Polaris Inc (PII) 2008 Q1 法說會逐字稿

Good morning. My name is Polly and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris first-quarter 2008 earnings conference call. All lines have 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, Polly, and good morning and thank you all for joining us for our first quarter 2008 earnings conference call. The speakers today are Tom Tiller, our Chief Executive Officer; Bennett Morgan, our President and Chief operating Officer; and Mike Malone, our Chief Financial Officer.

As before during the call this morning we will be discussing certain topics including product demand and shipments, sales and margins 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 risks and uncertainties.

There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning these factors can be found in our 2007 annual report and 2007 Form 10-K which are on file with the SEC. Now we will turn it over to Tom. Tom?

Thanks, Richard, good morning everyone. Thank you for your interest in Polaris. Earlier this morning we reported financial results for the first quarter. For the quarter, sales were $389 million up 22% and earnings were $0.55 per share, a 62% increase over last year. This was a record first quarter for Polaris.

We were pleased with our strong first quarter results and clearly this gives us a very good start to 2008. We continue to execute the same three-pronged strategy. Our core business strengthened, particularly in Snowmobiles; and Parts, Garments & Accessories and dealer inventories declined both year-over-year as well as sequentially from year-end.

Our operational excellence initiative continues to gain momentum and deliver benefits in quality, cost and speed. And our growth businesses continue to deliver significant growth led by the continued strength in our side-by-side category and improving momentum in our international business due to both market improvement and market share gains.

The external environment remains challenging. We're seeing increased uncertainty in the financial and credit markets, weakening consumer confidence and increasing oil and commodity pressures. Internally, we were directly impacted by the uncertain credit market with the previously announced change to our financial services fee arrangement based on the decisions of our provider, HSBC. We expect the external environment to remain difficult throughout 2008.

As a result of our strong performance and the momentum we're carrying in our businesses, we are increasing guidance for full-year 2008 earnings per share of $3.36 to $3.46 on improved sales growth of 5% to 7%. With that overview, I'd like to turn it over to Bennett Morgan, our President and Chief operating Officer, to update you on our individual business segments.

Let's begin with All-terrain Vehicles. Our ATV business had an excellent quarter with sales up 19% driven by continued strength of our side-by-side business and international sales. As we had planned, the core North American ATV industry remained weak in the first quarter declining by 19%. For the full year we expect the core North American industry to remain weak, down about mid-teens with some relative improvement in the second half of the year.

Despite this external weakness, we continue to make positive progress in our core ATV business. Our retail sales are on plan, dealer inventories continue to decline significantly, our spring order solicitation that we recently concluded met our order expectations and our market share was flat in the first quarter. The promotion environment remains aggressive but within our expectations.

Further, our Polaris Defense military adjacency got off to a very good start in Q1 and we expect it to approximately double again in 2008. The side-by-side business continues to shine. The retail success of the Razr continues. While we continue to increase supply and have made progress in some markets, we still have not yet caught up with customer demand with the Razr. We continue to monitor closely RZR cannibalization against our the base RANGERs and our Polaris ATVs and the numbers remain consistent at around 20% cannibalization rate.

The new RANGER Crew multi-passenger vehicle is off to a very strong start and base RANGER products continue to grow nicely. First quarter retail sales to consumers and shipments to dealers are both up well over 50% against more modest first quarter 2007 comparables.

Perhaps the single most misunderstood aspect of Polaris performance over the past couple of years has been our ability to successfully reduce our dependence on core US ATVs, in effect the reported numbers you see from the Motorcycle Industry Council. Our ability to innovate and diversify to adjacent markets and products outside of the core US ATV business has been extremely successful. The side-by-side market, the Polaris Defense adjacency, the Canadian market and our international ATV business all provide significant opportunities for growth in both sales and margins.

By the end of 2007, the sales units from core US ATVs was roughly just half of our overall Polaris ATV business sales units. But US core ATVs only account for about 25% of the total gross margin contribution of the overall Polaris ATV business. The impact of this diversification is that we are far less dependent on core US ATVs and are far better positioned to succeed versus many of our peers. As a result we can address the needs of the US core ATV market as it declines and still provide growth in sales and margin in total for our shareholders.

We expect this diversification to become even more pronounced as we move to the future. We're now expecting total reported ATV sales to be up about 4% to 7% for the full year 2008. Embedded in this is our unchanged expectation that core US ATV shipments will be down first based on a weaker US economy and industry and our intent to keep dealer inventories at appropriate levels.

Snowmobiles. The Polaris Snowmobile business and the industry concluded a successful season. For the first time in several years snowfall across the snowbelt was good and that created significant interest and activity in snowmobiles and related parts and accessories. Though sales slowed against tough comparables late in the first quarter, industry retail sales in North America grew low-single digits for the season, the first time in a decade we have seen industry growth.

Polaris retail sales were flat for the season and we lost a small amount of market share but we did re-establish ourselves as a clear number two in market share. Polaris season-ending dealer inventories are down over 40% year-over-year and are now at a 10-year low. Industry-ending inventory levels also appear to be significantly improved and overall I would say the industry is much healthier than we have seen in some time.

Product quality and consumer satisfaction on our model year '08 product improved significantly. We recently introduced our model year '09 lineup to our dealer network in Reno and the reception of the new product was positive led by volume and model expansion of our 800 [STI] motors and new shift value oriented machines. Early consumer response to our model year '09s is also very encouraging. Our snow (inaudible) sales are up about 40% year-over-year.

North American dealer orders for model year '09 are largely complete and based on what we see so far orders will meet to slightly exceed our expectations. Based on this we now expect our snowmobile sales to be up in the low-double-digit range for full year 2008.

Victory motorcycles. Victory had a decent start to the year with sales up 3%. From a negative standpoint, the industry was weak particularly in March due to the weakness of the overall economy and the late start to spring weather in many geographies. Victory retail sales fell behind plan in March as well.

Dealer inventory levels of our cruiser models are being closely monitored but we believe with the proactive build adjustments we made in late 2007 that we have got this about right. But we will be watching it closely if second quarter retail sales in the prime selling season do not meet our expectations.

From a positive standpoint, consumer feedback on the new Vision touring models continue to be extremely positive. Dealers are reporting good sales and deposit activity. Many customers are just waiting for the weather to warm to either demo or pick up their new bike. Product quality on our entire line of Victory's remains best in the industry and we have our most extensive marketing support to drive brand familiarity and dealer traffic.

In light of the external environment pressures and the strategic importance long-term of our Victory business, we're going to be a bit more cautious on our calendar year 2008 bill. We now expect full year 2008 Victory sales to be about flat versus 2007 with Vision increases offsetting declines in cruiser shipments to help reduce dealer inventory positions.

Parts, Garments and Accessories. Our PG&A business had an outstanding first quarter perhaps it's best ever with a 33% increase in sales. This growth came from all businesses and product lines led by RANGER, ATV and a strong snow season. Our focus on product innovation and integration with the (inaudible) product divisions continues to deliver strong growth and momentum in PG&A. We also recently completed our 125,000 square foot expansion of our worldwide distribution center in Vermillian, South Dakota to handle our growth and product mix changes more effectively.

Financial services. As we previously announced earlier this quarter, we had some bad news in the first quarter with our financial services business fee arrangement. Our provider, HSBC, unilaterally imposed a change in our contract and we absorbed the elimination of our fee income. We do this because we need to preserve acceptable consumer approval rates and protect our retail sales. We did so without waiving our legal rights.

As you would expect, we did not agree with the change or how it was executed and consequently we have filed a lawsuit against HSBC to protect our contract rights. Don't expect an immediate resolution to this lawsuit or any material changes to approval rates as a result. We have built a lower fee income expectation into our full-year 2008 guidance and we will continue to investigate longer-term alternatives for our financial services business. Mike will cover more of the specifics in his section.

International sales. International sales were very strong, up 28% for the quarter. The market conditions in Europe continued to be overall more favorable than what we're seeing domestically. RANGER and ATV sales drove the growth with strength in both northern and southern Europe. We continue to grow market share nicely throughout Europe.

RZR shipments did begin in higher volume in the first quarter but are still nowhere near international demand for this product. Our international snow business was strong again this season. We gained market share and saw nice growth. We introduced a new wide track (inaudible) stroke snowmobile for model year '09 primarily for the international market and it has been extremely well-received.

Based on the early model year '09 order feedback we expect another good international snow season. Our investment in building a strong global team outside North America is paying off. We are more diversified, we're outperforming the market and the growth outlook for international sales in 2008 is strong.

Operational excellence. We continue to make real progress on our operational excellence objectives with the ultimate goal of transforming the competitive advantage of Polaris. Key milestones. We improved our speed to market by successfully reducing purchasing leadtimes by 25% in the first quarter with our ATV and side-by-side supply chains. We reduced physical dealer inventory nicely. We also continue to expand our testing of new North American dealer wholesale order models to better meet the needs of the marketplace and our dealers. We plan to significantly expand this testing in the second half 2008 order period.

On the disappointment side we are unhappy with our progress year-to-date in reducing factory inventory levels. Our plan called for modest increases in the first half of the year as we continue to prioritize dealer inventory reductions and expansion of inventory to meet the additional market growth needs of our fast-growing opportunities in both side-by-side and international. However, we missed our plan in the first quarter and factory inventory increased by 18%.

Clearly we need to and will do significantly better over the upcoming quarters. Internally we're addressing the inventory opportunity aggressively and I continue to expect significant factory inventory reductions for the year and frankly will be disappointed if that number is not around 200 million by year-end. With that, I'll turn it back to Tom.

Thanks, Bennett. Before I turn it over to Mike, let me close by summarizing our remarks. The external environment remains tough and will likely remain tough for the forseeable future. As I said in January, I don't remember in my ten years here a more volatile environment. We certainly see the impact of this around us with a sluggish consumer, escalating commodity pressures and an expected reduction in our 2008 financial services income. On the other hand, the Fed has aggressively reduced interest rates which will lower our floor plan and debt interest costs and should hopefully stimulate the economy down the road.

Despite these challenges, we continue to deliver and we have had a strong start to 2008. Retail sales are on plan, dealer inventories continue to come down nicely. We're getting great growth of our growth businesses and we continue to make progress on quality costs and speed. We have excellent momentum and the plan's in place for the balance of 2008 including some exciting model year 2009 products later this summer. Based on carefully weighing both the internal and external factors, we're increasing our guidance for 2008 earnings per share to $3.36 to $3.46 on sales growth of 5% to 7%. With that summary, I will turn it over to Mike Malone, our Chief Financial Officer. Mike?

Thanks, Tom, and good morning to everyone. As Tom and Bennett both stated, we're very pleased with our results given the continued challenging external environment. As before, my comments and guidance today relate only to the results from continuing operations unless otherwise noted.

As I stated on the last conference call, we substantially completed the (inaudible) of the personal watercraft business last year. Therefore in our first quarter 2008 results there were no additional charges for this discontinued business. And for the remainder of 2008, we do not expect any additional material charges related to the watercraft business.

However, when comparing the current year to the prior year results, we are required to separate continue in discontinued operations given in the 2007 did include charges related to the personal watercraft. I will begin to refuse to guidance for the full year 2008 and then will move on to more specific guidance for the second quarter and a brief review of certain aspects of our first quarter results.

Given the strength of our performance in the first quarter and our expectations for the remainder of the year we are increasing our full year 2008 total company sales and earnings guidance. Total company sales for the full year 2008 are now expected to increase in the 5% to 7% range over last year. For the full year 2008, we now expect diluted earnings per share from continuing operations to be in a range of between $3.36 and $3.46 which is an increase of 8% to 12% compared to $3.10 per share earned for the full year in 2007.

Our updated expectations for sales growth for the full year 2008 by product line are as follows. With the continued success we're experiencing in our side-by-side vehicle business, we now expect our total reported ATV sales to grow in the 4% to 7% range for the full year 2008. Our core ATV shipments to dealers in North America are expected to be down again for 2008 due to the anticipated double-digit declines of the overall North American core ATV industry this year.

The sales decline will be more than offset by increased shipments of ATVs to the international and military markets as well as continued double-digit increases in in RANGER side-by-side vehicle sales driven by the RAZR and the continued growth of our utility RANGER models. Given the anticipated weakness of the North American core ATV industry in 2008, similar to what occurred last year and as part of our operational excellence initiative, we will again expect to ship fewer core ATVs to dealers in 2008 than what is actually retailed to consumers which will result in a significant decline again in year-end core ATV inventory at the dealers.

The snowmobile riding season ended in March finally was more normal this season which has helped to drive down Polaris dealer snowmobile inventory to their lowest level in ten years. These lower dealer inventory levels are expected to be beneficial to our business in 2008 through lower promotional incentive programs. Although we're still in the process of finalizing dealer orders, based on the current available information we expect our snowmobile sales to increase in the low-double-digit percentage range for the full year 2008 compared to 2007.

Our Snowmobile business continues to get healthier which is in line with our 2009 objectives of winning in our core businesses. With the slowdown in the United States motorcycle industry last year and the continued sluggishness of the industry through the first quarter, our motorcycle business will face a more challenging environment in 2008. Our current thinking is that our Victory motorcycle sales for the full year 2008 will be about flat with last year. Shipments of our new touring Vision models are expected to continue strong however we will be more cautious in supply of our cruiser motorcycle models given the soft economy to help dealers control their level of inventories.

And for PG&A sales, given our successful start to the year that this business has experienced, we now expect PG&A business to grow at a somewhat faster percentage rate pace than the overall company sales for the full year. Specifically for the second quarter 2008, total company sales are expected to increase 6% to 9% compared to the second quarter last year driven primarily by increased side-by-side vehicles and international sales.

Earnings from continuing operations are expected to be in the range of $0.66 to $0.70 per share compared to earnings per share of $0.62 in the second quarter last year. The gross profit margin percentage for the full year 2008 is expected to expand as product mix change continues to benefit gross margins as we sell more side-by-side vehicles and PG&A. In addition to lower warranty costs from improved quality, lower floor plan interest costs from the lower interest rates and lower dealer inventory levels and an expected net benefit from currency fluctuations all of which are offset somewhat by increased commodity costs pressures and higher promotional costs for the core North American ATV business in order for us to remain competitive. All in, gross margins are expected to improve up to 100 basis points for the full year 2008 which is unchanged from our previous guidance.

Operating expenses are expected to increase modestly in dollar terms and are expected to be about flat as a percentage of sales for the full year 2008 compared to last year. Operating expenses in dollars will increase primarily due to increases in research and development and advertising expenses to support the design and launch of our new products offset somewhat by efficiency improvements through our operational excellence initiatives.

We discussed in detail in a recent press release the changes we are experiencing in the retail credit side of our financial services business. This morning I will give you a brief update on this area.

You will recall that during the first quarter of 2008 HSBC claimed that it was no longer satisfied with its profitability from our 2005 contractual arrangement currently in place to provide revolving retail credit financing for Polaris products. HSBC threatened to significantly tighten the underwriting standards for Polaris customers and this tightening would have reduced the number of qualified retail credit customers that would have been able to obtain credit from HSBC to purchase our products.

In order to ensure that our customers would continue to be able to finance the purchase of our products, we began foregoing our volume based fee income under the HSBC arrangement effective March 1. We were not obligated to do so under the terms of our agreement with HSBC and we have not waived our legal rights under the agreement with respect to that income.

In addition, we have taken the following steps. Number one, we're encouraging our dealers to increase utilization of the installment retail credit arrangement between Polaris and GE Money Bank. This will not replace the volume based fee income we are entitled to receive from HSBC but it certainly will soften the impact of the change.

Secondly, we have been and will continue to investigate possible alternatives for the revolving retail credit arrangement. But in this challenging retail credit environment that we are operating in, our options are limited in the short-term to secure a favorable long-term contract.

And thirdly, we have filed a lawsuit against HSBC to protect our rights under the 2005 revolving agreement. As I'm sure you can understand, we cannot comment specifically on the pending litigation but it is anticipated that the legal process will take some time to work through.

As we have previously disclosed, the impact of the HSBC change is that our income from retail credit portfolio which includes both HSBC and GE will be significantly lower for the full year 2008 compared to 2007, somewhere in the range of $5 million to $10 million for 2008 compared to $28 million generated for the full year 2007.

As a result, the total financial services income for the full year 2008 including retail as well as our wholesale financing income and income from our other financial services activity such as extended service contracts and insurance, that total is expected to decline by more than one-half of the $45 million generated for the full year 2007. This expected decline includes lower income from our wholesale financing business (inaudible) acceptance in 2008 due to the lower dealer inventory levels and lower interest rate environment.

The decline in total financial services income will be particularly harmful in the second quarter of 2008 since the prior year period included retail credit fee income on sales of non-Polaris products paid by HSBC. Perhaps more important, however, is the availability of these revolving and installment retail credit alternatives to our customers. We measure that through approval rates and penetration rates.

During the first quarter 2008 the approval rates for each of GE and HSBC were at acceptable levels above 40% just as it was throughout 2007. During the first quarter of 2008, the penetration rate which is a percentage of our retail customers in the United States that our financing our unit product purchases through either HSBC or GE, that penetration rate was at 38% just slightly less than the 40% penetration rate achieved throughout 2007.

So in general, our customers are still getting credit to purchase our products. But certainly regions like Florida and California are under relatively more pressure and have lower than average approval and penetration rates in those regions.

Let me switch to wholesale portfolio. At the end of March, our wholesale portfolio related to floor plan financing for dealers in the United States was approximately $662 million an increase of 1% compared to the end of last year's first quarter. The slight increase reflects the strength of our PG&A sales in the first quarter of '08 as well as the mix of products that are being financed as more higher priced RANGERs and Victory Vision models are included compared to last year's first quarter.

The total units outstanding in the portfolio are actually down a little over 5% compared to last year and the core ATV unit inventories in the portfolio at the end of March are actually down about 10% due to our efforts to assist the dealers in reducing their core ATV inventory during the year. The credit losses in this wholesale dealer portfolio remain very reasonable averaging well less than 1% of the portfolio with no material changes experienced lately.

Interest expense on our P&L of $2.7 million for the first quarter of '08 is significantly less than last year as a result of lower interest rates on our bank borrowings generated by the recent interest rate cut actions of the Fed. Our income tax provision was recorded at a rate of approximately 35.5% of pre-tax income for the first quarter. For the full year 2008 our current expectation is for the income tax provision rate to be in the range of 33.5 to 34% of pre-tax income roughly similar to what was last year for the full year.

During the first quarter of '08 we were again buying our stock aggressively and repurchased 1.2 million shares under our share repurchase program at a cost of $48.6 million. We expect to continue to be active in the repurchase program for the remainder of 2008 given the current stock price although with the continued uncertainty in the overall economy, we may not be as aggressive in the upcoming quarters as we were in the first quarter. As of the end of March, we have approximately 5.2 million shares remaining on the current share repurchase authorization.

Taking a brief look at some cash flow and balance sheet information for the first quarter, our net cash flow used by operating activities was $31 million for the first quarter of '08 compared to a use of funds totaling $15 million in the first quarter last year. This increase in cash flow used during the quarter was primarily due to an increase in the factory inventory levels in 2008 to support the continued growth in each of our RANGER business and the growth from our international businesses. However, as Bennett mentioned, we're disappointed at the elevated level of our factory inventory and we're working hard to drive the factory inventory levels to be about to 200 million by the year as our operational excellence initiatives which benefit both factory and dealer inventory levels gain momentum throughout the year.

Cash flow provided by continuing operating activities is expected to increase for the full year 2008 compared to the full year last year. During the first quarter we made investments in the business through capital expenditures and new product development tooling totaling $20 million. Full year CapEx for '08 is expected to be in the range of 65 to $70 million as we continue to invest in new product development tooling and capital projects to reduce our production costs and improve product margins.

We expect appreciation for the full year 2008 to be in a similar range as capital expenditures. Accounts receivable were up 29% to $67 million at the end of March 2008 due primarily to the 28% increase in our international sales and to a lesser degree the increase in our military sales.

Total debt level finished at $260 million at the end of March, a modest increase from $243 million a year ago. Our debt to total capital was 64% of the end of March compared to 58% at this time last year. And EBITDA from continuing operations was $45.8 million for the first quarter of '08 up 26% from the first quarter last year.

So to recap, our full-year 2008 revised guidance total sales for the year are now expected to increase in the range of 5% to 7% over 2007 with EPS from continuing operations growing to $3.36 to $3.46 per diluted share for the full year 2008, an increase of 8% to 12% over last year. Second quarter 2008 sales are expected to be up 6% to 9% with earnings per share expected to be in the $0.66 to $0.70 per diluted share range compared to $0.62 in the second quarter a year ago.

At this time, we will take any questions that the analyst may have. Polly, would you please open up the line for questions?

(OPERATOR INSTRUCTIONS)(technical difficulty)

Tim Conder.

A couple of things. One, on the first quarter operating expenses, Mike, they appeared to be much better than what we were looking for and for the year you've kind of -- guiding them flat. Was there some timing going on between first, second quarter on some items there?

Nothing significant. Only timing thing I am aware of is we perhaps deferred a little bit of our advertising that we expected in the first quarter to later quarters. But other than that, nothing significant. I guess the other thing I would comment on is that related to our incentive based compensation with the share price being weak that does have an impact on some of our operating expenses relative to the compensation that hopefully we will recover later in the year.

Okay, that makes sense. Thank you. And then you had mentioned the currency would be positive for the year. And 14% of your business is outside North America in 2007. What is your exposure to pound versus the euro as it relates to that 14% of revenue. Obviously it sounds like you are anticipating that percentage to grow both in Canada and outside North America.

We -- remember when you say 14% that's 14% outside of North America. Our Canadian business is (multiple speakers)

12% or so?

Right, that's in addition to that 14%.

Right.

So the Canadian exchange rate is favorable year-over-year. That we expect will continue throughout the year in some favorability. We are hedged on that currency through the third quarter so we are confident about the impact of that at least through the third quarter on us.

In Europe, you mentioned the pound. We do have some exposure in the UK but frankly that is relatively small. Our largest exposure is in the euro as well as the Scandinavian currencies. That also has moved favorable. We don't hedge those currencies because it's more of a natural hedge for us but we will see benefit on sales certainly from European currencies.

The other thing I would comment on is offsetting those benefits are an increase in our cost related to the yen. We still have a fair amount of our engines that are denominated in yen and as you know the yen has changed significantly over the last few months. So we are anticipating higher costs of our engines that will impact our gross margins particularly in the second half of the year as our hedges expire in the second quarter. We're not hedged on the yen beyond the second quarter.

So we will have a little bit of pressure both from the yen and frankly other commodity costs on our margins. But net of the positive impact -- all this was a positive impact in the first quarter and will have a positive impact on sales for the full year but when you net it all it's rather neutral for the full year on currency impact.

Okay and then related to Victory, can you kind of breakdown, Tom or Bennett, breakdown what you see as ongoing channel sale and still building the dealer base there versus how your same-store sales went in Victory?

Sure, Tim. You know our Victory dealer count has been pretty stable over the last six to nine months and we expect that to remain relatively stable as we go through 2008. Frankly the focus with the more sluggish motorcycle industry right now is making sure that we work to keep our Victory dealers we have healthy as we can be and so while our long-term goals on taking the dealer count up remain in place, we will probably go at that more modestly than perhaps we told you in previous calls.

You know Victory sales are -- continue to outperform the industry and in their segments dealer inventories even with the increase of the new division segment frankly are about flat so we're doing a nice job on dealer inventory. Our sense is we are doing a pretty darn good job in competing in a pretty tough motorcycle business right now and we expect as the spring finally kicks in in most parts of the country we should see our retail sales even in a tough market accelerate nicely.

No, I mean if you're factoring in the Vision into your basically same-store inventories and it's flat that is good. What did you mention, Bennett, I apologize if I missed it in your earlier remarks or Tom's, the motorcycle heavy-weight market in the first quarter how was that trending?

It was down upper-single digits in the segments we compete in.

And then last question here, based on your (inaudible) date for the analyst meeting in July it looks like you -- if you looked at all of your product segments for the year your biggest push as far as new product focus this year is going to continue to be in that side-by-side segment. Any -- how much of your expectations I guess on the year are dependent on those types of introductions?

(multiple speakers) have been doing this (multiple speakers) for ten years so we're probably not going to take say too much about new products as you might expect other than -- if you look at how we are doing I think things generally are going pretty well at Polaris. We are executing the basic strategy we have and that whole cornerstone that's around innovation and new products. If you look at how we're doing relative to other people in the durables I'm not sure too many people are up 22% and 62% in the first quarter.

So we are on the gas real hard on new products and '09 will be similar to '08. '08 was a very, very good year and we have some very high expectations. We will see how they are met when the dealers see them and consumers see them but we feel real good about the strength of the product pipeline and you will see more about that when we get to Las Vegas this summer.

Thank you gentlemen, and good execution in a very tough environment.

Greg Badishkanian.

Great quarter, great execution guys. Just focusing in a little bit on the RANGER RAZR, how would you categorize the inventory at the dealer level and just how are you thinking now? Obviously there's a lot of enthusiasm at the dealer level with the consumers. There's some scarcity out there. And how do you see the balance in terms of generating sales and kind of maintaining that scarcity value our there?

Certainly, it has been a very, very nice start for the RZR and despite [foreign] increases in production here over the last several months we still haven't fully caught up to demand. We like a little bit of scarcity. If you're asking us how we will try to balance that we're trying to be aggressive but careful. We have no intentions of flooding the market with RZRs. In all honesty we have not come anywhere near reaching that cliff where we're seeing supply outstrip demand.

I think as some of you guys have done some of your channel checks you've heard maybe a few cases where you might have heard guys have caught up. But I think in most of those cases those were in markets that frankly were in the heat of a pretty strong winter and traditionally there is some seasonality in the northern part of the country. We expect we will have scarcity of the RZR for some time.

I think the other thing I would add is we've talked a little bit about it but there is tremendous demand for this product worldwide in our international markets and we really just started flowing the product to our international customer base in any kind of volume here in the first quarter. But we're nowhere near catching up with demand there yet. So we expect RZRs to continue to be strong for the foreseeable future and if anything, our expectations have been more than met with this product. I think the platform has the capability to be much larger than even we anticipated when we introduced the product a year ago.

How do you see the margins? Are they sort of kind of pretty consistent with it or as you increase your production are you going to get some scale there?

I would say from the dealer standpoint, the margins have been fantastic. They are certainly getting full retail for them. They're making a tremendous amount of PTA PG&E sales on this. So it's been a wonderful product for them. From our standpoint as the volume increases and we continue to get more experience with this product, our margins relatively are improving and we expect that trend to continue even in a reasonably difficult commodity environment. Again all things look good on the RZR and the RANGER front.

On the Crew, what type of competing products are there out there and as you get more sales under your belt what do you think the potential is for this product?

The primary competitor for that product is a Kawasaki (inaudible) which has actually been in the marketplace for a few years. Obviously this product has much higher levels of performance and ride quality and carries six passengers versus four. We believe it's a far superior product solution.

We expect it -- this is really when we talk about this product this is really part of our base RANGER kind of utility platform of products and clearly it provides multi-passenger capability. So it provides a very, very nice incremental addition to our RANGER portfolio of products and again I would tell you from the start that we have seen here over the first five months it's still relatively early -- that product looks like it will more than meet our initial volume expectations for that product as well. So we're thrilled with the start accrual by all means.

Great, just kind of moving over to snowmobiles, you mentioned that inventory levels are very low sort of historically in recent history and how are the dealers feeling about that? Do you think they're willing to sort of add some more inventory of new products coming out or do you think they still feel like they need to reduce inventory levels at their level?

I would say -- that is an interesting phenomenon. I think dealers are generally -- as we talked about our inventory is down over 40%. Our dealer inventory metrics are frankly very, very good for the vast, vast majority of dealers. Our view on this business after the tough (inaudible) that we have had is we believe we can have a very successful profitable heritage business that can make money for our dealers and make nice money for our shareholders and balance that risk reward equation appropriately. And I think we feel really good that we've largely gotten to that balance here by the end of the year.

The dealers are cautious but they are willing to take a little bit more risk relatively in a tough environment based on the fact that it did snow and their inventories are very, very healthy and frankly are primarily now current models. They've cleared up the vast, vast majority of these non-currents that have been plaguing the industry for a couple of years. Again I expect we will have a good snow season as we go forward and I expect the industry relatively to be better as well.

Let me just jumped in on that a little bit. Maybe just not Polaris snowmobiles but dealer attitudes in general whether you're talking about a Polaris dealer an [Arctic Catt] dealer Harley dealer, a dealer; I would say right now it's pretty cautious. Certainly everybody reads a newspaper and sees where the economy is and dealers are in general looking to make it through the recession if you will by controlling costs, by being careful with inventory, by being careful about their advertising spending and that kind of thing. It's really in that kind of environment you really need exciting products to get them jacked up.

They're going to be conservative and when you see products like the new snowmobiles were very well received. I think Bennett said we expect it to be low double-digit increases year-over-year. The Victory Vision, the RANGER RZR -- it's innovation that you need to win in a very sluggish overall market.

Great, appreciate that and keep up the good work.

James Hardiman.

Congrats on a strong quarter. A couple of questions for you guys. First versus I guess it was about six weeks ago at the beginning of March when you guys updated your first quarter guidance, what was the biggest difference versus that point in time? Was it that March was such a strong month or was it that there were some other items in January and February that just had not shown up at that point?

Generally, James, when we give guidance we are conservative and like to deliver the expectation. We were confident at the beginning of March that we could overdeliver on our initial Q1 guidance and so we upped the guidance by $0.05 a share. We were confident but very concerned about the external environment and what the retail sales environment might hold for March and upcoming months. And fortunately our retail sales activity in March was very close to our plan.

So that resulted in our ability to overdeliver what we expected for the month of March for the first quarter. In addition our -- things that were going well early in the quarter, the side-by-side vehicles and the PG&A business, really in all parts of our PG&A business again continue to have a very strong March was well. So we're pleased that we are able to overdeliver on the first quarter. I'm real happy about that.

Great, and then in terms of the side-by-side, obviously that's a big portion of your sales in the channel. I think the last number you put out there was about 40% of wholesale ATV sales. Can you talk a little bit in terms of how much side-by-side is represent at retail currently and I guess even more big picture obviously it's difficult to get at a real market number but any idea as to how big that side-by-side market can get? Can it get to be as big as the core ATV market long-term?

Let me try to take a crack a little bit on the market. Certainly we don't give month-to-month data like we do for ATVs and motorcycles. But we're relatively -- not relatively, we are very close to that market. We think that market clearly grew in 2007 although we have no industry numbers, up strong double digits. We expect even in a tough environment this has been the one category that's consistently (inaudible) the economic trend and we expect it will continue to grow nicely in 2008.

You know, I don't think we necessarily are willing to get that far out there that says it's going to be larger than core ATVs. Our outlook for the foreseeable future over the next couple of years is that we're going to see very, very nice growth out of the side-by-side industry and that category will grow. It provides solutions for customers from a multi-passenger standpoint, from a harder working standpoint and from a growing awareness standpoint on how you ride that product that we expect that product will continue to grow very, very nicely in our view longer term for Polaris is that the side-by-side business can be the very, very large business for Polaris and we see a tremendous amount of long-term growth in that business for Polaris.

Let me just had to that a little bit, James. We know the market's growing, we're not sure how much. We know we anticipate we're growing far in excess of the market. Bennett talked about in the first quarter that retail sales were well in excess of 50% increase year over year. So there's at least a couple of factoids.

I think longer-term though I think one of the reasons we're so excited about it is and I think we've mentioned this at a few of our analyst days is that we think we are positioned extremely well in side-by-sides to lead that market. Okay, we're the only manufacturer with two platforms and when we introduced the RZR a little over a year ago we talked about our ability to lead both in work and to lead in play.

And that was kind of the idea behind launching a separate platform with RZR and the execution of that obviously has gone very well. And so that gives us an ability to have a relatively stronger performance in side-by-sides than we do it ATVs. We have a good position in ATV market but we think we have the opportunity to have a leadership position in this very rapidly growing side-by-side market and we are demonstrating that I think quarter after quarter.

Finally with HSBC, there had been some discussion in the previous release that in addition to foregoing the fee-based income, you might have to also give promotional support to HSBC to keep the credit standards as is. I'm assuming that that is not the case? Is that (multiple speakers)?

Yes, James (multiple speakers)

One other thing on HSBC you talked about how you're trying to get your dealers to direct customers away from the HSBC revolving and towards the GE installment loans. Given the fact that I don't think you're getting much income from either of those who does that benefit if the customer is due in fact go in that direction?

I think number one, our objective is to make sure there is availability of credit for our retail customers. So there's a choice here. We're trying to encourage the dealers to offer the installment as a choice so that there is an alternative. We are getting a modest fee. It's more than zero. We're getting a modest fee from our GE installment credit currently so that does benefit us to that extent but again the primary purpose is to maintain availability of credit.

Ed Aaron.

Thanks, nice quarter. A couple of things -- so first on the balance sheet inventories, why would they have been above plan if sales came in above your expectations?

You know as we kind of talked in our remarks, it is an uncertain environment and sales were up nicely 22% and we have made some strategic bets on trying to put ourselves in position to meet that demand particularly in side-by-sides international where we're seeing the growth. And so we have made some conscious choices to build so to speak some more inventory to meet that demand in the first quarter with those two product lines.

If you look at the increase year-over-year it is almost entirely tied up -- more than tied up between side-by-sides and international. And from a side-by-side standpoint I mean we're turning that product extremely quick. With that said, you have heard us preach quite a bit about our operational of excellence initiatives and we think factory inventory is a significant opportunity for us in becoming a faster, more cost-effective organization for our shareholders. We can drive that waste out and where you hear us talk about it we're just not thrilled.

We know we can execute at a higher level and we will as we go forward. So that's what drove the increases but expect us to be more aggressive internally over the upcoming quarters and driving factory inventory down. We're pretty confident we can operate at a lower level of factory inventory than we are right now.

Okay thank you. And then just wanted to ask a quick question on the guidance. You know guiding up this early in the year is a little bit out of character for you guys and actually I don't think you have ever since -- Tom, since you have been there guided up this early in the year and just intuitively it's not exactly the environment where I would have expected to see that happen for basically the first time. I think out of the good amount of appreciation for the momentum you're seeing in your business but why is this year so much different terms of your visibility into the full year so early on?

I guess the way I would characterize that is that we understand that it may be a bit odd and the timing is strange. We have a lot of confidence in our ability to achieve the guidance that we have issued. We have overdelivered throughout 2007 in a very challenging environment. We have done it in Q1. We are conservative as we put our plans together and certainly conservative as we give our guidance.

And I would tell you that we are confident in our ability -- we've got orders for the first half of the year. We've got great product we're going to introduce in the second half of the year. There are things that are moving in our favor that we didn't necessarily plan on earlier in the year.

The Fed rate cuts have a significant impact on our cost structure for our debt and our flooring costs up in gross margins. For instance the lower interest rates -- the rate that we pay on our flooring is down about 40% from what it was in the first quarter of last year and we're getting benefit for that for the entire year. So there's other factors as well.

Let me just add to that. I think the primary reason that we are confident about the future is the strategy is working right? I mean this basic idea of [winning] the core, deliver operational excellence, growth through the growth initiatives -- that hasn't changed. It worked well in 2007. It's worked very well in the first part of 2008.

If you look at where the strength is, what is driving the growth, our international business we're number one in Europe for the first time in the first quarter. We are growing in ATVs there. We've got a terrific snowmobile business. International is strong. Nd certainly side-by-sides is very strong.

We had a very good snowmobile season. We didn't know that 90 days ago. But we're kind of through the snowmobile season. We have the orders. That looks good to us. But probably the one part of the business you're most uncertain about is ATVs -- where is the ATV business going to go? I think the point that Bennett tried to make in his prepared remarks is we are far less dependent on US ATV sales than most of you guys think. Okay?

It's less than 25% to of the gross margin of the ATV business and we can handle a soft US ATV business. Now if it's down 15%, we can't but we're expecting it to be down mid to high teens. If that's where that business winds up, we can do just fine as long as the growth part of our businesses continue to deliver and we see no signs even with this tough economy that everybody is well aware of those parts of our business slowing up.

So we feel good about it. Obviously time will tell but we had a very good year following this strategy in a tougher environment. Last year our retail sales are right on plan, our dealer inventory is in good shape. Our product pipeline looks good, our margins are expanding. We feel pretty good about things.

Okay, thank you. Just finally kind I bother you to ask for the FX impact for the quarter?

What we have been disclosing is the currency impact on our topline sales. So of the 22% growth in our sales in Q1 about 4% of that is relative to currency movements.

Bob Evans.

Good morning everyone and again congratulations on great execution. Can you comment on the international growth in terms of your guidance this year? What type of -- what percent I guess of the total ATV sales do you expect to be international, ballpark?

What percent of (multiple speakers)

I'm trying to get a of sense of how big proportionately international will be -- international ATV sales will be on your entire -- in terms of your entire overall ATV. I'm just wondering what portion will be international versus kind of your view on North America.

The percentage of ATV sales to the international sales is not that much different than it is for the overall company, Bob. So it is combined side-by-side and ATV it's like 65, 68% something in that range.

Okay, and I guess a similar question on military. I know there's a lot of growth there. I'm just trying to get a sense of the magnitude of how that might change. I think you said military was going to double this year in terms of the ATV business?

It doubled last year. It will double again we think this year. It's still a relatively small percentage of our topline. I don't want to say it's not a material number. It's not a big number. But as we have indicated the profitability at the gross margin level on those sales is extremely favorable to us.

Back to the gross margin comment you had made relative to a 25 -- I believe you said core ATV is about 25% of gross margin contribution. What was that say, three years ago or I'm just trying to get a sense of how much that has moved?

Scott, we don't know. It would be a guess (multiple speakers) over half. I'd guess 60% or a number like that. We can go back and figure that out but (multiple speakers) it's been a meaningful move, hugely meaningful move. We basically had very small side-by-side business and a small international business and no military. I will get that number at 60 but we can go back and take a look at that.

Just curious. I believe someone had made the comment earlier about you are testing new wholesale origination system I believe was the comment? Could you elaborate on that a little bit in terms of what you might be looking there in terms of dealer orders?

We're not going to talk about that in a tremendous amount of detail for competitive reasons. You know you have heard us talk quite a bit about our focus on operational excellence, driving out the non-value-added waste, getting more speed/cost out of the system.

One of the things when you have these extremely long order periods is it drives forecast inaccuracies both for Polaris and our dealers, creates a fair amount of strain. And so what we have been testing on a very limited basis and we intend to expand is a model essentially where we would take orders much, much more frequently. We also need to manage retail, make sure we're managing market share in that process. But it's a much more dealer friendly model that frankly we believe will drive the waste out in cost for both our dealers and for Polaris and will take care our end customers better. So that's really what we're trying to do.

But you can understand there's a significant amount of changes to our business operations if we went to much more rapid order taking with shorter lead times so to speak. So we're trying to do that prudently but that is the direction we're very much trying to go.

Okay and where are you in that process in terms of how far through it?

We're still in what I would call in the early stages. Like I said, what I tried to signal to you is we're going to do a significant test in the second half of the year which would have a higher percentage of our dealers but by no means are we ready to roll this out across all of our product lines or you know all of our dealer network. We're just not ready to do that at this point.

Polly, we have got time for a couple of more questions.

Craig Kennison.

Congratulations everyone. The question is with respect to the 2009 plan with a very strong quarter you just reported and your positive outlook, is the 2009 plan with EPS of 425 still on the table?

I would characterize things very much the same as I did in the first quarter call. 425 is a big number and I don't think there's anybody outside of this building that really believes we can get there. It's a goal for us. Obviously we have a very difficult economy. For us to be in a position to reach that goal I think we need to do a number of something around 360 per share this year. But we're not at that point yet.

We are raising the guidance from where we were to $3.36 to $3.46. We're still about $0.14 away from where we would need to be approximately to get to that 425. We will see. Last year, we wound up doing better than our original guidance. Things were off to a good start this year so we continue to drive towards that goal. That was the goal we laid out and that's the goal we're going to continue to drive towards.

You know what? If we wind up at 410 versus 425 I don't know that anybody here is going to commit suicide over it. I think we're headed in the right direction. We certainly are pleased with the basic strategy that we're following of winning in the core, delivering operational excellence and growth and all the innovation and new products. So we're going to keep doing what we're doing and run the business intelligently for the long-term and focus on quality and reducing inventory and those kinds of things. We will see where we wind up.

But we certainly haven't ruled that out, okay? It's going to depend on how the year winds up. Right now we're a little more optimistic than we were 90 days ago. We will see maybe 90 days from now we will feel differently one way or the other, I don't know. But we're going to keep pushing in that direction and certainly that remains the goal that we are going after.

Thanks. And then a follow-up with respect to your distribution process. You have been reluctant to use mass retailers to distribute your product really betting on the independent dealers and that seems to have been a good strategy. One of your competitors saw some cutbacks recently in the mass channel. Just big picture, what do you think about opportunities outside of independent dealers and are you still committed to an exclusive strategy? Thanks.

You know we've looked at this several times over the last several years and in every case we come back to that the distribution channel we have is the best channel for us. Certainly over the last several months nothing has changed in that view. We think with the operational excellence initiatives we can actually improve our relations with our dealers. We can make them more effective. We can take care of our end customers better and at least from the folks in this room at least talking to you right now we're very committed to our independent channel dealer channel although we think we can work together to improve our joint performance for our end customers as we go forward. And that's really how we're going to run the railroad.

Our dealer partners are really, really important to the success of Polaris as you know. This is a business that operates on passion at the end of the day and that is tough to quantify. It's tough to put in a financial model but when you see products like the RZR or the Vision certainly what we sell to our end consumer is passion and excitement and the opportunity to escape.

And we strongly feel the independent dealer channel with all its frustrations and limitations at times is the best alternative available for us to satisfy those needs. And we have felt that way for a long time and we're committed to the long-term success of Polaris dealers and we continue to work very, very hard every year to continue to help make those dealers more successful.

Thank you.

Last question, Polly.

Your concluding question comes from the line of Joe Hovorka.

Thanks, guys. Just a few quick questions. One, on the GE and HSBC I know you said you were trying to shift the dealers towards GE. Is there a difference in the way that they -- their credit standards -- will GE finance certain people and HSBC will finance others? Can you tell me the difference in credit standards?

I don't think they're significant changes, Joe. I'm not inside the blackbox of either one of them to understand exactly how it works. I don't think there's any significant differences. The main difference is the type of credit. GE is our installment credit provider and HSBC is revolving and they are different types of credit and there are different application processes and different collateral that is taken in each. It is a different process.

I understand the difference in the products. I also -- the way I guess I thought I understood it was that GE was little tighter than HSBC but it sounds like that may not be the case?

It really various. If it varies they can offer on an installment sometimes there's more of a downpayment or they have got more collateral in an installment. So that would tend to think toward that they maybe could go a little further since they've got a little bit more collateral on an installment. I don't know that there's any significant difference.

And then is there a difference between the number of -- the percentage of units financed between your RANGERs and your core ATV? Like what percent of each of those is financed versus cash payments or cash purchases?

I don't know that we have great data on that. I would suspect -- I just can't -- I can't guess. We'll have to get that for you.

Okay, and then the last question --

The one thing I would add is that traditionally we had financed a lot more ATVs through a revolver because of the dollar levels associated with that. So we saw traditionally much higher levels on ATVs and because RANGERS are much higher price point that doesn't work so well really for a revolving deal, that number is changing as we obviously have been able to open up our installment business with GE. And while I don't think RANGERS are anywhere near ATVs yet and that is a directional statement, it is growing nicely based on a more favorable installment program.

You're talking about what you financed through GE or HSBC?

Yes.

I was kind of curious -- I know you have given a number before on ATVs at something like 80, 85% are financed and you get your 38 or 48%. That's what I was trying to get at is there a difference between the total number whether it's financed through your programs or somebody else?

No, and the first number you would've got would've been an estimate on our part (inaudible) (multiple speakers)

I think we generally say we don't know how many are financing our products. We estimate that about two-thirds of our products are financed at retail and of that we're getting a penetration -- we're getting 38, 40% total penetration rate. Generally speaking ATVs are on the high-end of that percentage number and generally speaking snowmobiles are in the low end of that range and RANGERS are in the middle and growing is what (inaudible)

The last question is that I think you said in the wholesale portfolio units were down 10% for core ATVs. And then retail sales by your earlier comments are down about 19% in the first quarter. How do you foot the two if you're shipping in fewer units or selling out? Wouldn't you expect the ATV portion in the portfolio to be down as much or more than retail?

The HSBC -- for one, we've got a little bit of apples and oranges because one is US and the other one is North America. And the other consideration is what your beginning point is.

I think the other point is that again, not every unit is captured on our wholesale portfolio. There's some guys that will have purchased the unit outright and so in some cases what we state on our portfolio isn't necessarily a complete reflection of everything we have (multiple speakers)

We share the Polaris acceptance wholesale flooring data as a proxy for dealer inventory but it is not exact. It is what is being financed at that point in time through the joint venture. It is a proxy for dealer inventory, not anything accurate.

Okay, that's all I had. Thanks guys.

That's all the time we have this morning. I want to thank everyone for participating in today's call and we will talk to you again next quarter. Thanks again.

Think you, sir. This concludes today's conference. You may now disconnect.