Polaris Inc (PII) 2007 Q2 法說會逐字稿

Good morning. My name is Whitney and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris 2007 second-quarter earnings release 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, and good morning and thank you for joining us for our second-quarter 2007 earnings conference call. Here at Polaris today we have Mike Malone, our Chief Financial Officer and Bennett Morgan, our President and Chief Operating Officer. Tom Tiller, our Chief Executive Officer, is calling in today from the East Coast, where he is participating in the annual Kyle Petty Charity Motorcycle Ride Across America this week on the new Victory Vision Luxury touring motorcycle.

Today, as before, 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 Litigation Reform Act of 1995. Actual results could differ from those projected in any forward-looking statement, which, by their nature, involve risks and uncertainties. There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning a number of these factors can be found in Polaris's 2006 annual report and in the 2006 Form 10-K, which are on file with the SEC. Now we'll turn it over to Tom. Tom?

Thanks, Richard and good morning, everyone. Thank you for your interest in Polaris.

Earlier this morning, we reported financial results for the second quarter. For the quarter, earnings were $0.62 per share, up 17% from $0.53 last year on a 2% decline in sales. Polaris has had a good first half of the year. The business has performed according to plan we laid out at the beginning of the year. You will recall in January we talked about that 2007 is all about getting Polaris back on track. Specifically, we expected to win in the core, deliver operational excellence and grow in several targeted areas. We expected during the first half of the year for sales to be down as we work to lower field inventory. Six months later, these objectives have been achieved. Our ATV business is much healthier than it was a year ago. Dealer inventory is dramatically lower. Our margins are improving, and our new products like the RANGER RZR and the Victory Vision are being well accepted in the market. Thus far, we have gained market share across every product line during this calendar year. As a result, we are modestly raising and narrowing our guidance range for the full year to $2.95 per share to $3.05 per share. That represents a $0.04 increase in the low end of the range and a $0.02 increase at the upper end. With that a review, let's turn to the individual business segments starting with the all-terrain vehicle division.

The ATV division has had a good first half of the year in a sluggish competitive industry. As expected, ATV shipments were down for the second quarter as we continued to assist our dealers in reducing their inventory. Revenue was 2% lower than last year. Year-to-date, industry retail sales of core ATVs are down about 10%, while Polaris retail sales are down mid single-digit. So we have gained a modest amount of market share in the first half of the year through our efforts to become more competitive.

As most of you are aware, for the past several quarters, we have been working with our dealers to significantly reduce field inventory of ATVs with the goal of getting ATV inventory in line this summer. We have materially achieved that objective and expect to see modest revenue growth in the second half of the year as we continue our efforts to become more competitive and introduce several important new products.

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. Certainly the bright spot for the Company has been the introduction of the new RANGER RZR, which began limited production in the second quarter. The response, which we expected to be positive, has been even better than we had hoped. We are continuing to gradually increase production to meet the market needs, but it is likely that demand will exceed supply for the RZR for a number of quarters.

While RANGERs have been very strong, as I mentioned earlier, the core North American ATV industry remains sluggish and is a bit softer than we had expected going into the year. Promotions are in line with our expectations it, but we expect the industry to maintain quite competitive. From a positive perspective, we have seen some improvement in our international ATV business, which I will talk about in just a few minutes. So all in, I am pleased with the start from our largest business, ATVs.

Snowmobiles. Through this time in the year, there's not a lot to report about snowmobiles, but production for model year '08 has started normally, and like last year, we've shipped very few unites to dealers during the second quarter. Significant shipments will begin next quarter. Our snowmobile orders were a little bit better than we had expected 90 days ago, which you will recall, we expected to be down single digits. After we completed our dealer meeting, the orders were up just a little bit compared to last year. As importantly, we worked with our dealers so that nearly all our snowmobile dealers remained engaged in the business, which, as most of you know, is going through a challenging period.

The machines that were most positively received included the new High Performance 800 RMK and the value price shift model.

We will remain focused on executing the basics of quality, balanced supply and demand and making sensible investments as we go through this business cycle. The bottom line is that our snowmobile business is healthier now than it was a year ago and we are working to continue that improvement independent of the environment.

Victory motorcycles. Victory motorcycles continue to do well in a challenging motorcycle market. The progress of the last few years for Victory has continued into 2007. The business is showing strength and product quality, product appeal, retail sales, dealer network improvement and brand momentum. Shipments of Victory motorcycles were up 5% for the quarter. Unfortunately though, the sluggishness of the first quarter for the overall motorcycle industry has continued into the summer, and year-to-date, the industry is down mid to high single digits. This decline comes after many years of record growth in motorcycle sales, and given the economy, is not a complete surprise. And while Victory has continued to grow, the rate of growth is lower than we had anticipated. So assuming the industry remains relatively soft, we're going to modestly reduce our expectations for Victory from double-digit growth to mid single-digit growth.

Of course, the big news for the year remains the Victory Vision, which was unveiled in January and will begin shipments later this fall. Things are going well with the Victory Vision rollout. We have already produced limited quantities of the new models and expect to begin full production relatively soon. We've had very positive reviews from the press and the consumer interest has been strong. We're demonstrating the bike throughout North America over the next few months and expect the momentum to continue to build. We will formally introduce the Victory Vision along with the rest of the model year '08 Victory model line to our dealers later this month and expect strong orders.

Why is this one new model so significant? Well first, we expect the visibility and success of the flagship Victory Vision models will help enhance the Victory brand even further. And secondly, a successful entry into the luxury touring market will open a nearly $3 billion market for Victory and our dealers to attack over the next several years. Long-term, of course, we continue to see Victory as a significant growth engine for the Company.

Parts, garments and accessories. The PG&A division had a decent second quarter with a 5% decline in sales. We are seeing strong growth in Victory in RANGER-related items and softer demand for snowmobile and ATV-related clothing and accessories. We announced during the quarter an expansion of our Vermillion, South Dakota distribution facility. This is the first significant expansion since that facility was built ten years ago and the expansion will help support growth in PG&A over the next decade. As part of the expansion of Vermillion, we will also close a smaller distribution facility in Winnipeg.

International. Total international sales were up high single-digits for the quarter. Our business in Europe is improving. While Northern Europe has remained relatively strong, we have seen some improvement in some parts of southern Europe. Like in North America, RANGER and Victory are growing a little more rapidly than our other products across many of the international markets.

We will also open another international subsidiary, this time in Germany, which gives us a dealer direct presence now in seven of the largest and most important international markets. In addition to Germany, that includes United Kingdom, Sweden, Norway, France, Australia, and New Zealand. For the full year, we expect the international business to grow a little bit faster than the rest of the Company.

In summary, before I turn it over to Mike Malone, I would like to just summarize my remarks. After a rough 2006, we've begun to get Polaris back on track. We have had a good first half of the year. We are more competitive, gaining market share in each of our businesses, expanding margins, and are successfully introducing some great new products. And while we don't expect the market to get any easier, we do expect that we will grow modestly in the second half of the year, largely as a result of having much lower dealer inventory and the strength of some great new products like the RANGER RZR and the Victory Vision, both of which will have their biggest impact, not this year, 2007, but in 2008. So I am pleased with the execution thus far and I remain optimistic about the future.

And with that summary, I will turn it over to Mike Malone. Mike?

Thanks, Tom, and good morning to everyone. We are pleased to report earnings that exceed the upper end of our guidance range for the second quarter. These results demonstrate our continued success in executing our business plan we developed over six months ago. Today, I will review our revised guidance for the full year, 2007, and give more specific guidance relating to the third quarter and some brief comments on certain aspects of our second quarter just completed. Given the continued success we have experienced in our RANGER side-by-side business and, more specifically, the new RZR as Tom commented on, we are increasing our total Company sales guidance for the balance of the year, and now expect sales to grow in the range of up 3% to up 5% for the full year 2007. Additionally, we are slightly increasing and narrowing the earnings guidance range, and now expect diluted earnings per share from continuing operations for the full year 2007 to be between $2.95 and $3.05, an increase of 8 to 12% over the $2.72 earned last year.

Current expectation for sales growth by product line for the full year 2007 have been adjusted as well and are as follows -- ATV sales are now expected to be up in the range of 3% to 5% for the full year 2007, an increase from the prior guidance of flat to up 3%. The increase in the expectations is driven by the strength of our side-by-side RANGER business retail sales as the market and our market share continues to grow, as well as the dealer and consumer reaction to the new RZR, which has exceeded our expectations.

We are also increasing our snowmobile guidance range somewhat for the full year 2007 as we now have final firm orders from all our dealers. We now expect sales for the full year 2007 to increase in the low single-digit percentage range for the full year for snowmobiles.

As Tom mentioned, the motorcycle industry has softened over the past few quarters, and the overall industry is down from a year ago. This has had some dampening impact on Victory retail sales activity, the dealer inventory levels, and our optimism for the model year 2008 Cruiser dealer order levels. As a result, we're moderating our Victory motorcycle sales guidance and now expect sales to increase in the mid single digit range for the full year 2007. We remain very excited about the new 2008 Luxury Touring Vision models, which will begin shipping to dealers near the end of the third quarter.

PG&A sales are expected to grow in the low single digit percent range for the full year 2007 as growth in the motorcycle and RANGER business is somewhat mitigated by softer PG&A sales for our core ATV business and lower snowmobile-related PG&A sales.

For the third quarter 2007, the total Company sales are expected to increase in the range of up 6% to up 9% from the third quarter of a year ago, as the growth in our RANGER side-by-side business, particularly the RZR continues to accelerate and the core ATV dealer inventory correction gets completed.

Earnings from continuing operations for the third quarter 2007 are expected to be in the range of $0.99 to $1.04 per diluted share, which is flat to down 5% compared to earnings of $1.04 in the third quarter of last year. This third-quarter earnings guidance contemplates that operating expenses are expected to be higher in the third quarter of this year compared to last year due to a significant increase in advertising related to the new 2008 model year product launch for both the RZR and the Vision products. In addition, the third quarter of last year, if you recall, we needed to reverse previously recorded stock and performance-based compensation expenses, a result of the decreased Company financial performance last year. In the third quarter of this year, these costs are expected to be more normalized.

Also, income from financial services in the third quarter of this year is expected to be significantly lower than last year, as our retail finance partner, HSBC, has decided to discontinue financing non-Polaris product at our dealers, and I will talk more about that decision shortly.

The gross profit margin for the full year 2007 is expected to expand in the range of 80 to 100 basis points compared to the full year 2006 gross margin percentage of 21.7%. This increase is due to manufacturing and purchasing efficiencies, a better sales mix, with more, higher-margin RANGER sales, lower floor plan costs, resulting from the lower dealer inventory levels, and a favorable foreign currency fluctuation, all offset somewhat by planned increases in promotions and incentives and more aggressive pricing to improve our core ATV competitive position.

Moving down to operating expenses, for the full year, are expected to increase both in dollar terms and as a percent of sales for the full year 2007 compared to last year, primarily due to the increased advertising expenses to support the launch of the new products and the anticipated higher, more normalized incentive compensation expenses as our financial performance improves in 2007. Each of these higher expenses will be particularly notable in impacting our planned third-quarter '07 operating expenses.

Income from financial services for the full year 2007 is now expected to decline in the single-digit percent range compared to the full year last year in spite of being up 27% on a year-to-date basis through the second quarter. There are two reasons for the expected lower income. The first is nothing new; as we've been saying all along, the income from our Polaris acceptance wholesale credit portfolio is expected to decrease this year as dealers lower their inventory levels and related interest payments to Polaris acceptance. However, the new news is that our retail credit provider, HSBC, has informed us that beginning on July 1st, they will no longer offer revolving financing for non-Polaris product sold through our dealers. Now the good news is that we don't have any credit risk in the portfolio that would require us to participate in any losses of that portfolio. The bad news, however, is that we will no longer realize the fee-based financial benefit of our dealers selling competitive product. As a result, we now expect the income from financial services generated in the second half of this year to be significantly lower than the income generated in the second half of last year. Remember this is a fee-based business for Polaris. Therefore, we're not at risk for any credit losses on any part of the retail portfolio. And also, the arrangement with HSBC to finance the purchase of all our Polaris product through our dealers is not affected by the recent decision. We are working on alternatives to replace some of the non-Polaris product retail credit volume lost from the recent HSBC decision.

For the second quarter of '07, we financed through our retail credit programs about 38% of our Polaris products sold to consumers in the United States, a similar penetration rate to last year, with approval rates consistently above the 40% level. The volume of revolving and installment retail credit contracts written in the second quarter of '07 was about 285 million, a 38% increase over last year. This increase is due in large part to the success of the now discontinued financing program related to the non-Polaris products.

At the end of the quarter, the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $606 million, a decrease of 10% from $673 million at the end of last year's second quarter, reflecting the decline in the dollar amount of dealer inventories in the United States. Credit losses in this dealer portfolio remain very reasonable, averaging well less than 1% of the portfolio.

During the second quarter, as we've previously communicated, we completed the second and final closing of the sale of KTM shares under the terms of our agreement signed in December of 2006. Approximately 272,000 shares were delivered at a purchase price of $15 million in the second quarter. As a result of the second closing we recorded in the second quarter of '07 a gain on the sale of the KTM shares of about $1.4 million pretax or about $0.02 per diluted share due to the recognition of previously unrealized currency translation gains. Polaris now holds approximately 345,000 KTM shares, representing slightly less than 5% of their outstanding shares, which we intend to hold for the foreseeable future.

Since Polaris no longer receives a benefit from its ownership percentage of KTM's income, the impact of KTM on the equity in income of manufacturing affiliates on our P&L was zero for the second quarter and will continue to be zero in future periods.

The income tax provision for the second quarter was recorded at a rate of approximately 36% of pretax income. For the full year 2007, our current expectation is for the income tax provision rate to be in the range of 33.5% to 34% of pretax income. During the second quarter, we repurchased and retired 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 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.

Full-year 2007 capital expenditures are expected to increase to be in the range of 60 to $65 million, unchanged from our previously issued guidance, as we invest more heavily in new product development tooling and capital projects to reduce our production costs and improve our product margins. We continue to expect depreciation for the full year 2007 to be in the range of 65 to $70 million. Accounts receivable are down 4% from a year ago to $53 million, but factory inventories still remain higher than what we would like at $268 million, an 11% increase over a year ago. As we have stated in prior calls, our objective has been to reduce dealer inventories first, then focus on the factory inventories. We expect factory inventories to approach the $200 million level by year-end 2007.

Total debt levels at the end of the quarter were $200 million, representing the $200 million term loan utilized in December to complete the accelerated share repurchase transaction. Total debt to capital was 51% at the end of the quarter compared to 21% 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 $34 million and improved year-to-date operating cash flow from continuing operations by $13 million compared to a year ago. EBITDA from continuing operations was $89 million for the year-to-date 2007 period, up 5% 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 3 to 5% with earnings per share from continuing operations growing to be in the range of $2.95 to $3.05 for the full year, an increase of 8 to 12% over last year. Third-quarter 2007 sales are expected to be up in the range of 6 to 9% with earnings per share from continuing operations expected to be in the range of $0.99 to $1.04 per share.

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

(OPERATOR INSTRUCTIONS). Greg Badishkanian, Citigroup.

Nice progress so far, guys. Just a question regarding sort of ATV. I think you mentioned that it was down in the mid single-digit range; is that for the second quarter or is that sort of a year-to-date?

For the year, I think what I said in my prepared remarks, Greg, is for the year, year-to-date, the industry is down about 10% and our -- in retail sales, and our Polaris retail sales are down in the mid single digits.

Okay good. That's helpful.

And that is core U.S. ATV.

Core, okay, good. Kind of looking out at sort of the next few quarters, your expectations for that, I guess, are basically to stay the same?

Yes, I think what we've said is that we expect the industry to continue to be down, although our projections show in the second half of the year they will be down less on a year-over-year basis than they were in the first half, partly because the comparables are easier. And we continue to expect that we will gain market share in the core ATV market in the second half of the year.

Good. And how would you categorize the promotional level in the ATV industry in general?

I think as I said in my prepared remarks, it's about what we expected, with the industry -- the overall consumer economy is sluggish, right? Look at autos. Look at boats. Look at motor homes. Everything in kind of the discretionary big-ticket leisure stuff is a little sluggish, so I would expect that you will continue to see all competitors continue to work pretty aggressively, but we haven't seen anything that we did not expect in terms of competitive moves. In terms of what happens going forward, your guess is as good as mine. I don't know. They don't share those plans with me, but at least on a year-to-date basis, things have gone very much according to our plan.

Great. And that kind of leads me to the next part. I think you had mentioned the motorcycle industry, I guess that's all motorcycles on and off-highway, continue to be soft. Can you give us a little bit more maybe color around that and what your expectations are for the rest of the year there? And then also, do you think that the weakness in the motorcycle industry is due to the same sort of macro factors that are impacting all the other leisure vehicle sectors?

I do think that it's the same factors. What I said was for the U.S., for all motorcycles, mid to high single digit declines on a year-over-year basis. The segment of the business that we compete in, which is the heavyweight cruiser segment and now, soon to be the touring segment, is a little bit better -- it's relatively better than the overall motorcycle market, which includes things like sport bikes and dirt bikes and that kind of thing. But if that segment, too, is down just not quite so much.

It's also important to remember, I think for investors that have a little bit longer-term horizon in particular, is that the motorcycle industry last year was at an all-time record high. It has just increased year after year after year. So even with the market being down a little bit, it still is at a very, very respectable level, so we are excited about particularly the Vision opportunity.

Great. Good. And in terms of the RZR, we're hearing it's -- the reception is phenomenal by the dealers. Can you give us a little bit of indication in terms of how you are going to approach it from an allocation as well as from a manufacturing perspective, because I suspect you are -- there's going to be great demand and maybe even some shortage there on that product.

Yes, there are shortages on the RZR and we have had a good start to the launch of production. And this is an all new vehicle, so anytime that you start a completely new platform like the Victory Vision or the RANGER RZR, it's not a trivial exercise getting going in production. So we've had a good start. We've actually been able to ramp up a little bit faster than we had anticipated, but we're going to be, I anticipate based on everything that I've heard, in a shortage situation for the next number of quarters. We do have an allocation process that we are working with our dealers and obviously trying to satisfy as much of that demand as quickly as we can while, at the same time, balancing the absolute need for quality. We can't go so fast that we stumble in terms of quality. So we are -- in the spectrum of problems, it's a very nice problem to have and we are continuing to work on that.

In terms of both the dealer and the consumer feedback, it's been very, very strong. We expected this to be a winning product as we talked about in January when we unveiled it to the financial community. But it's been stronger than even we anticipated. So we are continuing to work the RANGER issues aggressively.

Good. Thank you.

James Hardiman, FTN Midwest Securities.

Couple of questions here. First, for the second quarter, your guidance was $0.57 to $0.60. By my calculations you got about $0.03 from currency, looks like about $0.04 from the financial services growth. Now on the last call, you said that you don't really build currency into your guidance. On the financial services side, you seem kind of bearish on that segment, given the fact that you had at that point, annualized the additional programs. I guess excluding those items, how did you do versus your own expectations on sort of a core EBIT basis?

I don't know. Mike, you want to take that one?

Sure. I don't know that I want to get into line by line guidance. We don't give specific guidance for the quarter line by line, margin operating expense, etc., etc., etc. I can't verify or confirm the specific currency and financial services implications that you are relating to, James. So I don't know that I can comment specifically.

I would say that certainly the things you mentioned are -- have been positive in the quarter. The things, perhaps, that were a little dilutive to our original plans were, perhaps, the ATV promotional level. We spent a little bit more than perhaps we anticipated as the market continued to be a little bit -- or the overall market continued to be a little bit weaker than what we expected. That has remained elevated and we've participated in that more elevated environment. And perhaps there are a few other adjustments, but I guess I would rather not comment specifically on guidance that we never really issued.

I guess from my perspective, James, again, without getting into each individual line item on the P&L or the balance sheet, I was pleased with the quarter. I think in any quarter, probably in our history, there's things that don't go quite according to plan, but I think overall, we've had a dramatic reduction in ATV inventory, we're meeting or exceeding our financial plan, we're growing market share in every product line, and we have it looks like a couple of real winning products on our hands. The RANGER RZR for sure, and we will know better over the next several weeks with the Victory Vision, but I am quite optimistic about that.

So in terms of the things that we laid out at the beginning of the year, winning in the core, delivering operational excellence, and growing in some selected growth areas, we -- in terms of the core, we are up market share in every product line. In terms of the operational excellence and gross margins are up 130 basis points in the targeted growth areas. The RZR is on fire and we're pretty optimistic about the Victory Vision. So I think big picture, I'm pretty happy -- I'm a lot happier now than I was nine, 12 months ago.

No, that's fair enough. I wasn't looking for line by line guidance. I'm just -- you just -- it seems like the last couple of quarters you've gotten a currency benefit. And from the sound of things that you've said in the past, you don't really -- you don't expect to get that currency benefit. You don't build it in the guidance. I guess what I'm sort of trying to model out as we go forward is the assumption that you will continue to get that benefit or is it still too tough to tell?

Well, I think what's fair is that we have adjusted our expectations based on the actual results that we've achieved for the first part of the year. Currencies generally have moved in our favor, whether it's the Canadian dollar or the euro or other European currencies have all moved in our favor. And we don't -- you're right, we don't necessarily plan or guide on movements of that currency, but the fact that they are elevated have improved the first-half performance and that's, obviously, baked into the actuals, and, therefore, has some impact on the full year.

That's fair enough . Second question, in terms of financial services, it looks like over the last say, four quarters, that segment has grown about $10 million. Can you give us any idea, hopefully quantitatively, but at least qualitatively, what portion of that growth has been from these additional programs that are ultimately going to be going

I would say nearly all. If you go back and track the penetration rates that we've been disclosing, on our product sales and how many of our products are being financed through the retail credit programs, it's been in the mid to high 30% range over that period of time. So our product has been relatively consistent with what's being financed. The very dramatic growth and the outperformance basic, honestly from what we've been expecting, has come from commenting financing non Polaris product and that's the program that's going to be discontinued.

Great. And just one final question. In terms of Goldman buyback, can you give us any indication of what percentage they are done? In addition to that, you sort of talked about, when you first rolled out that program back in December, that obviously you didn't want to be in the market sort of competing against Goldman because ultimately if the price was sort of more than anticipated, there would be some sort of truing up at some point. Now given sort of the run-up in the shares, do you anticipate having to have any true-up with Goldman Sachs?

Okay, the status, I really can't share any more than what I did last quarter or what we've announced in the press release, that we anticipate that this, their activity covering their short position will be complete by mid-September. I really don't have any other more specifics than that, but we think that as we approach the end of the third quarter, that they will be complete and at that point, if we choose, we can be back in the market buying on the open market with our share repurchase. As far as the status of the true-up, you are correct; the stock price average has moved positively since December when we initiated this. And there will be a true-up payment that we will make to Goldman Sachs once they are complete, which will in essence, be an additional payment from the Company to Goldman for the purchase of those 3.5 million shares. The way that is computed contractually is to compare the average of the share price from the start date in December to the completion date, whenever that is, and compare that to the $46 and change that we initially bought the shares at.

Great. Appreciate it, guys.

Ed Aaron, RBC Capital Markets.

A couple questions. First, when you look kind of further out to your '09 goals, and you covered some of this at the analysts' meeting but I was hoping maybe we could revisit it a little bit. How -- there must be some level of industry performance in your major product categories that you'll need to get to those numbers. Can you give us some rough ideas of where that stands today? And particularly, when you look at the core ATV category?

Yes, as I think I mentioned in response to Greg's question, we expect in the second half of this year for the ATV business, the ATV industry, to be down, but to be down less on a percentage basis than it was in the first half. And we continue to anticipate a flattening of the ATV industry as our models look forward into 2008. Now that's like any other forward-looking model. You have models, we have models, but that's what those models continue to indicate. And so, if we can achieve a flat ATV, core ATV industry, I feel confident that we can execute the growth plans that we outlined. Specifically, the $500 million worth of growth from the RANGER business, largely now. We disclosed it coming out of the new RZR category. But we will have other new products coming out of there, out of the Victory business, and in particular, the expansion into the luxury touring market. The motorcycle business, I'm sorry, the military business continues to go well. We are pleased with the progress that we are making there. We will, as we go through future quarterly calls, we will update people on that, but that's coming along well. Our international business is strengthening a little bit and we continue to work for one additional adjacent market. So probably the one wild card is the snowmobile business. We don't know what mother nature is going to bring there. We will respond to that rather than trying to predict that. But that's basically the game plan that we have.

Okay good. And then a couple of other questions if I could. On the HSBC thing, why did they alter that agreement? Obviously there was some significant benefits to you, which might be the explanation, but can you just help us understand why that change materialized?

Well, that was clearly a decision they made. We weren't too happy about it. My understanding is that they were not happy with the profitability of that segment of the business that they were writing from our dealers. And we were participating quite heavily in -- on the fees for that business and they felt that they needed to make a change to improve the profitability for their overall portfolio. But what has not changed at all is the relationship that we have with HSBC or the income that we are getting on this fee base on the Polaris book of business, which is the vast majority of the volume. And obviously the one that we care the most about is to help our dealers and consumers buy our product at the dealerships. And that has not changed. And the credit quality of the customers and the credit loss experience and all those factors from the Polaris product part of the portfolio, remain very solid.

Okay. That's helpful. Thank you. And then, the wholesale receivables, they were down I think you said 10% year-over-year, which I think is a little bit of a lesser rate of decline than you saw in the first quarter. I would have thought that maybe it would have gone more the other way, just given that the kind of the inventory situation improved further. Can you help me get my head around that?

Yes, and maybe we will tag team this one, Mike. Let me start and maybe you can fill in. If you look at dealer inventory, we measure it two ways, one is dollars, the other is units. And if you look at the overall number of units, with respect to ATVs at first, it's down in excess of 20%. It's down well -- significantly in excess of 20%. And if you look at the total number of units that are in the dealerships, snowmobiles, ATVs, Victories, RANGERs, it's actually at a five-year low, which is pretty significant. We are pleased with the progress that we have made there. But what -- the reason the dollars aren't down so much is if you look at the stuff that's growing, RANGERs, RZRs, Victory, there's a pretty significant mix impact there in comparison with some of our other products. I don't know, Mike, do you want to add to that?

No, that's exactly my answer.

Great. And then one last question if I could, just as it relates to buyback. First is the Goldman payment, is that included in your guidance for the year? And then secondly, you will have the opportunity to get back in the market and buy back stock starting I guess in September at the latest. Can you just give us a sense of how much balance sheet leverage you're comfortable with?

The true-up payment when we make it, Ed, will be an equity transaction, so there's no P&L impact to that transaction. We will write a check and it will be an additional payment of those shares that we bought back in December. So it will be -- will kind of go through the equity, not the P&L.

The debt level, what we've said before, we're comfortable carrying this $200 million term loan through to maturity. It's got a five-year maturity. We may carry that to maturity. We may choose with our cash flow to pay some of that down. And the other logical use for our positive cash flow, free cash flow, will be to repurchase shares. So we've got a fair amount of flexibility.

I guess what I would tell you in advance is that our expectation all along has been that when Goldman is done with their accelerated buyback, that we would return to more historical normal levels quarter by quarter on the share buyback. So if you go back and look at the last 10 years, we've been relatively consistent with our buyback activity. And absent anything else, we would expect to kind of continue that long-term trend.

Thank you very much.

Kathryn Thompson, Avondale Partners.

Tagging on to your financial services questions from earlier in the call, what percentage of your financial services revenue came from non-Polaris dealers? And then along with that, had there been any meaningful changes sequentially year-over-year of that non-Polaris revenue?

Catherine, we have not disclosed specifically the mix of Polaris and non-Polaris. I would, as I said before, the significant amount of the growth year over year, quarter over quarter has come from that part of the portfolio. Our retail sales have been flat to down a little bit over the last period of time, and our penetration rate has been pretty consistent. So that -- what falls out of that is much of the growth is coming from the non-Polaris. The second part of your question was --?

Had there been any meaningful change or increase in that non-Polaris -- the financial services from non-Polaris products at your dealers? So in other words, had there been a significant increase or decrease in that number that would prompt HSBC to say hey, we're not getting as much of a cut as we would like that would prompt this decision to discontinue this relationship or that portion?

Yes, I guess the way I will answer that is the growth in our income that we are recording has come from a significant increase in the volume of non-Polaris product being financed.

Okay. That's helpful. And just to clarify a little bit with your RZR versus your traditional RANGER product, is it safe to assume that your gross margins for RZRs are higher than your core RANGER products? (multiple speakers) production, that is.

Not quite. Our -- what we've said is that our RANGER line of products is our highest margin vehicle business. That's higher than ATVs. It's higher than snowmobiles and it's higher than motorcycles. Our RAZR product is a new product. It's ramping up production. Initially, obviously, with a new product, it's not quite at the level that our other RANGER product is. But it's a very attractive margin and as volumes increase, it will get a little better. And we are very happy with our margins on RZRs and our RANGER business.

I guess to the point, could it potentially exceed your current traditional RANGER product margins?

I don't know that we would expect that.

Okay. Okay. That's all I have for right now. Thank you.

Hakan Ipekci, Merrill Lynch.

Thank you. A couple of questions. One is now that RZR is out there, do you have any incremental data on the potential cannibalization from your existing lines from existing RANGERs and ATVs? The other two questions are -- it seems that you have expanded your product base in Europe with Victory and RANGER. Can you elaborate a little on some of the initiatives you've taken there and what you expect to do going forward in terms of the momentum there? And finally, with respect to the FX, can you give the benefit for the quarter for the second quarter? Thank you.

Okay. I'll try a couple of those. With regard to the cannibalization, I think it's still too early. We are interested in understanding that, but when you look at the numbers, they are still relatively small, and most of the people are very enthusiast-type early-adopter type buyers. We're trying to get a sense on what the cannibalization rates might be as you get further out. So I think it will probably be a few months here before we really have data on our own that we would be comfortable that is not just noise. Sometimes in the first few months of a new product, you just get that very high pent-up demand, and so it's too early to know that.

With regard to Europe, what -- I think what I said was that RANGER and Victory are growing faster than ATVs and snowmobiles like in the North American market. But they are still quite small parts of our international business. RANGERs are expensive to ship and they don't have the percentage penetration that you would have in North America.

Victory, we still are in the UK and we've entered a number of smaller markets. We are in Iceland. We are in Russia. We are in Mexico. But we still have not put Victory onto the continent, which would be the probably significant move in terms of expanding Victory's distribution. That's something that at some point in the future, is a logical move for us, but we have not done that yet. With regard to the FX, I will leave that for Mike.

Tom, I didn't quite understand your FX question.

Do you have -- I think last quarter it was roughly $0.05. Do you have for the second quarter kind of a benefit, an FX benefit for the quarter?

Okay, I don't disclose that, so the -- James, earlier, was computing a currency benefit in the second quarter and you, obviously, have a number for the first quarter. We're not disclosing what that is, so I don't -- I will -- directionally I can say that it was beneficial in the first quarter; it was beneficial in the second quarter. But those numbers are not coming from the Company.

Okay. Great.

Bob Evans, Craig-Hallum Capital.

Nice job on the first half. Can you comment a little bit more on the -- drive this to the outside, on the HSBC, do you see other viable alternatives out there? Is this going to be a temporary situation where the financing is not going to be provided to non-Polaris products, but you would see this -- that gap quickly being closed?

Maybe let me try that one, Mike, just for a minute here. I think big picture, what's going on with the non dealer thing, we are always looking for ways to grow our business and we have had a very strong financial services business for a number of years. We had a wholesale business and I think it was about nine years ago we started the retail side and it started very, very small and it's grown into a nice, profitable business and we have it structured now that we are only on a fee basis.

We came up with an idea a couple of years ago to try to extend that business into financing other products in the Polaris dealership as kind of an adjacent growth market. And I think the good news is it worked. We grew that business together with [HSB] very attractively. But we don't bring the value to that relationship that we do on the Polaris side. Obviously, with Polaris, we have the brand. We have the marketing of the brand. We have the dealer relationship. And I think that HSBC saw an opportunity to go after that business without having to give Polaris a cut of those profits. That's not something that we are particularly excited about. But they are certainly free to make that business decision. So when it was small, it was helpful to have us, and as it grew bigger, it's probably -- they think they can probably get that on their own and that's fine. That's certainly their right.

In terms of alternatives, we are working on some things. I would not anticipate anything materially happening here in the next 30 days or something like that, but we are looking for -- always looking for other ways to grow our financial services business, through extended service contracts, through other kinds of credit vehicles as we try to grow the overall business. I don't know, Mike, do you want to add to that?

The only thing I would add, Tom, is that our HSBC relationship has been focused on revolving credit, so like credit card type purchases, and that has obviously done very, very well. We do have an alternative financing vehicle relationship with GE for installment credit. That's been very helpful in some of the larger ticket items that we sell in the dealership like Victory motorcycle or more recently the RANGERs. So we've seen some growth in our installment credit opportunities at the dealerships through GE. And we participate in that portfolio through a fee-based income as well. So there are alternatives that we can look at. As Tom said, there's innovative ways for us to grow and we will continue to look for that as we have in the past.

Okay, thank you. And on the inventory, it moved up here sequentially Q2 versus Q1 and then I believe you said by the end of the year you expected to go towards the $200 million revenue or $2 million range. Can you comment a little bit more on kind of why the sequential jump in Q2? And then where you think you could take it, the inventories -- where does it come out of, I guess, going to $200 million?

Yes, so much of the movement year-over-year is in either snowmobiles or RANGERs. So snowmobile inventory went up compared to a year ago in the factory as our orders came in. As we said, we have increased our guidance a little bit, and we've started shipping to the dealers later than we have in prior years. So some of that is snowmobiles, which will obviously be moved in the second half of the year. And then the other piece is with the growth of the RANGER business, we've got more inventory in the factory for RANGERs.

Where we want to go between now and the end of the year, much of the decline will come sequentially year-over-year out of ATVs. As we have said, our focus has been to get the dealer inventories fixed and then we will drill down the ATV factory inventory, so we will make significant progress in rebalancing that inventories as we get into the '08 model year between now and the end of the year.

So we should see significant -- relatively significant free cash flow from working capital?

Yes. Last year we had a significant use of cash for inventory and we should see that turn around this year.

Okay. And obviously, I assume you will use that for either debt paydown or share repurchase.

Yes.

And then Tom, just roughly six months after you made your '09 goals known, how do you feel relatively speaking six months later -- better or worse, about the same?

About the same. I think some parts are slightly better. Some parts are a little tougher, a little softer in comparison. I think the thing, certainly that I feel the best about is RANGERs. The RZR launch has been tremendous. The base RANGER business continues to do very well, even independent of the RZR. And we have a very strong portfolio of products in the side-by-side segment of the market that we're going to introduce here in another week or so. So I feel real good about that.

The industries are a little softer than I thought in the first half of this year, Bob, both ATVs and motorcycles are a little softer, not a lot, you know, a couple of percent. But no huge deal there, but that is probably the part that is the pressure. Military continues to go well. International is a little better than I thought it would be. So but all in, compared to six months ago, strategically, I think we're right on plan. And I'm really pleased with how the business has kind of been straightened out here over the first six months. Last year was not a year that we were happy with and we laid out this game plan, which was a pretty aggressive game plan, and I think in the first half of the year, we've executed it very much according to the plan that we've laid out.

I agree. Thanks a lot.

Whitney, we have time for one more question. We'll take the next presenter.

Joe Hovorka, Raymond James.

Thanks, guys. Most of my questions have been answered, but just a couple of housekeeping things. One is the tax rate in '08, is that going to go back to 33%?

Joe, I'm not going to give guidance yet for 2008.

That's fine. And then the Vision production in the third quarter, was that moved up from the fourth quarter or am I thinking about that wrong? Was that always third quarter?

No, it hasn't changed, Joe. What we said for the Vision is it's going to be available in the fall. And what that means is we haven't set a precise date for when we are going to start shipments to our dealers and that's because we have, as you know, a relativity complex product here. The Vision is the most complex product that we've ever manufactured. And it's very, very, very important that that go well. So we're allowing ourselves a little wiggle room here in terms of specifically when production is going to start, and specifically when shipments are going to take place. But we are on plan.

As I mentioned in my prepared remarks, we've produced a number of preproduction units. That's gone well and we anticipate that production starting relatively soon and have no show-stopper type issues. So we expect at this point, a on-plan launch, but we're also cognizant of the fact we've started new vehicles before, and they have got to start gradually and in a measured kind of a way to make sure that the quality of the product comes out the backdoor correctly. That's very, very important, particularly with this very discerning luxury touring customer.

And have you announced an MSRP yet?

We have. We've -- we announced that publicly; I don't think we've announced that publicly, no. We have set the pricing. We're going to be -- we've unveiled that to our dealers. We will have a complete program of that next week and then that should be public in another week or ten days or so, Joe.

Okay. And then last question, sorry it's on the financial services, but when did that agreement start -- the third-party financing for HSBC?

That business kind of evolved out of our change in the way we did the income generation; I think it was August of '05 was when we eliminated our credit risk and went more to a fee-based arrangement. And it was that move that kind of precipitated this additional program. Obviously it started very, very slow and we ramped up as we got more dealers engaged in that program.

So August '05, when you went to the fee-based program, that's when the third party also became available?

Correct.

Thank you all.

Thanks. We are out of time. At this point in time, I want to thank everybody for participating in the call today, and look forward to speaking to all of you next quarter. Thanks again for listening. Good bye.

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