Polaris Inc (PII) 2007 Q3 法說會逐字稿

Good morning. My name is [Tonia] and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris 2007 Q3 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) Mr. Edwards, you may begin your conference.

Thank you and good morning and thank you for all joining us this morning for our third-quarter 2007 earnings conference call. Here at Polaris today we have Tom Tiller, our Chief Executive Officer, Bennett Morgan, our President and Chief Operating Officer, and Mike Malone, our Chief Financial Officer.

During the call today, we will be discussing certain topics including product demand and shipments; sales and margin trends; income and profitability levels; and other matters, including more specific guidance on our expectations for future periods, which should be considered forward looking for the purposes of the Private Securities Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements, which by their nature involve risk and uncertainty. There are a number of important factors that could cause actual results to differ materially from those anticipated. Additional information concerning a number of these factors can be found in Polaris' 2006 annual report and in the 2006 Form 10-K, which is on file with the SEC.

Now, I will turn it over to Tom.

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

For the third quarter, earnings were $1.07 per share, up from $1.04 last year, on an 11% increase in sales. This was a record sales quarter and the results modestly exceeded our expectations.

Despite a sluggish economy, especially for consumer durables, our business continues to be good and most of the themes that you'll hear today are consistent with what we talked about 90 days ago. We are following the plan that we laid out at the beginning of the year, specifically winning in the core, delivering operational excellence, and targeting five important growth opportunities.

Our overall dealer inventory is much lower than a year ago and our new products, like the RANGER RZR and the Victory Vision, are delivering what we had hoped. As a result, we are again raising and narrowing our earnings guidance for the full year to $3.05 to $3.10 per share. This represents a $0.10 increase in the lower end of the range and a $0.05 increase at the upper end compared to 90 days ago. As we usually do during the third-quarter call, we will give you saw early qualitative thoughts about 2008.

With that overview, let's turn to the individual business segments starting with the all-terrain vehicle division. The ATV division had a solid quarter in a sluggish core ATV industry and a vibrant side-by-side market. ATV shipments for the quarter increased by 15%, driven by strong RANGER sales and more normal levels of dealer inventory of core ATVs. Dealer inventory of core North American ATVs, measured in units, are more than 25% lower than they were at this time last year.

In terms of the industry, on year-to-date basis, the core ATV industry is down about 10% versus last year, while Polaris is down mid single digits. So we have gained market share as a result of our effort to be more competitive.

We had our annual dealer meeting in Nashville during the quarter. The meeting went very well and dealer orders exceeded our expectations. While dealers are concerned about the economy and the overall ATV industry, they came into the meeting in a better frame of mind as a result of the inventory reduction which has occurred over the first half of this year.

The new model year '08 products and programs were very well received and the retail results since the meeting have been quite positive. Some of the highlights included new two-up touring models, some exciting new sport ATVs, and a value-priced SPORTSMAN 400.

As has been the case now for quite some time, the side-by-side market continues to be strong. While we do not have quantitative industry data, we believe based on dealer reports that the overall market continues to grow double digits. And the RANGER line of side-by-side vehicles continues to be even stronger at retail and is certainly the bright spot for the Company. Both the base RANGER business and the newer RZR sport model continue to be very strong. Retail sales continue to be much higher than a year ago.

Dealer inventory of RANGERs in great shape and at the dealer meeting, we introduce some exciting improvements to the base Ranger along with an all-new six-passenger model called the RANGER Crew. The RANGER RZR continues to be in very hot demand and despite four increases in production rates and a modest price increase, the RZR remains in an oversold condition. Dealer's continue to report very strong consumer interest in the new RZR and we expect to remain oversold through this year.

One question that we have consistently been asked since the introduction of RZR is what about cannibalization? In other words, are RZRs simply replacing another Polaris unit that the consumer would have purchased had the RZR not been available, or are the sales truly incremental? Well, we have some early data from the customers who have actually purchased RZRs and it looks like about 80% of the sales are incremental and about 20% cannibalize either another RANGER or a Polaris full-size ATV.

All in, the RZR continues to be a home run. In fact, I would say that the RZR has probably been the most successful new product that Polaris has introduced in the past ten years.

In terms of 2008, we expect good things from our ATV business. Certainly we expect the core North American industry to remain under pressure, but we have a number of positive factors helping us as we head into next year. First, Polaris' core ATV business is much healthier than it was a year ago. Dealer inventory is in much better shape, which will allow us to ship closer to what we retail in 2008. Dealer attitudes are better than they were at this time last year. We are winning the competitive battle and the new products that we have just introduced are being accepted very well.

Finally, we have an even stronger RANGER line up and will see a full year of impact from the RZR. So we will be strong in the expanding side-by-side market as well. We expect solid growth from the ATV division in 2008.

Snowmobiles. As we head into the fall, the snowmobile season is off to a bit of a mixed start. Consumer interest and attendance at snowmobile shows has been pretty good this fall and early season industry sales have been up slightly, but they represent a small percentage of the overall season sales. The next 120 days, as they do every year, will be the critical time period for retail activity. Dealer inventory of snowmobiles, like ATVs, is much lower than it was at this time last year. And like it does every year, in snowmobiles it comes down to weather and competition. It is simply too early to call the 2008 snowmobile outlook at this point. We will know more at the end of the fourth quarter and we'll let you know then.

Victory motorcycles. Victory motorcycles are continuing to do well in what has become a challenging motorcycle market. Our overall expectations for Victory are a bit more cautious than they were 90 days ago. Shipments of Victory motorcycles were down 17% for the quarter, but should be up in the low single digits for the full year.

You may note that last year's third quarter provided a pretty tough comparison. Last year Victory had a 60% increase in shipments in the third quarter.

In terms of the motorcycle industry, year-to-date the overall motorcycle industry is down about 6% in unit sales at retail. Victory continues to outperform the industry and has been growing retail sales mid single digits. With the deliveries of Victory Vision this fall, we expect a retail sales rate to accelerate further for the full year.

The dealer meeting went well for Victory. Dealer's got their first chance to ride the Victory Vision and the feedback and the orders for the new bike were very positive. The dealers are concerned about the slowdown of the overall cruiser market, including Harley-Davidson. So we will be more cautious about the cruiser part of our Victory business as we chase the touring segment growth with the Victory Vision. We also introduced two new cruisers, a product called the Vegas Low designed for shorter riders and the value-priced Kingpin 8-Ball.

Speaking of the Victory Vision, we began shipments late in the quarter and shipped the first handful of units to consumers right on schedule. Production for the first several months will be primarily dedicated to those consumers who have placed deposits with dealers. The early reports back from the dealers and first consumers are very encouraging.

The long-term significance of the Victory Vision is that it opens up a very large, nearly $3 billion incremental touring segment of the motorcycle industry to Victory. In terms of 2008, we expect Victory to continue to grow retail sales well in excess of the overall market, driven by a full year of the touring bike. Cruiser shipments will likely be a little lower in 2007 as we monitor the overall market and competitive actions.

Parts, Garments, and Accessories. The PG&A division had an excellent third quarter with a 13% increase in sales. Our innovation in the PG&A category continues as we have introduced more than 200 new items to the line at the dealer meeting. Of particular interest were new cab systems for the side-by-side product line, a comprehensive line of touring accessories and clothing for Victory motorcycles, and new plow systems for ATVs and RANGERs.

The largest contributor of the PG&A growth has been the RZR accessory demand, which like the base vehicle has far exceeded our forecast. We have also seen substantial margin expansion in the PG&A business, which has been quite helpful.

International. The international ATV market is doing fairly well. Through the first half of the year, the European market was essentially flat with strength in the northern European region and a somewhat weaker market in the South. Polaris is outperforming and is gaining market share and distributor inventories have come down nicely. Currency movements have been helpful to our international business. Finally, we opened our latest subsidiary in Germany during the quarter and things appear to be off to an encouraging start in this large market for ATVs.

Military, we continue to pursue the military opportunity aggressively and have had a number of wins lately, including winning the largest contract in our history, which was announced during the third quarter. The TACOM order, which was a competitive win, was for approximately $18 million. We've now received orders from approximately 20 military agencies or branches of militaries around the world.

We also announced the introduction of two new military vehicles during the quarter -- the MV800 and the MVRS platform. The MV800, which is a militarized version of the Sportsman 800, features a new proprietary engine which is compatible with military fuels. The MVRS is a derivative of the RANGER platform and offers customers yet another option for a high-performance Polaris defense product.

Let's shift gears now and talk a little bit about the outlook for 2008. 2007 was all about Polaris getting back on track and I think we have done that and I'm pleased with the 2007 results so far.

2008 should be about profitable growth. A modest bounce back from ATVs following the 2007 inventory reduction, a full year of RZR and Victory Vision, and an even-stronger introduction of new products than 2007 should be the primary positive factors. Uncertainty around the economy, especially the housing segment, high energy prices, and sluggish industries are the primary concerns.

In this environment, we will follow the same three-pronged strategy that we did in 2007, specifically winning in the core, delivering operational excellence, and focused growth opportunities. In the core, expect us to continue to be aggressive in product development and to win the competitive battle and to get our fair share of a tough market. And the growth opportunities continue to look as good today as they did a year ago, maybe even better in some areas.

We also will deliver the fuel to drive is growth through operational excellence and to hear more about that, I would like Bennett Morgan, our President and Chief Operating Officer, to briefly describe what we've been doing with operational excellence in 2007 and what you should expect to see as we go forward.

Thanks, Tom. Good morning. For many years Polaris has generated nice results through our efficient operations. With operational excellence, we intend to take our performance to a completely new level with the objective of becoming the Toyota of the power sports business.

Operational excellence will not only fuel the success of our winning in the core and growth strategies, but can transform the competitive position of Polaris in the power sports industry over time. We will accomplish this by focusing on, understanding, and meeting our end customers needs and then working those insights back into our operations by driving out the unnecessary wastes in time, cost, material, and activity that adds absolutely no value to our end consumer.

To achieve this in power sports, it comes down to three simple principles for Polaris -- quality, cost, and speed. Our goals are aggressive and straightforward. In quality, we intend to improve consumer satisfaction by 50% by 2010. In cost, we intend reduce systemwide cost by over 20% by 2010. In speed, we want to improve our speed to the end consumer by 50% by 2010.

On the quality and cost principles, operational excellence is an evolution to a bigger and broader objective of what we have already been striving for for years, industry-leading quality and 5% annual productivity improvements. Now with the key insight of the consumer as our compass, our focus has been broadened to the complete consumer experience and the total Polaris value chain, which includes our suppliers and our dealer partners.

We will be able to generate tremendous leverage and value for our consumers by focusing on waste opportunities that previously we just did not spend enough time on. The consumer does not care where the waste or the problems are in the value chain. They simply do not want to pay for it or experience them. It is really that simple.

As we focus on reducing the non-value-added waste across our value chain, we can become much faster in responding to and meeting our end customer needs. Over time as these broader insights and efficiencies are executed, we can become faster than anyone in the power sports industry in meeting customer needs. Our speed can become a transformational competitive advantage.

Now, we have already begun to generate significant results through operational excellence in 2007. We have improved our quality by over 10%. We've reduced systemwide cost by over 6%. We've improved our speed to the consumer by over 15%.

The early improvements in our waste reductions have come from lower dealer inventories and days supply, purchasing leadtime reductions, gross profit margin expansion, tooling and capital efficiencies, new product development cycle time reductions, improved profitability for our value chain partners, and ultimately more satisfied end customers.

Not all of these non-value-added waste reductions have fallen to our bottom-line yet in 2007, but overtime they should and we expect additional improvements in 2008 in the areas I mentioned and in some additional areas.

Let me give you a quick example to illustrate operational excellence at Polaris. With the new RANGER crew that Tom mentioned, which is the industry's first six passengers side-by-side vehicle, which will be available later this quarter, our product development cycle time was completed within just 12 months and specifically incorporated customer insights and feedback. We were able to get to market much quicker and much more cost effectively by high reuse of an existing platform, common engine architecture, and an improved product development process. Our investment levels and resources in capital were significantly more efficient and built off the industry's highest-quality chassis, which gives us confidence our quality and customer satisfaction will be outstanding.

Currently, our dealer orders exceed supply, which is okay. It will drive lower day supply and potentially improve dealer profitability.

So in a nutshell, with operational excellence principles, we are faster to market, lower-cost, and have world-class quality. Delivering operational excellence will be a marathon, not a sprint, at Polaris. It will improve our competitive and financial results for our consumers, our value chain partners, and for Polaris and our shareholders. It will allow Polaris to not only better survive tough economic and market conditions, but ultimately to thrive and grow.

Thanks and now I'll turn it back over to Tom.

Thanks, Bennett. So to wrap it up, we had a good third quarter in a tough game. We are looking forward to closing the year strong and expect 2008 to be another good year for Polaris. Our core business is significantly healthier that was a year ago. Our sales are growing again. Gross margins are expanding. Market share is increasing in every business.

So we're pleased with the progress that we've made thus far and we remain committed to the long-term objectives that we outlined a year ago. With that report, I'll turn it over to our Chief Financial Officer, Mike Malone.

Thanks and good morning to everyone. Before I begin, I want to highlight this third quarter's 11% increase in sales to $544 million, which not only represents our first quarterly increase in sales in eight quarters, but which also represents the highest quarterly dollar sales generated by the Company for any quarter of any year in our 53-year history. We are very proud that accomplishment, particularly in the current challenging macroeconomic environment.

We accomplished this achievement in the quarter while shipping fewer units to dealers in the third quarter this year than the third quarter last year. So obviously our topline sales growth is benefiting from a favorable mix movement with increased RANGER sales at higher price points and double-digit growth from PG&A as well as favorable currency movements.

Let me give you more specifics on our third-quarter results and our fourth-quarter and full-year 2007 guidance. As Tom mentioned, the introduction of the new RANGER RZR has been a huge success for us. Given the success and the continued growth in the base RANGER business and our dealer's core ATV inventory at significantly lower levels, we are increasing our total year total company sales guidance and now expect sales to grow in the range of 5% to 6% for the full year 2007.

Additionally, we are increasing and narrowing the earnings guidance range and now expect earnings per diluted share from continuing operations for the full year 2007 to be between $3.05 and $3.10, an increase of 12 to 14% over the $2.72 earned last year.

Current expectations for sales growth by product line for the full year 2007 have also been adjusted and are as follows -- ATV sales are now expected to be up in the range of 5% to 6% for the full year 2007, an increase from prior guidance. The increase in our expectations is driven by -- is driven primarily by the strength of our RANGER business.

We are maintaining our snowmobile sales guidance for the full year 2007. We continue to expect sales to increase in the low-single-digit percentage range for the full year in the snowmobiles.

As Tom mentioned, the motorcycle industry has declined throughout 2007. Similar to what we talked about 90 days ago, this has continued to have some dampening impact on the Victory cruiser retail sales activity and dealer inventory levels.

As a result of our tapping the brakes, our reported Victory sales to dealers were down 17% for the third quarter and down 2% on a year-to-date basis. We remain very encouraged about the new 2008 luxury touring Victory Vision models, which began shipping to dealers late in the third quarter and will accelerate during the fourth quarter. So we now expect our reported sales of Victory motorcycles to increase in the low-single-digit range for the full year 2007.

In the PG&A business, we are experiencing accelerating growth for parts and accessories for RANGERs, particularly RZR accessories as our side-by-side business continues to grow. Additionally, as Tom mentioned, we have been very focused on product innovation for all of our product lines within PG&A.

Accordingly, our current expectations for PG&A sales growth is to increase in the mid-single-digit percent range for the full year 2007, a modest increase from prior guidance. Growth in the PG&A business is especially beneficial to the Company's profitability given that the gross margins on PG&A are significantly above the corporate average gross margins.

For the fourth quarter 2007, total company sales are expected increase in the range of up 12 to up 15% from the fourth quarter a year ago as growth in the RANGER side-by-side vehicle business, particularly the new RZR, continues to accelerate and the core ATV dealer inventory correction is largely behind us. Earnings from continuing operations for the fourth quarter '07 are expected to be in the range of $1.01 to $1.06 per share, up nine to 14% compared to the earnings of $0.93 per share in the fourth quarter of last year.

The gross profit margin percentage for the full year 2007 is expected to expand in the range of 80 to 100 basis points compared to the full year last year gross margin percentage of 21.7%, unchanged from our previously-issued guidance. This increase is due to a better sales mix with more higher-margin RANGER sales, improved PG&A margin rates, manufacturing efficiencies, lower floor plan costs resulting from our lower dealer inventory level, and favorable net foreign currency fluctuations. All of these positive factors are offset somewhat by increases in sales promotions and incentives, more aggressive pricing in certain market segments to improve our core ATV competitive position, and higher warranty costs.

As we have previously mentioned, operating expenses are expected to increase both in dollar terms and as a percentage of sales for the full year 2007 compared to last year, primarily due to the planned increased advertising expenses to support the launch of our new 2008 model year products and anticipated higher, more-normalized incentive compensation expenses as the Company's financial performance improves during 2007.

As expected, these two factors were the primary drivers in the 29% increase in operating expenses experienced during the third quarter of '07. I would expect this trend will continue in the fourth quarter as well, although operating expenses as a percentage of sales should decrease somewhat in the fourth quarter of '07 from last year as a result of the higher sales growth.

Our expectations for income from financial services for the full year 2007 is for the income to decline in the single-digit percent range compared to the full year last year, which is unchanged from our previous guidance. As I have mentioned in the previous calls, there are two reasons for the expected lower income this year. The first is that income from our Polaris Acceptance wholesale credit portfolio is expected to decrease for the full year as dealers lower their inventory levels and their related interest payments to Polaris Acceptance.

The second reason is the change related to non-Polaris financing, retail financing. As I discussed in the last conference call, beginning on July 1 HSBC no longer offers revolving retail credit financing for non-Polaris product through our dealers. As a result, as was the case in the third quarter, the income from financial services generated -- expected to be generated in the fourth quarter of '07 will again be significantly lower than that generated in the fourth quarter a year ago. 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. Also HSBC continues to provide revolving retail credit to consumers to finance the purchase of Polaris product through our dealers.

During the third quarter, we reached an agreement with GE to provide retail credit financing for non-Polaris products sold at our dealerships on an installment basis to help dealers replace the lost non-Polaris financing options from HSBC. This new arrangement with GE is beginning to grow as the dealers become more familiar with the program. Dealers can earn similar or even better fee income from the GE installment program as they were under the HSBC revolving non-Polaris financing program. However for Polaris, the fee income from the new GE installment program is significantly less attractive than the expired HSBC program.

During the third quarter of '07 we financed through our retail credit programs, both HSBC and GE combined, about 38% of Polaris products sold to consumers in the United States, which is down slightly from about 40% last year. Approval rates have remained consistently above the 40% level. In fact, approval rates are actually a bit higher this year as the GE installment loans become a bigger portion of the retail credit portfolio. The volume of revolving and installment retail credit contracts written in the third quarter of '07 was about $182 million, which is a 14% decrease from last year due to the loss of the HSBC non-Polaris product financing volume.

At September 30, '07, the wholesale portfolio related to floor plan financing for dealers in the United States was about $697 million, a decrease of 9% from what it was at the end of last year's third quarter, reflecting the decline in the dollar amount of dealer inventories in the United States. Remember this decline of 9% is in dollars. The units outstanding in the portfolio are actually down over 20% compared to last year due to the significant mix change to the higher priced RANGER and Victory inventory outstanding. Credit losses in this dealer portfolio remain very reasonable, averaging well less than 1% of the wholesale portfolio.

The income tax provision was recorded at a rate of 30.8% of pre-tax income for the third quarter 2007 compared to 28.4% in the third quarter a year ago. Generally in the third quarter of each year we true up our tax provision to reflect the actual results of filing the prior year tax return. The higher income tax provision rate in the third quarter this year compared to the third-quarter last year relates to a lower dollar value of favorable tax events recorded this year. 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 pre-tax income, which is unchanged from our previous guidance.

As we have previously discussed, since we sold a majority of our ownership of the KTM shares earlier this year, we no longer get a net benefit from our ownership percentage of KTM's income in our income statement. Last year in the third quarter, we recorded income net of taxes of $2.7 million versus the zero this year, or a difference of about $0.06 per share.

As previously announced, during the third quarter of '07 we paid $13 million to Goldman Sachs related to the purchase price adjustment that was contemplated under the share repurchase transaction entered into in December of last year. Subsequent to Goldman's completion of the accelerated repurchase program in August, we began repurchasing Polaris stock under our historical open market buyback program and during the third quarter we repurchased and retired about 808,000 shares. As a result of the combination of both the accelerated buyback and the open market repurchases, the diluted weighted average shares outstanding for the third quarter '07 was about 11% lower than the third quarter last year.

At the end of the third quarter, we have authorization from the Board to repurchase up to an additional 3.9 million shares of Polaris stock and continue -- expect to continue our historical pattern of open market share repurchases going forward.

Full year 2007 capital expenditures are expected to increase this year to be in the range of $60 million to $65 million, which is unchanged from the previously-issued guidance as we invest more heavily in the new product development tooling to drive innovation our products and capital projects to reduce our production costs and improve product margins. We continue to expect depreciation for the full year '07 to be in the range of $65 million to $70 million.

Accounts receivable at the end of the quarter are down 11% from a year ago to $70 million, but factory inventories still remain somewhat higher than what we would like at $258 million, but are down sequentially from the second quarter of this year by 4%. As we have stated in prior calls, our objective has been to reduce dealer inventory's first, which we have done, then focus on factory inventories. ATV factory inventories is in fact lower than last year at this time, but both our snowmobile and Victory factory inventories are somewhat higher, some of which is due to timing of shipments to dealers. We continue to expect factory inventories to come down, approaching the $200 million level by the year end '07.

Total debt levels at the end of the quarter were $200 million, representing the term loan utilized in December to complete our accelerated repurchase transaction. Debt to total capital at the end of the quarter is 52%, compared to 19% 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 $87 million and generated year-to-date 2007 operating cash flow from continuing operations of $149 million, an increase of $57 million, or 62%, compared to a year ago. EBITDA from continuing operations was $168 million for the year-to-date 2007 period, which is about the same as a year ago.

So to recap, our full year 2007 guidance has been increased and we now expect our sales for the full year to increase in the range of five to 6% over 2006, with EPS from continuing operations growing to be in the range of $3.05 and $3.10 for the full year '07, an increase of 12 to 14% over last year. Fourth quarter 2007 sales are expected to be up in the range of 12 to 15%, with earnings per share expected to be in the range of $1.01 to $1.06 per share, an increase of nine to 14% over last year.

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

(OPERATOR INSTRUCTIONS) Hayley Wolff.

I have a few questions. First, could we have a little more detail on ATV inventories wholesale versus retail shipment trends into the fourth quarter and '08? When -- are you at equilibrium and if not, when do expect to achieve equilibrium there?

Second, can you characterize the sales patterns on a month-to-month basis and into November just to try and get a read on the consumer behavior throughout the quarter?

Lastly, the guidance that you -- the long-term guidance of $4.25 in 2009, is that still a valid number? If so, do you see a steady increases to get that number or is there something that would lead to a step up in your rate of growth in '09 vis-a-vis '08?

Thank you. I think with regard to the wholesale and retail ATV trends, just in the interest of time, I think we covered almost all of that in prepared remarks in terms of what is going on for the industry, what is going on for us, what is going on with market share.

I would say that the inventory is about balanced. You have individual dealers, individual models and that kind of thing, but certainly the vast majority of the inventory reduction is behind us at this point. I think I -- again, in my prepared remarks, we talked about unit inventory of ATVs at dealerships is down by in excess of 25% compared to the same time last year. So I would refer most of that to the prepared remarks rather than just repeating it in the interest of time.

Hayley Wolff So you're flowing product in at the same rate that it is going out now? More or less, yes. With regard to month-to-month guidance on retail trends, that is nothing that we provide. We simply do not do that. We would expect for the full year that the industry will continue to be down probably about 10% and I would expect that we will continue to gain market share. As I said in my prepared remarks, that we would be down -- we are down year-to-date about 6%. I would say that I would expect to end of the full year materially in those same kinds of numbers. They may change a little bit, but no big change.

Again as I said, in the prepared remarks, we are confirming our long-term goals, the $2.2 billion in sales by 2009, the $150 million in net income, and $4.25 a share, and it will be a steady increase. There's no -- we're not expecting any kind of onetime event or that kind of thing. As we had talked about almost a year ago now, 2007 was about getting the Company back on track, getting the inventories right, introducing some hot new products. That has gone well. 2008 and 2009 is about profitable growth and, again, in the prepared remarks, in each business we talked about some of the drivers there.

Well, there have been some data points out there with consumers slowing down dramatically in September and I am just trying to confirm whether or not you saw any change in that behavior.

We had an excellent quarter overall for retail, including an excellent September. We were very, very pleased with September.

Thank you.

Greg Badishkanian, Citigroup.

Really nice quarter, guys. Just a few quick questions here. Obviously, you know, the RZR was -- did phenomenally well. 20% cannibalization, I mean that seems pretty low. Would you expect it to stay at the level and did that sort of come in below what you were -- I am assuming that came in well below what you were expecting in terms of cannibalization.

It did, Greg. You might recall back in January there were people even back then asking what is the incrementality of this? I think the numbers we were estimating at that point were somewhere between 30 and 50%, with our estimates being probably closer to the higher end of that range, the 50% piece of that, and the dealers being somewhere around 30%. We have, as I mentioned in the prepared remarks, actual data of 20% so far.

Now, I would caution you it is early and the people that have purchased the product so far tend to be early adopters and that kind of thing. So I would not be surprised to see that increase somewhat, although I would be quite surprised if it went to 50% or a number up there. So I think we will continue to monitor it and I would guess we are in that 20 to 30% kind of range, which is pretty encouraging.

To the extent that you can comment, how big do you think the opportunity is for the RZR over the next year or two? How big do you think it could become as part of the -- as a percentage of maybe your RANGER sales or market share, however you want to categorize, if you are even able to at this point?

Yes, we have been very pleased, obviously, with how RZR has gone and also I think everybody that has done dealer checks has reported on that. It is pretty hard to miss, I think, but the other piece of the puzzle that is gone very well also is the base RANGER business. Both those parts of the business are doing very well and are a substantial part of our -- the third prong of our strategy, this growth thing. We're talking about $500 million worth of growth by 2009 and both RANGER and RZRs will be a key part of that.

While I cannot give you a specific number about RZR, what I would tell you is we are on track for that right now. We are actually slightly ahead. If you took that $500 million and you divided it, say, equally over the three years, '07, '08, and '09, we are ahead of that pace and a good bit of that being driven by RANGERs obviously, but the other growth initiatives are important, too. The Victory, the international, military and this adjacent market segments that we have talked about. So I feel good about the whole growth side of things in a pretty tough economy.

Yes and from our conversations with dealers, they are very excited. Obviously they cannot get enough of the RZR, so that is creating some scarcity value there. How do you look at that going forward versus achieving sales versus sort of keeping that sort of excitement and scarcity value which is helping the brand?

Yes, that is a tricky balance. On one hand, obviously, we want to try to satisfy demand, capture demand. On the other hand, we're talking about a durable here, so the last thing you want to do is put in too much capacity and then once you get the channel full and so forth that you will wind up overshooting significantly and then you will wind up discounting the product and all that sort of stuff, so we're being very careful in terms of trying to balance those two things. As I mentioned we have increased the production rate four times. We've increase the pricing a little bit, $200 at retail. I would expect that we will continue to be oversold into the first quarter.

Beyond that, we will see, but I expect the product will remain very hot. There is nothing like it that is out there and you got the channel fill issue this year, but the facts are it is a really dominant product and 80% of the customers that are not -- the noncannibalized sales, if you will, those are coming from competitive brands, people that would consider alternative products. So that is all big share gains and we love that.

So we will keep trying to balance those two things and be very, very carefully that we do not overshoot in terms of putting so much capacity in place that we wind up hurting ourselves next year.

Good strategy. Congrats again. Thanks.

James Hardiman, FTN Midwest Securities.

A couple questions for you guys. First, on the tax rate, it looks like this year's tax rate was higher than last year, but it seems like both years, and really the last three years, have gotten a pretty big benefit. You talked about truing things up in the third quarter, so I guess my question is should that be something we should expect every third quarter, to get a decent-sized benefit from that true up process? As I go forward to next year, is that sort of -- is this a rate that I should sort of push forward into my estimates for next year?

Well, as I have said, we generally true up and in the last few years, it has been positive in the third quarter. It obviously can go either way depending on how accurate we are on some of our year-end estimations of the tax provisions, so I would tell you we true it up and it can go either way, kind of like currencies can go either way or anything else. So I guess I would suggest if you look at our full year guidance on the tax rates and spread it by quarter, anyway you want.

Okay, but your full-year guidance for the tax is not changing, so this is sort of the rate you expected at least a quarter ago I am assuming?

Correct.

In terms of the Victory dealerships, where do we stand today in terms of the total number? You had talked about opening about 100 this year. I am assuming that those plans have slowed down somewhat. Where do we stand today in terms of the total dealerships?

No, we did not say we were going to open 100 Victory dealerships this year. We said we would expand the Victory dealership count and we have. I do not know that I have that number. Let me see if I can get that for you, James, here on the call. Let me come back to you on that.

In terms of the additional rate of growth, I think that is fair, that the expansion in the number of dealerships probably will slowdown a little bit as the cruiser market generally has slowed through the motorcycle market. So there does seem to be a little less interest of dealers generally of picking up any motorcycle line, including Victory.

Mike has been kind enough to put the actual number in front of me here. We've got that. At the end of the quarter, we had 369 Victory dealers and the year-end goal was 400, so we are a bit shorter of that. I do not know where we will wind up in the fourth quarter in terms of some editions, so I do not know if we wind up at 380 or some number like that, but --

Okay, I thought the goal had been 450 at the beginning of the year.

2009.

That's -- the goal for 2009 is 450?

Right.

I guess as it relates to that motorcycle business, I guess when I think about the long-term 2009 goals, should I assume that each of the sort of line-by-line goals are still the same or based on what you've seen in Victory, are you scaling back and then making that up somewhere else?

No, I think, as I said, we feel pretty good about the overall growth objectives for the Company. When we put out the $500 million worth of growth last year, there were a bunch of people with eyes about the size of a saucer. There is no way this company is going to grow sales by $500 million, including some of the people on his telephone call, by the way.

The individual pieces may move around a little bit. We may use a little more flour and a little less sugar to take bake the cake than what we thought a year ago, but I think -- as I said, we're more than one-third of the way through that progress through a pretty tough economy and all that. So I feel pretty good.

In terms of the long-term future of Victory, I continue to be very, very bullish. Think of what we have accomplished in motorcycles. Next year will be our tenth anniversary. We are the first company to successfully enter the market. We've got a fantastic product. We've done well in the cruiser side and now we're going into the touring segment.

The market, while it is down, it is down 6% off the all-time high and it has had a record run for 15 or 16 years, so it is a big market. It is attractive. We've got a good initial position and over the next ten years we're going to continue to build out motorcycles and motorcycles are going to be a big part of the success of Polaris and obviously of Victory.

So we may have perturbations one quarter to the next or a year to the next on a particular model in a particular segment, but when you look at the demographic trends, people love to ride motorcycles and we get through the housing bubble or some of the other short-term things, the motorcycle business is going to just fine. We're going to continue to focus on innovation, on improving the dealer network, on building that brand, and we should see long-term growth out of Victory.

Fair enough. Just one real quick question here. You talked in the release about the PG&A segment, how that was helped by the timing of delivery of preseason snowmobiles items. I am assuming that is not especially large and that we should not be assuming that is going to -- a significant number is going to come out of the fourth quarter. Can you quantify how much of a boost that was in the third quarter?

Actually, James, that was a little bit of a timing change between Q2 and Q3. If you go back to Q2, it was quite a bit lower than it has been historically and I think we talked about timing a quarter ago and it just moved between Q2 and Q3.

Okay, great. Thanks guys.

Ed Aaron, RBC Capital Markets. Kathryn Thompson, Avondale Partners.

Just a couple questions. First, how is the profitability profile of your military contracts versus your traditional ATV products or RANGER products?

It is very attractive.

Would you say it is similar?

No, I said it is very attractive.

Okay, but would you say that it is better than just your traditional, for instance, RANGER product we'd sell to the consumer?

Yes, I would.

Also, you had some nice improvements in the cash flow from operations and it is something that you talked about a little bit last quarter. Do you have any free cash flow goals for '07 and '08? If so, could you quantify those?

We have not (inaudible) quantified externally our goals for operating cash flow. Obviously it will be a lot higher this year given that last year was unusually low, so we have got a very low bar. We've been exceeding. As we go throughout this year, we will be in excess of $200 million and we have been suggesting that we will continue to use that strong cash flow in a similar way that we have historically utilized cash flow, which is to invest back in the business, pay an attractive dividend, and continue to repurchase shares aggressively.

I know this question was asked earlier, but it was basically how big do you think the RZR segment can be? Right now, do expect that could it be anywhere, say, five or 10% of your total ATV segment sales? I'm really just trying to get a sense of how big it could be on a percentage basis over the next two to three years.

I'm sorry, Kathryn, were you asking RZR specifically or RANGER total?

RZR specifically.

Okay, let me see if I can give you something here. You know, I think we have said that RANGERs -- I think originally it was 15% of the total ATV business. Now, this is RANGER total, RANGER plus RZR. I think we said it was 15% and then I don't know what it was. A year ago or something, we said it was 20%. Now it looks like it might be in excess of 25%, the combined side-by-side market. When we say side-by-side, that includes the base RANGER utility business and also the RZR recreational vehicle.

You know, I would guess -- I would have to go back and look at the numbers exactly, but probably there is more utility vehicles than there are RZR's, so the combined business is more than 25%. RZRs would be something less than half of that. That should give you at least some ballpark.

Any other -- you have given a lot of nice color on your Victory segment, but any other updates in terms of how your Victory Vision shipments are progressing and how long it might take to fill the channel?

Sure, it has just barely started. I don't know how many units we shipped in the third quarter; a handful, two dozen. And we have -- those are showing up in consumers' hands. I have actually talked to quite a few of the consumers that bought the Vision and it's really fun. I call them up. I called the guy up that bought actually the first one down in Alabama and this was a couple weeks ago. I talked to him for about half an hour. I did not think the guy was ever going to stop talking about how much he loved the motorcycle and all that.

I think he has got 1500 miles on the motorcycle in the first couple of days, which it's just -- it's unbelievable. People love the motorcycle. They love everything, the styling, the performance, all the things that we'd hoped. Obviously, the first several months are presold. So when those bikes show up at the dealerships, they are getting uncrated and prepped and going right out to consumers.

Many of these people have waited for quite some time since we introduced the bike, so that is great to see. Obviously, we're monitoring, talking to those dealers and consumers. So far, everything is going quite well, but it is very, very early.

We will keep filling the channel, first for dealer demos and also for these consumer deposit bikes, I would guess through the end of this year. As the bikes are being delivered, I'm sure that there are consumers that want to see the bike and ride the bike before they would make a decision on whether to purchase it. So, so far really, really good, but very early.

Thank you very much.

Bob Evans, Craig-Hallum Capital.

Can you give us a little bit more or elaborate a little more on the RZR buyers? I know you touched on that, Tom, earlier, but can you give us a little greater sense of what -- the 80%, what type of buyer is it?

It's somebody generally, Bob, that is in a market for a side-by-side vehicle that had a RZR not been available, would have considered a competitive brand of side-by-side vehicles. As you know, that segment of the business, I think we talked about in January at our analysts' meeting, that segment of the business has been growing very, very fast, the recreational side-by-side segment of the business. And as the last couple of years, products have come into that space, and some of the people are coming off from ATVs.

I think part of the reason that the ATV market is down a little bit is because of the growth of side-by-sides. Those customers, instead of buying an ATV, are buying a side-by-side. So the 80% are looking at the side-by-side market, and had a RZR not been available, they would have purchased a Yamaha or Arctic Cat or some other brand of side-by-side.

But nothing out there is close to matching the performance level of a RZR right now, so if they can get one, that is what customers certainly seem like they're voting for.

Okay, and would you be willing to quantify more on the -- you said RANGER growth. Would you be willing to quantify kind of what that growth rate is?

It is high, Bob.

That is the level of quantification?

Strong, strong double-digits, I guess would be my quantification. Just for all the people on the call, because our prepared remarks ran a little long, typically we end it at 10 Central Time, 11 Eastern Time. We're going to go for about another 10 minutes. We do have a number of people lined up in the queue for questions, so we'll end at about 10:10 Central Time, 11:10 Eastern Time.

Two more quick questions and I will move on. The GE deal, the financing deal, I think, Mike, you said it was lower profitability than previous deal. Will we see some kind of makeup between maybe where you were this quarter and where you've been in the past as a result of this deal, or can you give us greater color there?

Well, I think it is going to start off pretty slow. It is really building up from next to nothing. On an installment basis, it is a little bit different animal for the dealers to sell an installment loan than a revolving loan. So our expectations, frankly, are relatively modest as we get this thing going and ramping up.

I think my guidance for the fourth quarter speaks for itself, and we will learn more through the fourth quarter and I will try to give a little bit more specific guidance on that for 2008 in the next call.

Okay, and final question. Tom, can you address -- you had given some color on 2008. Can you give us some sense of level of operating leverage that might be attained, whether that is through -- on the SG&A side or gross margin side; just looking for a little color there?

Not yet, Bob. As you know, we're a little later probably than many companies in the budgeting cycle, simply because of the uncertainty around the weather and the snowmobile business and so forth. So we expect it to be a good year, certainly a year of profitable growth.

The main drivers again will be the bounceback in core ATVs because we will not be taking dealer inventory down, full years of Vision and RZR, and also some very, very strong new products in '08; similar perhaps or maybe even a little better than what we did in '07.

So we are pretty cognizant of the housing market and the pressure on consumers, and we expect the industries to continue to be tough, but we feel pretty good about where we are.

Okay, and you think there is a product that can be as good as the RZR in '08?

That is what I said.

Just checking, thank you.

Hakan Ipekci, Merrill Lynch.

Questions. You have given some goals on the operations excellence in this call and I was wondering does that mean that with your 425 guidance, is that going to be a margin expansion will be better or a more important contributor than you previously thought or does that mean there could be some upside to the 425 number as you look into '09?

Let's not get upside to the 425 number yet. What we said is there are 2.2 billion and 425. We are a ways from 2009. I think my own sense from talking to investors and analysts and just watching what is going on in the sector is that there is a lot of people that are pretty down on the recreational segment right now. Boats are probably about as beat up as I have seen them. Brunswick, Arctic Cat, Harley-Davidson, Polaris, the stock market is at an all-time high and we're just we're not at an all-time low, but pretty depressed valuations.

We are optimistic about the future and we are -- the first part of this three-year plan has gone really almost exactly like we would have hoped, with the exception of the RZR probably being a little stronger than we would have forecast. And so we continue to think that 425 and 2.2 billion are good numbers.

What the operational excellence really allows us to do is to win that competitive battle. When we say we're going to fight hard, we are going to fight hard and that costs money. It costs money to advertise more. It costs money to develop all these great new products and that money has got to come from someplace and what we have been able to do at this point is to deliver what we need to deliver at a bottom-line because we have been pretty darn creative on the operational excellence stuff.

So let's keep those goals where they are now. As we get closer, we will fill you in more and if things get better or things get worse, we will let you know that. But right now, we feel pretty good about those.

I see. And with respect to the availability of financing, it seems that the approval ratings have been steady or even climbing. Given what happened in the markets, what do your sources indicate in terms of the availability of the financing in the overall market and kind of how does it go with what happened in August?

We are satisfied with the credit availability for our customers from our credit providers. As I indicated in the prepared remarks, our approval rates are just fine, actually little better. In August --

I think maybe the question was through alternate providers if they do not finance through Polaris, you know, local banks, that kind of thing.

You know, I think -- I guess I am not too aware of what the criteria are for alternative lenders and if there has been any movement, but I do not know that I can answer that part of the question specifically.

We have not received -- we do not have data on that, but in terms of feedback from dealers, that kind of thing, that is not feedback that we have received that qualified customers cannot get financing on a widespread basis or anything like that. That is not feedback we've received at this point anyway.

Okay, great. Thank you.

We have time for two more questions and then we got to end.

Ed Aaron, RBC Capital Markets.

A couple accounting questions for you, Mike, on the warranty, was that because of higher claims or were you just trying to increase your reserves a little bit? Then also on the accounts receivable decline, I was a little bit surprised to see that, given that your PG&A sales were pretty good and that you mentioned some improvement in your international businesses. And then I have one more question after that, but --

Okay, the warranty is due actually to increases in both the provisioning rate and the claims paid. That -- those details for time purposes, we will see those details in the 10-Q filing, but there's been an increase in both.

On the accounts receivable, the decline -- much of that relates to a change in structure that we made in Canada in the last year where we have sold off our PG&A receivables to GE and therefore we have got much lower receivables in this third quarter than we did last year in Canada. That is the primary reason for the decline you see. You had one other piece of the question?

Yes, this is kind of pushing the topic, but in the third quarter you had your year-end promotion, which included that double down promotion. I was just wondering if you could comment maybe on the consistency within your dealer base during that promotion, because some dealers participated while some dealers did not. I was curious to know if you got much feedback from dealers one way or the other coming out of that promotion?

I think by large the double down promotion was successful. Just in terms of did we pull sales forward, why do we do promotions, all that sort of subject, for those that have followed the Company for quite some time, it is not unusual that we do promotions at the end of the model year similar to what car companies do and others. The purpose is to try to clear the channel as much as you can of prior-model-year product, as in this case, the model year '08 come in. So I do not know that you are necessarily pulling sales forward. You're really going after more of that value-conscious buyer who really does not care quite so much about the latest performance in machine, is looking more deal-oriented. In terms of -- if you go back to '04 with the factory authorized clearance and '05 and '06, we have done this playbook more or less the same, I think, each year, so not a big difference there.

In terms of the consistency across the dealer network, again, I would not say in comparison to other promotions that we have run from time to time a big difference there. You know, I think that the feedback we've gotten from dealers generally, certainly in comparison to competitive brands, they were very, very pleased with how the double down promotion went. Now, we have 1700 ATV dealers, so you are going to see variations somewhat in there. But I think if you look broadly, our feedback was very, very positive and quite consistent.

Thanks, nice quarter.

Joe Hovorka, Raymond James.

Mike, a quick clarification. You said something earlier. You said $200 million. Was that free cash or operating cash flow for 2007?

Operating cash flow from continuing operations.

Okay, not free cash, thanks. Then, Tom, your comments in regards to the new products for next year being actually equal to or larger, including with the RZR in '07, I am assuming that is your existing product lines, not this new adjacent product that you're talking about?

I guess I would not say too awful much about the specifics of any product that we're going to introduce next year, Joe. I think it is just more directionally. If you looked at '07, coming off a pretty rough '06, there were a lot of people with concerns where Polaris was going to go and we talked about this whole idea of winning in the core, delivering operational excellence, and growth.

And I think all three of them have gone pretty well. We have grown market share in every single product lines so far. The operational excellence, Bennett updated you, but I am pleased with how that has gone. The growth, we're ahead of pace. So we're going to keep the same basic formula working in 2008, in what is going to be a similar environment, a tough environment. We are not out of good ideas yet. We have some pretty creative people in this company and you are going to see us kind of turbocharge that effort, if you will, in 2008.

In terms of the specific markets and where they are going to come and all that sort of stuff, it is just way too early to talk about that. But we will follow that same basic game plan that we showed the world a year ago.

Sure, okay. Can you quantify maybe your ASP growth in ATVs in the third quarter? I think you said units were down?

Yes, what I said was units were down for the whole company and at this point in time, I do not have the number to share with you.

But, obviously, the majority of it being mix related, right?

Right, I was just trying to get a sense of if units were down 1% or 8% in ATVs, I guess. Is the ASP growth marginally more than the 15% revenue growth that you have put up or is it significantly bigger? That is what I was just trying to gauge the mix shift. No comment? Can you refresh my memory on why D&A is down in '07 versus '06?

Not off the top of my head.

I am glad I am not the only one that forgot why. Then, finally, can you quantify maybe the foreign currency impact in the quarter, either on topline operating income, however you might want to talk about it?

Joe, we do not quantify that. I said in my prepared remarks that it had a positive impact on our sales, both the European currencies and the Canadian currency moved in our favor, which helps our sales and our gross margins. However, the yen also impacts our gross margins a little bit slightly negative as well as the European currencies. We purchased a lot of our component costs in euro currencies, so that dilutes somewhat our gross margin. So net, it is favorable on sales, net favorable on gross margins, and net favorable to bottomline.

Okay, great. Thanks.

With that, we're out of time. We want to thank everybody for participating in the call this morning and we will speak with you next quarter. Thanks again. Goodbye.

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