quarters, which is that our business is stronger in northern Europe than in southern Europe, but overall remains about what we expected for the first quarter.

Our Scandinavian snow business was relatively good this season. Orders there have met our expectation, and we are gaining market share in some selected markets.

Before I turn it over to Mike, I would just like to summarize my remarks. As most of you know, 2006 was a disappointing year for us. But late last year we laid out a strategy to get the Company back on track. We talked about winning in the core, delivering operational excellence, and growing the Company by $500 million over the next three years. After the first quarter, we are happy with the start down that road.

Retail sales are at or above plan across the business and nearly 10% higher than a year ago, despite a sluggish market. At the same time, the number of units in dealer inventory is more than 20% lower than it was a year ago and continues to come down according to plan. We have had good introductions of the new RANGER RZR and Victory Vision products, and we have delivered a solid first quarter financially.

So I believe our business is healthier than it was a year ago, and we are looking forward to a good year in 2007 and beyond. With that summary, I will turn it over to Mike Malone.

Thanks, Tom, and good morning to everyone. We are pleased to report earnings at the upper end of the guidance range for the first quarter, and also happy to report that we are seeing progress in our dealers lowering their inventory levels. Our businesses are executing very well compared to the budgeted plan that we set out for ourselves for 2007. So 90 days into the year, there have been no major surprises and, therefore, no major changes in expectations to communicate.

Today, I will reiterate our guidance for the full-year 2007 and give more specific guidance for the second quarter, and a brief review of certain aspects of our first-quarter results.

Our total Company sales guidance for the full-year 2007 remains unchanged, as we expect sales to increase in the 1% to 3% range for the full year. We expect diluted earnings per share from continuing operations to be between $2.91 and $3.03, an increase of 7% to 11%, which is unchanged from previously issued guidance.

Expectations for sales growth by product line for the full-year 2007 also remained unchanged and are as follows. ATV sales are expected to be in the flat to up-3% range, with our core ATV shipments down for the year as we continue to help our dealers make corrections in their inventory levels through the first half of the year; while our side-by-side utility vehicle shipments are expected to experience strong double-digit percentage growth for the full year, as the market continues to grow, and the initial dealer and consumer reaction to the new RANGER RZR have been excellent as Tom talked about.

On snowmobiles, you will recall that we reduced our production and shipments of snowmobiles significantly, by 39%, last year. So even though our retail sales of snowmobiles this past season were lower than the previous year, the season-end Polaris North American dealer inventory levels are much lower than last year at this time. Although the dealer ordering process is still underway, we are confident in reiterating our previously-issued snowmobile sales guidance, which is expected to decrease in the single digit percent range for the full-year 2007 compared to last year.

Victory motorcycle sales are expected to increase in the mid-teens percent range for the full year, unchanged from previous guidance, with the initial shipments of the new 2008 model Visions coming in the second half of the year.

Finally, PG&A sales are expected to grow at similar growth rates of the overall Company, also unchanged from previous guidance.

For the second-quarter 2007, total Company sales are expected to decrease 3%, to decrease 5% from the second quarter of last year as we continue to work with our dealers to reduce the core ATV inventory levels in North America.

Our earnings from continuing operations are expected to be in the range of $0.57 to $0.60 per diluted share in the second quarter, an 8% to 13% increase compared to the $0.53 per share earned in the second quarter last year.

The gross profit margin percentage for the full year is expected to expand at least 100 basis points compared to the full-year 2006 percentage of 21.7%. This increase is due to manufacturing efficiencies and cost-reduction efforts that are being undertaken; a better sales mix, with more higher-margin RANGER sales in 2007; lower floor plan financing costs, resulting from our lower dealer inventory levels, and therefore lower payments to Polaris Acceptance; and we expect lower snowmobile warranty expenses as a result of our improved quality.

All of these improvements will be offset somewhat by planned increases in promotions and incentives to improve our competitive position.

Operating expenses are expected to increase both in dollar terms and as a percentage of sales for the full-year 2007, primarily due to increased advertising expenses to support the launch of our new products, as well as anticipated higher, more normalized, incentive compensation expenses as the Company's financial performance improves.

These higher operating expenses are expected to be particularly evident in the third quarter this year, as we ramp up the new product advertising, combined with the comparative impact of the reversal of previously-expensed incentive compensation costs in the third quarter of last year.

Our income from financial services for the full-year 2007 is now expected to be approximately flat with last year, an improvement over our earlier guidance. The income from Polaris Acceptance's wholesale credit portfolio is expected to decrease for the full-year 2007 as dealer's lower their inventory levels and related interest payments to the financed company.

On the other hand, the income generated from the retail credit portfolio for the full year is expected to increase from last year. In the first quarter of 2007, we financed through the retail credit program with HSBC about 37% of our products sold to consumers in the United States, similar penetration rates from last year. We have realized approval rates consistently above the 40% level. The volume of revolving and installment retail credit contracts written in the first quarter of this year was $199 million, a 67% increase over last year, due in large part to the continued success of our financing program related to used and non-Polaris products financed through our HSBC relationship. Remember, this is a fee-based business for Polaris and we are not at risk for credit losses on this retail portfolio.

At the end of March, the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $655 million, a decrease of 9% from the $722 million at the end of last year's first quarter, which reflects the decline in the dollar amount of dealer inventories in the United States. Tom talked earlier about the decline of 20% in our unit dealer inventories.

Remember, the credit losses in this dealer portfolio remain very reasonable, averaging well less than 1% of the portfolio.

During the first quarter, we completed the first closing of the sale of KTM shares under the terms of the agreement that we announced in December. Approximately 1.11 million shares were delivered at a purchase price of $61.7 million. As a result of the first closing, we recorded in the first quarter of 2007 a gain on the sale of the KTM shares of $4.8 million pretax or about $0.09 per diluted share, due to the recognition of previously unrealized currency translation gains.

In addition, we expect that the completion of the sale of the remaining 272,000 shares of the KTM stock related to our December agreement will occur in the second quarter and will generate an additional gain of $1.2 million pretax or about $0.02 per diluted share. This $0.02 gain is included in our second-quarter 2007 EPS guidance given earlier.

Upon the completion of these transactions, Polaris will hold approximate 345,000 KTM shares, representing slightly less than 5% of KTM's outstanding shares. Since Polaris no longer receives a net benefit from its ownership percentage of KTM's income in our income statement, the impact of KTM on the equity income of manufacturing affiliates was zero for the first quarter of 2007.

The income tax provision was recorded at a rate of approximately 33.3% of pretax income for the first quarter. For the full year, our expectation for the income tax provision rate is that it will be in the range of 33% to 33.5% of pretax income.

During the first quarter, we repurchased only a nominal number of Polaris shares related to employee stock incentive plans. We did not repurchase any of our shares on the open market, as Goldman Sachs is still working to complete their portion of the accelerated buyback program initiated in December of last year. We do have approximately 4.8 million shares available to repurchase under the Board of Directors' authorization once Goldman completes the accelerated buyback, which is anticipated to be no later than September of this year.

For the full-year 2007, capital expenditures are expected to increase to be in the range of 60 to $65 million as we invest more heavily new product development tooling and capital projects to reduce our production costs and improve product margins.

We expect depreciation for the full-year 2007 to be in the range of 65 to $70 million.

Total debt levels finished the quarter at $243 million, primarily as a result of the $200 million term loan utilized in December to complete the accelerated share repurchase transaction. Debt to total capital at the end of the first quarter was 58%, compared to 18% at this time last year, as a result of the significant impact of the additional debt on the numerator, and the accelerated buyback on the denominator of the calculation.

We ended the quarter with cash of $45 million and improved the operating cash flow by $28 million compared to the first quarter a year ago.

EBITDA from continuing operations was $36 million for the first quarter, up 13% from a year ago.

So to recap our full-year 2007 guidance, total sales for the year are expected to increase in the range of 1% to 3%, with EPS from continuing operations growing to $2.91 to $3.03 for the full-year 2007, which is an increase of 7% to 11% over the $2.72 per share earned last year.

In the second quarter of 2007, our sales are expected to be down 3% to 5%, with earnings per share expected to be in the $0.57 to $0.60 per share range, an increase over last year's $0.53 earned in the second quarter. At this time, we will take any questions that the analysts may have. Monica, would you please open up the line for questions?

(OPERATOR INSTRUCTIONS) Edward Williams with BMO Capital Markets.

Yes, just a couple quick questions for you. How comfortable are you at this point with the dealer inventory levels relative to what your goal was going into this year? When do you anticipate the dealer inventories getting to levels that you're comfortable with on a sustained basis?

And if you could, just give us some color as to what you're seeing with regard to the overall health of the dealers, given the macroenvironment that we are seeing.

Sure. As I said in my prepared remarks, dealer inventory has come down very nicely starting last year and into the first quarter. Total dealer inventory of all products is down more than 20% in terms of units versus the same period last year. That is excellent. We are right on plan where we expected to be.

As we have communicated a number of times previously, we expect by this summer to have ATV inventory to be where we will operate on a go-forward basis.

In terms of the dealers' overall health, I think it varies, of course. We have 1,700 dealers, so there is a wide variation depending on where you are and the types of products that you sell and the local economy.

But I would say in general the markets are pretty sluggish. If you look at the ATV industry, it is sluggish; the motorcycle industry is sluggish; the snowmobile industry is sluggish. So dealers are concerned about that. They are paying close attention to their costs, including their inventory carrying costs, and every other costs in the dealership. So I think that they are being cautious. And given the macroenvironment, I think that that is reasonable.

Okay. Then the last question for you, Tom, is just if we look at the European market, what are you expecting out of Europe in general as compared to the Company, as far as the year is concerned? Is it any different than the Company average, as far as the revenues are concerned?

Then secondly, are you looking at -- is there anything you can do to take Southern Europe and try and expand or improve the operating businesses in the Southern European market?

Yes, I would expect the international business to perform reasonably in line with the overall Company. It could be a little better, a little worse, but not a huge departure with the overall Company.

Of course, we are working to improve our operations in Southern Europe. We have a couple of markets that are a little sluggish right now that we are working through. Different issues in different markets. We have some land access issues; we have some competitive issues; we have inventory issues, depending on the particular market that you're talking about. So we are working on that.

But I would expect overall for the international operations to be about in line. We are going into some exciting new markets for us that, while they are small as all new markets are to begin with, may offer some nice, long-term promise.

That includes Russia. We have been in Russia for a few years now. We have seen some very nice growth in both snowmobiles and ATVs, and actually are going to introduce Victory in Russia this year, later this spring. So we are excited about that.

But overall, I would say international would be about on the Company average.

Okay, great. Thank you very much.

Greg Badishkanian with Citigroup.

Nice progress in the quarter, guys. Just a few quick questions here. Can you give a little bit more color around how you have improved your ATV business and just what you are doing to take some decent share this quarter?

Yes, I think, as we talked about when we laid out the overall strategy, Greg, it was of winning in the core. It's important for us in a sluggish snowmobile and ATV business to grow market share. That includes being more competitive across a number of dimensions.

With Polaris, that always starts with product innovation. Okay? We are never going to be able to outspend our competitors. Just to remind you, some of our competitors are 50 times our size. So the idea of us starting a price war, or promotion war, that kind of thing is goofy. So it has to start with product and innovation.

So if you look at, for example, where we saw strength, we talked about a few of the models in there. One was the Outlaw 525; that is the world's fastest ATV. That is an ATV that we have powered with KTM power. It is very lightweight. It is just a terrific new product, and customers are clamoring to get that.

We have delivered innovation in the two-up segment. Even though the overall market is sluggish, obviously the ATV market is a very large market. There are niches in there that are performing quite well, and we have actually captured the number-one share position in the two-up market in a relatively quick period of time. So that has been a place.

So innovation is the start. The second area is more and better advertising. We have increased our advertising levels and weight, and I think our effectiveness. I think, we are getting good feedback from consumers and dealers. They are seeing our ads more and they like what they're seeing.

Finally, from a promotional point of view, we are being competitive. We're not going to have crazy promotions or that kind of thing, but we do need to be competitive with what is out there in the market. As we bring our dealer inventory down and eliminate the cost, both for us and our dealers, that allows us to spend that money in places that is more value-added. So I think we are off to a good start, and I would expect us to continue to work very, very hard to be competitive in the core part of the business.

On the inventory for ATVs, would you expect -- assuming your retail stays about the same, for the next two quarters or so, will the shipments that you have planned, will that lead to sort of a reasonable inventory level? Or are you assuming some improvements at retail?

No, what we have said and I think a number of times now, is that we expect that North American dealer inventory of core North American ATVs to be further reduced in the first half of the year. It should achieve a desired target, which I would say is a great level of inventory, which balances availability with demand, right where it ought to be, by this summer.

Then, we expect to maintain that position as we go forward. We will have the problem fixed, solved, whatever words that you want to use, at that point. That is how we laid out the overall business plan this year, and that is what we communicated to you guys in terms of our overall guidance.

That is why our shipments are down in the first quarter. We expect them to be down in the second quarter, but up in the second half of the year, and the full year to be flat to up 3% for the total ATV business.

Does that imply retail of about flattish for the second quarter? Or what type of expectations do you have at retail?

Yes, we are not going to predict retail performance. That is something that we just have not done. We obviously have a retail plan and an industry plan and all those sorts of things. But we are just not going to provide guidance on those topics.

Okay, great. Thanks.

James Hardiman with FTN Midwest Securities.

Good morning. A couple quick questions here. Talk a little bit more about financial services. What was so different about the first quarter versus the rest of the year? Obviously, if inventories are going down as you guys kind of talked about, the wholesale financing is going to also be down.

It seems like -- at least, I think -- that you have long since annualized the new programs that you have done. I'm just trying to figure out what was the incremental boost here in the first quarter; and what is going to change as we move through the rest of the year.

So, we were up 35% in the first quarter. As I said, wholesale -- the wholesale business is expected to be down for the year. That will -- it was down some in the first quarter. It will be down actually more as we go through the year and our dealer inventories, compared to last year, are significantly reduced.

You're right on the retail business; we will start to anniversary and annualize the significant growth, but that will start in the second quarter. That is really when we saw the -- a year ago in the second quarter is when we really saw the big jump in this new retail program.

So first quarter was a significant increase, and we would expect the retail growth for the balance of the year to be more normalized.

So the comps get much more difficult starting in the second quarter.

Correct.

Okay, so you started that new -- those new programs more than a year ago, but they didn't really start to kick in until second quarter; is that fair?

That is exactly right, yes.

Okay. Next question, just quickly, with accrued expenses, it looks like they were down about 20% versus sales that were down about 5%. What is -- is that a timing thing there? What is going on there?

If you look at our year-end balance sheet, you kind of see what is going on there. A couple things that are significant that are a little unusual that occurred in the first quarter of this year, coming off of the year-end balance sheet.

One is the compensation expense accrual at the end of the year was significantly lower. That is because our profit-sharing and other incentive plans in 2006 were significantly less due to our poor financial performance. So the payment of those in the first quarter was significantly less in '07 than in was in the first quarter of '06.

The other thing that is a little unusual is because our wholesale sales have been down, the payment of the dealer holdback incentives has been lower, because the retail sales are lower. So that also -- if you look at the year-end balance sheet you see that that was lower; and the payment of that in the first quarter was lower than a year ago. Those are the two biggest impacts.

Okay, great. Then just one last question. You sort of talked about in the snowmobile segment how even though you guys have reduced inventory some of your competitors have not. And that that could potentially be somewhat of an issue.

Can you talk along the same lines with ATVs? If you guys have reduced inventories, what does the overall industry look like. Is it going to be an issue for some of your competitors to sort of follow your lead here?

Yes, we don't have a great data on that. We unfortunately don't have access to our competitors' inventory positions at retail. So we -- a lot of the information we have is more anecdotal. It comes from salespeople who visit competitive dealerships; it comes from dealers themselves and that kind of thing.

So I would say in the snowmobile side we probably have better data than we do on the ATV side. But in snowmobiles in particular, we know that at least a couple of our competitors have inventory that is substantially higher than it needs to be. So I would be very, very surprised if there are not significant efforts to move some of that inventory out.

In ATVs, there are significantly more competitors. At any point in time, there is always a competitor that has inventory that is too high. That is just kind of the nature of things, I guess. But I wouldn't point to anything that would be as out of whack as I'd say the snowmobile situation is right now.

Great. Thanks, guys.

Craig Kennison with Robert W. Baird.

With respect to your inventory plans, how are you planning to gauge whether dealer inventory is at an appropriate level? What sort of metrics would be important to track?

Well, I think, we do have some experience in the business, Craig; so I think -- we have a belief as to what that number is, I suppose, based on the 53 years in the business. It is always a trade-off, right? You balance availability with cost and stockouts and all those kinds of things.

We will certainly get our first significant feedback when we go to get orders from our dealers at the model year changeover, which occurs in the summer. So if the dealer inventory in the dealer's opinion is still way too high, we will probably feel that in our orders that we have built into our financial plans as we go through the model year changeover. So that will be the first kind of market feedback.

But we read all the competitive -- all of the channel checks that you guys do. We read those very closely. So we know what you guys hear, many of you hear anyway, from the dealers. It is not -- sometimes they vary a little bit channel check to channel check. They vary a little bit from what we hear.

But I think just primarily based on our experience, we think we know what that number is; and we will find out as we get through the summer.

That's helpful. Thank you. Then secondly, with respect to some of the credit issues that have been a central theme in the broader recreation product world, especially since some of these subprime issues have surfaced, can you give us a sense for what percentage of your sales ultimately go to consumers that might be categorized as subprime, or maybe with a FICO score below 620, or whatever metric you want to choose?

On the surface that is a difficult question to answer. We have this HSBC relationship. We are no longer at risk for the credit piece of that, so we don't have up-to-date perfect information coming from HSBC.

However, we do know that HSBC does not do subprime lending for our types of customers. The FICO scores that are getting approved and getting financed has (technical difficulty) over 700 on average. That number has not deteriorated much over the last year or so.

Our approval rates have been consistently over 40%, which is good for industry. So our sense is that, in the past and currently and probably going forward, not many of these subprime customers are getting financed through HSBC.

What we don't know is how many of those customers are finding financing someplace else and that are purchasing our product. We don't really have visibility to that. So on the impact on our financing business, I really don't think that there is going to be much impact.

The real question, I think, and one that a lot of companies, a lot of industries are dealing with, is -- what is the bigger macroeconomic impact that could occur from an overall tightening of credit? And that is a little harder for us to predict.

Excellent, thank you very much.

Bob Evans with Craig-Hallum Capital.

Good morning, guys. Can you comment, Tom, touching on the previous question on the snowmobile market. I know you don't have perfect information, but given what you see and know, what would you think a reasonable number would be in terms of wholesale shipments being down going into next year, from an industry standpoint?

Well, that is a hard question to answer, Bob, because what I don't -- when you look at that, what do you try to do with -- in terms of orders and so forth? There's a bunch of factors that that depends on. You know, what you got for new products coming by segment; and what is going on in the dealer base; and so it is really hard to tell.

In terms of our situation, I said we are going to be down. We don't -- orders aren't complete, but we're going to be down kind of mid single digits, somewhere in there.

In terms of what the other manufacturers are doing with their dealers, we have heard qualitative feedback out of the dealer meetings, but it's pretty mixed. Some dealers that are kind of like oh, it's okay; and then other dealers that are pretty upset. So that is a very hard number for me to judge.

It should be down in excess of where we are, simply because their inventory levels are -- not for all competitors, but for some competitors -- substantially higher. So. But then you have got to look at all the other factors that go into making that decision.

So I am not sure I do have a good answer for you, but I would expect it should be higher, a larger reduction than what our reduction is, because the inventory situation is in some cases significantly worse than our inventory situation. We feel pretty good about where our dealer inventory is. In terms of the dealer feedback that we received at the dealer meetings, it was pretty good.

It is a tough industry, it was a tough year, everybody understands that. But the order numbers were in general pretty reasonable. People like the new products, and the quality is substantially better than it was a year ago, and people are hanging in with it.

I think I was concerned going into those dealer meetings that we could lose a number of dealers, dozens perhaps, as they are dealing with very difficult snowfall situations locally. I don't think that is going to be the case. I think we will keep our dealer network intact and potentially could lose less than 10 dealers, which is phenomenal.

Okay.

The other thing I might add on the snow business is that it is quite regional. In the West, Western United States and Western Canada, where they have had good snow the last couple of seasons and we have got very competitive product, the industry is doing fine and we are doing fine. So there are pockets that look good and that are very encouraging.

That is for sure. The West is clean, Bob. Very clean.

Hopefully it will snow in the Midwest one day again. But, except for in April. Can you also comment RZR shipments? When should we --? I know Q2 you're going to start; but when do you start getting, I guess, more meaningful volume levels? Will that be Q3 and kind of continuing to grow from there? Or just trying to get a sense of your thoughts on ramp.

Yes, it will be pretty limited in Q2 as we have started production at relatively slow rates; and of course, that takes time to ramp up both for us and for our supply base. The shipments will grow in Q3 and Q4.

As I mentioned, I would anticipate, based on the reaction, that we're going to be supply constrained for a number of quarters, several quarters for the foreseeable future, anyway. This looks like a very hot product.

Okay. You touched on this before, but as you sit today versus the beginning of the year, can you comment both for Polaris perspective and industry perspective kind of retail -- the retail environment in terms of sellthrough that you are seeing? I mean, about what you thought, a little bit better than you thought? Just again from your perspective and the industry perspective.

Yes, I would say from our perspective compared to a year ago or even 90 days ago, there's a lot of things to be positive about. Retail obviously was very good in the first quarter. Our orders have been good in our spring order sessions. Our RANGER business is strong. Our Victory business is strong. Financial services is strong. We have had a good launch to the Vision and the RZR. PG&A business looks good. So there's a lot of positives.

In terms of what I am concerned about, worried about, obviously both the ATV and motorcycle industries are a little softer than we expected. Motorcycles, it is probably less of an issue for us, simply because we are so small. We are just getting going in motorcycles and probably are less sensitive to what the overall industry is doing.

In ATVs, it is a tad weaker than I expected, not materially; but as we go through the spring it will be important to see how that performs. So that is really the main thing that we kind of got our eye on right now.

Okay, thank you.

Tim Conder with A.G. Edwards.

Thank you. Tom, a clarification real quick. The motorcycle statistics that you gave for the first quarter for the industry, that is heavyweight only, correct?

No. That was overall motorcycles.

Overall everything, all in. Okay.

That includes dirt bikes, everything.

Okay. Any commentary on heavyweight?

No. No specific comment on heavyweight.

Okay. Then you guys had a pretty decent currency benefit in the first quarter; or by our guesstimates around $0.05 or so. Can you give us a little more color on that and what your expectations are for the balance of the year relating to currency?

Sure. We did have some currency benefit in the first quarter, primarily out of Europe and our Scandinavian business. That is where most of that is coming from.

The Canadian dollar was actually a little bit harmful, not significantly, but a little bit harmful in the first quarter. The Japanese yen was a little bit helpful also.

So that is very, very hard to predict. We don't guide necessarily movements in currencies. We don't plan for that one way or the other. We did benefit from it in the first quarter, but I really can't predict, Tim, what to expect for the balance of the year.

I will tell you in our guidance we generally don't do much prediction unless we have got significant hedge positions that we can map out. But for where we are in our hedges, we are pretty well hedged for both the Canadian dollar and the Japanese yen through the third quarter. As I said, the Canadian dollar is negative, the Japanese yen is a little positive, and they relatively balance each other out.

So I can't predict. I would expect at least from our guidance perspective, we are expecting an offsetting impact on currencies for the balance of the year.

Given the continued on going upward march in the euro, should that give you more benefit? Or are the issues that you have already cited with Southern Europe and the access issues continuing to be more of an overriding factor for '07?

Well, the euro overall from a currency perspective is relatively naturally hedged. We purchase a lot of our engine components out of Europe and other components; and roughly speaking that offsets the sales activity that we have coming out of our European operations. So generally speaking, the movement in the euro is naturally hedged and doesn't have much of an impact on our operations.

Okay, okay. Then should we anticipate or infer in the first quarter that your international ATV sales were up single digits also? Or was that up single digits internationally driven, I think as you alluded to, more by sleds? Can we get a -- or just a little color on how the ATVs went internationally?

ATVs were about flattish. Sleds were up a little, strong double digits in international in the first quarter.

Okay, okay. Then I think you guys had previously given the follow-up on a prior question. You said that your expectations for the US core market in ATVs were going to be down mid single digits. Is that still fair on an annualized basis here?

Yes, I think so, Tim.

Okay, okay. Then, inventories were up not quite 8% versus the decline in sales. Anything from a timing issue, gentlemen, going on there?

Well, factory inventory is higher than we would like it to be. We did -- basically what we are doing here is we are working on the dealer inventory first, and then we will address factory inventory.

So we have constrained the shipments in the first half of the year. So that is probably not going to lead to factory inventory reduction, right? So factory inventory we expect would remain high in the second quarter on a relative -- relatively speaking.

Then in the third quarter, as our shipments increase year-over-year, you will see some improvement, I would expect, in factory inventory. By the end of the year, I would think our factory inventory would be where we would like that to be.

So dealer inventory first, where that should be by the end of -- by the summer; and then factory inventory in good shape by the end of the year.

Okay, and speaking of year-end, Tom or Mike, whoever wants to take this, what are you --? You levered up here to buy back the stock in the fourth quarter of '06. Where do you see by year-end -- do you see that leverage factor coming down? Is it the goal to get that down into a certain range? Or just somewhat any directional indications?

Well, we do have a $200 million term loan that is longer-term in nature. So our expectation is that we would maintain that level of indebtedness for the indefinite future.

Okay, through the term? Okay.

Yes.

Is that in your opinion after the period for Goldman to finish their part of the contract? Does that in any way -- do you feel -- sort of constrain you a little bit more on a share repo going forward, given the higher debt to cap?

I don't really think so. No, I don't see it that way. We are very comfortable with the level of $200 million on that term loan. Our cash flow attributes remain strong.

Very good, right.

So I don't feel that is a constraint at all.

Okay. Then just kind of more of a -- I don't know if you want to call it a housekeeping issue or classification issue. Why do you include the $0.11 from continuing ops? Again, I know it's from the KTM sale. I know it is coming out of the equity income basically, you're substituting that for here in the short term, a onetime thing.

But I guess why call it that? Why not just sort of -- here is our base earnings? So we have a better apples-to-apples comparison going forward.

Well, Tim, we play by the accounting rules and the accounting rules say that it is other income. That is where we have got it classified. We really can't choose to present things where people would like to see them. We have got -- there's rules on where the classification belongs on the income statement, and we are complying with that.

If you want to do things differently on your side, and choose to characterize things differently as onetime or nonrecurring or whatever, you have the latitude to do that. But for us, we have got rules, the accounting rules, to comply with. And we are doing it according to what is appropriate.

Okay. In all fairness to you, you guys have been very upfront in breaking out how much that was. So that was just kind of more of a curiosity question. Okay. Thank you, gentlemen. Appreciate it.

Monica, we have time for one more question.

Joe Hovorka with Raymond James.

Two quick questions. One on the Goldman repurchase, can you give us any color on where they are actually at in covering their position? Are they half done, a quarter done, whatever?

Then secondly, D&A was down in the quarter. What was driving the lower D&A number?

On the Goldman status, you know, Joe, I don't really have great visibility to that, so I really don't have anything that I can share. What they tell me is things are proceeding according to plan.

They had initially given us a range of expectations for when they would be complete, and they are operating within that range, and that is what we have previously communicated. On -- your second question was on depreciation and amortization?

Yes.

I think that was down a little bit for the quarter. I think that is more timing related than anything else. It was down about 9%. I gave you our full-year expectation for that. I think the decline in the first quarter is more timing than anything else.

Your full-year depreciation, though, will also be down versus the full-year last year? Correct?

Yes, a little bit.

What is that? Why would it be going down?

Just the -- you know, I don't have it specifically identified. It is probably the fully amortized toolings from a couple years ago. We had significant investments in some snowmobile engines a few years ago that would have been fully amortized last year. That is more than likely what is going on.

Okay, great. Thanks, guys.

I want to think everybody for participating today. We are out of time. Hopefully, we will see you again next quarter. Thanks again for participating.

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