Polaris Inc (PII) 2008 Q2 法說會逐字稿

Good morning. My name is Bobby Joe and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris Industries' second quarter 2008 earnings call. (OPERATOR INSTRUCTIONS). Mr. Edwards, you may begin your conference.

Good morning and thank you for joining us for our second 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.

During the call this morning 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 involves risk 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.

Good morning everyone. Thank you for your interest in Polaris. Earlier this morning we reported financial results for the second quarter. For the quarter sales were $456 million, up 21%, and earnings were $0.72 per share, a 16% increase over last year. This was a record second quarter for both sales and earnings per share.

Polaris has had an excellent first-half of 2008, despite a very difficult external environment. Consumer confidence is at a 16 year low due to the challenges of high energy prices, the continued housing slump and the tougher credit environment.

Cost pressures have gotten more challenging recently, due to increasing prices for many commodities, most notably diesel fuel and steel. As a result, companies in our industry and similar industries are facing big challenges with both demand and cost. Polaris' ability to weather these challenges and thrive in this environment can be traced back to having a solid strategy designed to work in a tough environment and solid execution of that plan.

We are winning the marketshare battles across our businesses and around the world, while continuing to drive dealer inventory levels down. We are controlling our costs by improving our efficiencies and productivity through our operational excellence initiative, and we're growing our topline through compelling product innovation.

Over the past few years we have made important investments in compelling growth segments like international, military, Victory and side-by-sides, and those investments are paying off with revenue and earnings growth, even during these tough times.

While we are pleased with our continued success, we're managing through this cycle prudently. We're planning for the difficult industry conditions to persist. Now going into our upcoming dealer meeting in Las Vegas, with grounded order expectations. We will continue to be aggressive in product development and we will announce some fantastic new products later this month. Polaris has proven that innovative products sell and sell well, even in this difficult environment.

As we look toward the remainder of the year we're balancing our optimism from our strong first-half results, strong business momentum and great new products against the caution of a tougher external environment and nervous dealers and nervous consumers. After considering each of these factors we're modestly raising and narrowing our guidance range for the full year 2008 to $3.40 to $3.48 earnings per share on sales growth of 9% to 11%. This represents a $0.04 increase in the low end of the EPS range and a $0.02 increase in the upper end. This conservative approach is appropriate until we gain greater clarity on both third quarter retail sales and the dealer orders we receive at our show next week.

With that overview, I would like to turn it over to Bennett Morgan, our President and Chief Operating Officer, to update you on our individual business segments.

I will begin with all-terrain vehicles. Our ATV business had another excellent quarter with sales up 24%, again driven by strong side-by-side and international sales.

The core U.S. ATV market remains very weak, and a bit worse than we had expected through the first-half of 2008. Industry sales are down 23% year-to-date in the U.S. We expect the U.S. ATV industry to remain challenging for the foreseeable future. Comparables do become somewhat easier as we move forward, particularly in the fourth quarter, so we still expect some modest relative improvement in the second half. But we now believe the ATV market will be a bit worse for 2008 than we did 90 days go. We have already proactively adjusted our builds and supply down appropriately based on the evolving market conditions. To produce in perspective, remember that U.S. core ATVs represent only about 20% of our total ATV business gross margins.

Despite the weakness there are a number of positive signs in our core ATV business. Our retail sales on full-size Sportsmans are actually year-over-year. Dealer inventory levels continue to come down. They are down 10% from year ago levels. And we expect continued reductions over the next 12 months. The Canadian market remains much healthier than the U.S., and we're significantly outperforming our competitors in this important market.

Year-to-date in North America we continue to win the marketshare battle, gaining a modest amount of share. And our new 2008 Sportsman 800 Touring 2-up ATV recently won ATV of the year from the largest ATV industry magazine. We remain very committed to this part of our business, and we will be introducing some great new products later this month in Las Vegas.

Sales of Polaris side-by-sides continue to grow rapidly. Retail sales and shipments both continue to grow at a very healthy rate, up over 50% year-to-date. Our innovative product platforms with RANGER on the work side and RZR on the recreation side, continue to capture marketshare at an extremely impressive rate. We recently learned from an independent industry research source that we achieved the number one U.S. marketshare position in side-by-sides for calendar year 2007, and we're clearly aggressively growing our lead in 2008 based on our year-to-date retail results.

Second quarter retail sales for the RZR and our multipassenger RANGER Crew remain very strong. We continue to make progress towards getting supply in balance with the demand on both of these products, but shortages still remain in some key markets.

As Tom mentioned, we have significant new side-by-side product announcements planned for later this month, and we expect to continue to outperform the side-by-side market based on these new products introductions.

Snowmobiles. Due to the time of the year there is not a lot to report about snowmobiles and not a lot has changed from 90 days ago. Production for model year '09 has started normally, and as is our recent pattern, few shipments to dealers occurred in the second quarter.

As I mentioned in last quarter's call, dealer orders slightly exceeded our expectations, as did preseason [snow check] sales for our new model year '09 products. Dealers inventory levels are at their lowest level in 10 years, and we're anxiously anticipating the beginning of a new snow season.

Moving to Victory motorcycles. The Victory motorcycles business has had a mixed start 2008. The heavyweight motorcycle market segments in which Victory compete in are sluggish, down mid single digits year-to-date. Victory retail sales continue to outperform the segments in the overall market, but is not achieving our internal growth targets year-to-date.

For Victory retail cruisers remain soft and vision sales are good. Second quarter wholesale shipments to dealers were down 19% as a result of reducing the model year (inaudible) cruiser build, as we announced in earlier calls. We will continue to manage our supply for model year '09 product cautiously to ensure we hope manage dealer inventory levels tightly and protect the premium brand image of our Victory brand. In light of this we now expect calendar year 2008 Victory sales to be down versus 2007.

On the positive side, this upcoming dealer meeting in Las Vegas will mark our ten year anniversary of Victory. We are the first successful American entrant in over 60 years into the motorcycle business. And I think there are three compelling reasons why Victory has been successful. We have the best product. We provide the most value in our class, and we have the most satisfied customers.

We now have a comprehensive line of cruisers and luxury touring motorcycles, with plans for future segment and geographic expansion. Our Vision models continue to penetrate the luxury touring segments. And the customers that own Visions are thrilled with the product and the quality. We believe the long-term future for Victory remains very bright.

Parts, garments and accessories. Our PG&A division had another very strong second quarter, with a 24% increase in sales. And year-to-date sales are up 28%. We are seeing sales grades across each of our businesses, each of the geographies and each of the product groups. Product innovation, improved integration with the vehicle and the vehicle teams, and excellent execution is driving our growth in PG&A.

We successfully completed our transition out of our Winnipeg PG&A warehouse to our expanded Vermillion distribution center during the second quarter. We have a host of innovative new products planned for the second half that will be introduced later this month in Las Vegas, so we are optimistic that PG&A performance will continue to outpace the Company growth.

Moving to international. International sales growth was very strong again in the second quarter, up 40%, and up 34% for the first-half of 2008. International sales account for 19% of total Polaris sales through the first-half of 2008. This international growth is being driven from marketshare wins across our international businesses, key market growth and RZR. While RZR sales did increase significantly in the second quarter, supply remains behind demand, and will probably remain so throughout calendar year 2008.

European ATV markets continue to be relatively stronger than the U.S., down low single digits year-to-date. We continue to gain marketshare internationally, and we're approaching number one in Europe in ATVs for the first time. We continued to expand our subsidiary presence in key markets. We will go direct in Spain, which is the fourth largest European ATV market effective August 1 of this year. And we also plan to enter the Australian motorcycle market with Victory later this year.

As I said in last quarter's call, our investments in building strong global teams outside of North America are paying off. We're more diversified, we're outperforming the market, and the growth outlook for international sales in 2008 remains strong.

Operational excellence. We continue to make some real progress on our operational excellence objectives, with the ultimate goal of transforming the competitive advantage of Polaris. This initiative has become more critical than ever as commodity costs escalate rapidly and the difficult external environment adds volatility and uncertainty to the demand side of our business. Our focus on quality, cost and speed has allowed us to continue to offset much of this cost pressure by driving out the non-value-added waste throughout our value chain.

Our second quarter gross margins actually expanded by 70 basis points. Transportation costs and key input commodities, like steel and diesel fuel up significantly, we're planning to take targeted modest price increases for model year '09 on many of our products to try to offset the higher material costs that we're experiencing. We expect to remain competitively priced based on the model year '09 pricing communicated already by many of our competitors.

Factory inventory is up 4% year-over-year on a sales increase of 22% year-to-date. The increase is being driven by higher side-by-side in international inventories, as these businesses grow rapidly. We have made positive progress internally in taking steps to improve our inventory, but at this time it remains a key focal point and an opportunity. We expect factory inventory to continue to improve throughout the balance of the year, and still expect to end the year at about $200 million.

Inside Polaris we're working relentlessly to improve our speed to market. This speed gives us nimbleness to react and move faster than others. Overall dealer inventories continue to come down year-over-year, down over 8% across our portfolio. We have improved our purchasing leadtimes by 25%, with plans for more. We have increased our mix model manufacturing line capabilities so that we can build virtually every model, every week in our factories. And we continue to reduce our new product development cycle time, which allows us to get new products to market faster and more efficiently.

In Las Vegas we will unveil a major phased regional test of a new way of doing business with our dealers for our core ATV and side-by-sides that changes the fundamental power sports business model premise of one to two times a year ordering.

So we are on the gas in transforming Polaris through operational excellence. It is clear within the walls of Polaris that it can be down, and over the upcoming quarters it will become more apparent to our consumers, our dealers, our suppliers and our shareholders, and of course our competitors.

With that, I will hand it back to Tom.

Before I turn it over to Mike, let me close by summarizing our remarks. Polaris is performing at a high level in a tough market. Second quarter sales of 21% increase and earnings per share increases of 16% are results we're proud of. And operationally the results are even stronger. Operating income, excluding financial services for the second quarter, was up 56%.

We're winning in the core. We're starting to transform the Company through our operational excellence initiative and growing through innovation. Exactly what we said we would do two years ago.

The environment is challenging, and we're not expecting it will improve significantly over the upcoming few quarters. With that said, Polaris expects to continue to grow and deliver. Our strategy is working well, and we're executing at a high level, and we have some fantastic new product news coming this next week.

I'm cautiously optimistic for the balance of 2008 based on carefully weighing the internal and external factors. We're increasing and narrowing our guidance for the full year 2008 to $3.40 to $3.48 on sales growth of 9% to 11%. We will seed how the dealers and consumers respond to our new products in Las Vegas, monitor third quarter retail sales, and respond accordingly.

With that summary, I will turn it over to Mike Malone, our Chief Financial Officer.

Good morning to everyone. As Tom and Bennett stated, we had a great start to the 2008 year in a continuing challenging external environment. My comments today will focus more on more specifics of our second quarter reported results, and the updated 2008 guidance.

As Tom and Bennett have stated, given the continued strength of our performance in the first-half, and the expectations for the balance of year, we're increasing and narrowing our full year 2008 total Company sales and earnings guidance. Updated expectations for sales growth for the full year by product line are as follows.

For ATVs we now expect sales to grow in the 9 to 11% range for the full year 2008, which is increased from 90 days ago. Our core ATV shipments to dealers in North America are expected to continue to be significantly lower than last year due to the anticipated double-digit decline of the overall North American core ATV industry in 2008. This decline in the core will be more than offset by increased shipments of core ATVs to the international and military markets, as well as continued double-digit increases in RANGER side-by-side vehicles.

Given that the year-to-date actual total ATV growth is now at 22% increase. This full year guidance of 9% to 11% increase implies that second half 2008 growth rates of low single digit increases as we anniversary the initial shipments of the RZR last year.

With orders in hand from our dealers for model year 2009 snowmobiles, we're confident that our snowmobiles sales for the full year 2008 should increase in the mid teens percent increase range compared to last year. This sales guidance is slightly improved from 90 days ago.

Sales for Victory motorcycles for the full year 2008 are now expected to decline in the low double-digit percentage range, given the continued weakness in the U.S. heavyweight motorcycle segment, as Bennett mentioned earlier. This sales guidance is slightly less than 90 days ago.

It is very important for us to protect our premium brand image that we have built over the past 10 years by closely monitoring dealer inventories, and we're making adjustments to production and shipments to react as necessary.

And for PG&A sales, given the successful start in the first-half of 2008, we continued to expect the PG&A business to grow at a faster percentage rate pace than the overall sales for the Company for the full 2008 year.

For the third quarter 2008 total Company's sales are expected to increase in the 2% to 5% range compared to the third quarter last year, driven primarily by increased side-by-side vehicles, international sales, and PG&A sales. The third quarter percentage sales increase is less than we have experienced in the first-half of 2008 as we began shipping the RANGER RZRs in significant quantities beginning in the third quarter of last year.

Earnings from continuing operations are expected to be in the range of $1.07 to $1.11 per diluted share for the third quarter of '08, compared to $1.07 in the third quarter of last year.

The gross profit margin percentage for the full year 2008 is expected to improve up to 80 basis points, which is slightly less favorable than the up to 100 basis points of our prior guidance. Product mix changes continues to benefit gross margins as we sell more side-by-side vehicles, and growth continues in our international and PG&A businesses, each of which enjoy a higher than average gross margin percentage, as well as lower floor plan interest costs from the lower interest rates and lower dealer inventories that we are experiencing this year.

These gross margin improvements are offset somewhat by increased commodity costs that we have been experiencing in each of our businesses, particularly relating to input costs like steel, aluminum and plastic resins, as well as diesel fuel transportation costs. These higher commodity costs have impaired our gross margins by over 100 basis points so far this year. These increased commodity costs are the primary driver of the more modest gross margin expansion expectations in the second half of 2008 compared to the actual improvement of 140 basis points achieved in the first-half of the year.

We continue to expect operating expenses to increase in dollar terms, but be about flat as a percentage of sales for the full year 2008 compared to last year. Operating expenses in dollars have and will continue to increase primarily due to increases in research and development and advertising expenses to support the design and launch of our new innovative products, many of which we will unveil next week.

Our guidance for financial services income for the full year 2008 remains unchanged and is expected to decline by more than one-half of the $45 million generated for the full year 2007. As we discussed in previous calls, this decline is primarily driven by the impact of changes made by HSBC of discontinuing the financing of non-Polaris products at Polaris dealerships in July of last year, and eliminating the volume-based fee income payment to Polaris in March of this year.

We discussed in detail in the previous conference call the changes made by HSBC and our response to those changes. There is not really anything new to report today regarding the actions taken as a result of HSBC's decision.

Our customers continue to look to HSBC for revolving retail credit and to GE for installment retail credit opportunities to finance the purchase of our products. The availability of revolving and installment retail credit to our customers remains at acceptable levels. We measured that through approval rates and penetration rates.

During the second quarter of 2008 the approval rates for customers in the United States for GE and HSBC combined was well above the 40% approval rate achieved in 2007, with GE volume and approval rates increasing, and HSBC volume and approval rates decreasing from their respective 2007 levels.

During the second quarter of 2008 the penetration rate, which is the percentage of our retail customers in the U.S. that are financing their whole good unit purchases through HSBC and GE combined was at about 36%, only slightly lower than the 39% rate in the second quarter of last year, and the 38% penetration rate experienced in the first quarter of '08.

So in general, our customers are still getting credit to purchase our products. However, there are certain regions like Florida, California, and Arizona that are under relatively more pressure and have lower than average approval and penetration rates.

At the end of June 2008 the wholesale portfolio related to floor plan financing for dealers in the U.S. was approximately $603 million, down 1% from last year's second quarter level. However, the total units outstanding in the portfolio are actually down quite a bit more than this 1% decline. The dollar amount does not decline as much as the product unit amount due to the strength of our PG&A sales in the second quarter, as well as the mix of products that are being financed as more higher prices RANGERs and Victory Vision models are included this year compared to last year's second quarter.

Credit losses in the dealer portfolio remain very reasonable, averaging well less than 1% of the portfolio, with no material changes experienced lately.

Interest expense of $2.5 million for the second quarter of 2008 is significantly less than last year as a result of the lower interest rate environment on our bank borrowings.

The income tax provision was recorded at a rate of approximately 36% of pretax income for the second quarter of this year, similar to the second quarter of last year. For the full year 2008 our current expectation is for the income tax provision rate to be in the range of 33.0 to 33.5% of pretax income.

During the second quarter we repurchased 811,000 shares under our share repurchase program at a cost of $37 million. Bringing the year-to-date 2008 shares repurchased to just over 2 million shares for $86 million. We expect to continue to be active in the repurchase program for the remainder of the year, given the current weak stock price. As of the end of June we have approximately 4.4 million shares remaining on the share repurchase authorization from the Board of Directors.

Net cash flow provided by continuing operating activities was $53 million for the second quarter of 2008, a 46% increase from the second quarter last year. The improvement in cash flow provided by operating activities is expected to continue during the second half of the year.

During the second quarter of '08 we made investments in the business through capital expenditures and new product development tooling totaling $18 million. For the full year '08 our expectation for capital expenditures are to be in the range of $65 million to $70 million, unchanged from last quarter, as we continue to invest in new product development tooling and capital projects. We expect depreciation for the full year to be in a similar range as our capital expenditures.

Accounts receivable were up 37% to $73 million at the end of June, due primarily to our 40% increase in international sales during the second quarter. Total debt levels finished at $261 million at the end of June, up from $200 million in June of last year, due primarily to our share repurchase program.

Debt to total capital was 65% at the end of June compared to 51% at this time last year. And EBITDA from continuing operations was $100 million for the year-to-date period this year, up 12% from a year ago.

So to recap our full year 2008 revised guidance, total sales for the year are now expected to increase in the range of 9 to 11% over last year, with EPS from continuing operations growing to $3.40 to $3.48 per diluted share for the full year 2008, which is an increase of 10 to 12% over what we earned last year for the full year.

Third quarter 2008 sales are expected to be up 2 to 5%, with earnings per share expected to be in the $1.07 to $1.11 per diluted share range compared to the $1.07 in the third quarter of last year.

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

(OPERATOR INSTRUCTIONS). Greg Badishkanian, Citigroup.

Great job on the quarter guys. Just a few questions. First, with respect to the RANGER RZR, as you said and as we have done our checks, there is still a lot of scarcity out there. I'm just wondering, how do you think about supply and demand? Do you want to keep it at this level? Do you feel like you can maybe add more to the channel -- inventory to the channel? What is your thoughts on that?

This is Bennett. We have been working at it pretty hard since the introduction. We have taken our supply up four times. We are making progress. There still is a scarcity as your checks would validate.

We would like to keep the product still relatively shorter than demand, but we still think there is some upside at an appropriate level of some additional supply in the channel as we move toward. Our day supply is still incredibly light in many, many places. We're still seeing the highest month-to-month retail velocities we have seen from RZR over the last couple of months. So the product continues to grow, and I think there's opportunity for additional supply without, what I would say, flooding the market.

We also have some fantastic new product innovations coming with RZR, which we expect will further potentially accelerate demand. And then we have the whole global issue around RZR as well, where we are clearly about where we were last year far behind demand and supply. So we still got to work to do to get RZRs out and fill the global market demand for that product.

This is Tom. Let me just add on that a little bit. I think we are -- we continue to chase it, not to the degree we did six months ago, but I think if you look here in North America on average, you see dealer in of between 2 and 3 units per dealer. I think steady-state inventory ought to be something like 5, 6 units per dealer, so we're still a little bit short.

We are going to raise the production rate a fifth time here as we go forward. And I think probably the big question mark is what happens with the new products that we are going to introduce? We will see. We will see how that works out, but we are pretty excited, so we will see if the customers are.

Two follow-ups to that. International, when did you start shipping that out? So you are -- you are seeing you have pretty severe scarcity in Europe then right?

Yes. Because of the just rampant North America shortages we had last year, they got a few units really during calendar year '07. We have started to greatly accelerate the shipments, particularly in the second quarter this year. I think the product is slowing normally now to the international marketplace, but it will take a couple of quarters to fill that backlog demand.

Good. With respect to new products, when do those ship to dealers again?

It depends, but generally speaking, our model year '09 products that we announce in Vegas later next week will ship sometime either late third quarter through fourth quarter. Obviously there's a pipeline fill that will take some time through that, so we expect that hopefully will carry into 2009.

In terms of guidance for the rest of this year, what type of -- how would you categorize the success of the new products? Are you expecting blockbusters like a RZR or just sort of a decent type of new product launch?

I think we said we are pretty excited. We will see. We will be able to answer that question a little better next week. I think many of you are coming to Las Vegas, and I guess I don't want to spoil the surprise. But I think we probably said enough, we're pretty excited so (multiple speakers).

I was thinking more in lines of guidance, what is baked in that?

As I said in the prepared remarks, you've got sort of a battle of good versus evil here, right? On the good side we are -- I feel really, really good about the innovations that we have delivered in the marketplace in the last 18 months. And I feel really, really good about the innovations that we going to deliver in Las Vegas.

Longer-term going forward, it really goes back to investments we made four and five years ago when we increased the size of the engineering group. We built Wyoming. For those of you that have followed the Company for a long time, we said you're going to see an entirely different level of performance in terms of innovation going forward. And we saw it first with the RZR and the Vision, and now you're going to see it next week in Las Vegas. That is going to be -- that pipeline is full for the next several years. I feel really good about that.

The part that is very difficult to predict is all the obvious stuff, the macro stuff. You tick up the paper today -- yesterday it is the mortgage companies and this morning it is General Motors. And who the heck knows where the price of oil is going to go. It is the tension between trying to figure out where the consumer is going to go and the overall macroenvironment, and our focus on the controllable factors. We feel real good about how things are going from a controllable point of view. We're just trying to balance as best we can the obviously difficult macroenvironment.

But I think, just to build on Tom's point, if you're talking specifically about guidance, we have not built in significant upside expectations based on these great new products. I think we've got a very balanced approach to that. And we are excited as heck, but --.

I think the word we used is grounded order expectations. We expect that core ATV orders, even with the new products, are going to be down year-over-year. And we expect, based on both the market momentum and the great new products that we have, that side-by-sides orders will be up. So we will see. We will sit down with our dealers and understand what is going on in their local markets and how they feel about it, and then we will obviously be able to adjust following that.

That is exactly what I wanted to hear, just how conservative your guidance was with respect to new products. So that was very helpful. And great execution guys. Thanks.

James Hardiman, FTN Midwest Securities.

A couple of quick questions for you guys. The industry numbers that you guys put out there, ATV -- core ATVs down 22%, I believe, and motorcycles down mid singles year-to-date. Can you give us the numbers for the second quarter?

It sounds like, if I'm doing the math right, that if you factor in the first quarter numbers, core ATVs were significantly worse. And maybe the heavyweight motorcycles sound like they might have been a little bit better, at least in terms of growth, during first quarter -- versus the first quarter. Do you have those numbers for the second quarter?

The second quarter for ATVs -- U.S. ATVs, that was down a little more than the year-to-date number for core U.S. ATVs. And motorcycles were actually -- the second quarter was actually up mid single.

That is all motorcycles?

That is all motorcycles.

Yes, I think he asked heavyweight.

Heavyweight was about flat.

Again, not maybe for you James, but for other people listening on the call, the motorcycle market right now is a little bit goofy. The overall market is performing really quite well, and that tends to be in scooters, which are runaway strong, and very small motorcycle segments that we don't compete in. That is because of the gas prices. So you've got people going out there and buying scooters to commute on or whatever. Our segment of the market, the large touring segment, and I think Richard gave the numbers for those. That is the part to watch, at least when you're considering us.

That is very helpful. Then I think you touched on the fact that obviously you're looking for a pretty big slowdown, at least deceleration, versus the first half numbers when you look at ATV sales during the second half. You talked about them and the biggest driver sounds like it is comping against the RZR and just overall being conservative.

Does that factor in -- what sort of core ATV numbers does that factor in? Are you expecting that to stay about where it was in the second quarter or are you expecting that to get worse? What are you expecting from that front?

I would say core U.S. ATVs to be about where they have been in the first half, not meaningfully different. But we think the economy is going to continue to be difficult. The comps, I think as Bennett mentioned in his prepared remarks, are a little easier, particularly in the fourth quarter, so a number similar to what we've seen. So it is going to remain fairly soft.

Then from a seasonality standpoint, obviously there has been a pretty seismic shift towards the side-by-sides. Does that make -- are more of those side-by-sides -- obviously there's a big hunting season coming up in the fall. Does the shift help sales during the third quarter or hurt sales? Have has the seasonality of your business changed based on the shift to the side-by-sides?

I don't think there's a big change with regard to seasonality, but I think what the shift of side-by-sides out of core ATVs does, I think it helps us long-term. It has nothing to do with seasonality, but we have talked about this I think at some of the analyst presentations and so forth.

If you look at each of the other segments that we compete in, snowmobiles, motorcycles, core ATVs, there is some pretty darn tough competition. And there is a leader, right? So like in cruiser motorcycles, Harley Davidson is obviously a leader with a very, very strong franchise and a very strong brand. In core ATVs, Honda has been the leader of core ATVs in terms of market share forever. And Honda is an extremely run well-run company with a very strong brand and very difficult to take market share. But in side-by-sides really no one has owned that category. There is no one that has really said, okay, this is going to be our game.

I think seven years ago when we looked at this category we thought we could do that. So we have made a lot of investments, not just the RZR in the last 18 months, but really over the last decade to go into this business. We started out number seven of seven. Each year we have gained market share. As Bennett said, we are now number one and distancing ourselves.

Our goal here is pretty simple and that is to lead this category and establish a clear long-term number one position. If we can do that and do that successfully, as this market continues to shift out of core ATVs into side-by-sides, that is a tremendous advantage for Polaris. We go from being in a tough number two, number three position in core ATVs to a strong number one. And I think that we have made investments over the last seven years that will take competitors quite a while to catch up on.

I don't think the seasonality is a big thing. I think it is the share positions and the relative strength that we have in that category that is significant.

Very helpful. And then just one last question on the finance side. What is your level of confidence that GE is going continue to be an ongoing financing partner, given how they have been shedding some of their finance operations? And if they were to drop out of power sports do you feel comfortable that you would be able to pick up the slack following that departure?

This is Mike. Now there is obviously a lot of uncertainty in the retail credit market in credit overall. Suddenly we have experienced volatility in our business, particularly with HSBC this year. Our relationship with GE is very strong. We have -- we are not aware of any issues long-term with their desire to finance retail customers in the power sports areas that we participate in. We have had conversation with them on that. Obviously things change and the credit world is very turbulent and there's lots of changes. So at this point in time we think it is very solid, and we are actually financing much more of our product with GE on a retail perspective than we did last year.

If they were to choose to exit, it would obviously have a big impact on the whole industry, and it would have a big impact on us. We're looking longer-term at alternatives to the more traditional solutions for retail credit. But at this point in time we are continuing to finance our customers' products with the combination of GE and HSBC. And think that, at least for the midterm here, that is the most appropriate solution.

Ed Aaron, RBC Capital Markets.

Nice quarter guys. I have one question then a couple of follow-ups. On the RZR international opportunity, I'm just trying to better understand the differences, if there are any, in consumer preferences in Europe versus the U.S. to try to figure out how big that opportunity might be in comparison.

This is Bennett. Clearly the RZR from a standpoint of international market response has opened up the side-by-sides business for us. And I think there's a couple of reasons for that. The international marketplace, at least across the globe, tends to the a little bit more recreational performance oriented. And the RZR plays to that kind of customer very, very nicely.

The other thing that you have in most international markets is the size and the footprint frankly of our RANGER makes it in lots of cases too big for many international markets. It is very expensive to ship. The RZR provides a number of benefits on both that side as well.

It will not be as large as the U.S. opportunity, but again, we are seeing literally hypergrowth in our side-by-sides business, and that has driven internationally. And that is being driven off of the RZR phenomenon. It is a little too early to say exactly where that will end up, but we're very bullish on the -- we're very bullish on the long-term growth opportunity that RZR will provide not just for the upcoming quarters but in the 2009 and beyond.

Thanks. That's helpful. Then two more questions, if I could. On the price increases planned for the model year '09 changeover, I understand your competitors have raised price, but just trying to understand what gives you the confidence that throughout the industry that these price increases are going to be tolerated? And then secondly, Mike, can you comment on why the dealer holdback was up 35% on a year-over-year basis?

In terms of the price increases, I think as we have looked at the competitors that have announced '09 stuff so far, they have taken some price increases. And wel will take some appropriate balance, modest -- use the word you want -- price increases, not across the board, but in those segments where we really have some innovation. So it is quite a bit easier to recover price when you have something that is obviously in higher demand. That is more or less the model that we are going to take. I feel pretty confident in our ability to do that.

I think the other thing that I would mention, at least on the innovations that we have seen so far from the competition, I think it is fair to say that there is nothing too compelling so far. They are kind of muted. I think that most of the people in our segment, just consumer durables generally, are retracting right now. If you look at the motorhome industry, you look at the boat industry, you look at marine engines, you look at power sports, up most companies are really cutting back and they are laying people off and closing plants and reducing R&D and that kind of thing.

We are obviously being very careful about our spending and that kind of thing, but we're leaning forward. We are on the gas hard. Our new product introduction in '09 is as strong as any we have ever done. Mike talked about the advertising levels and so forth. So we're watching what is going on out there, but we think there is an opportunity to grow in this market and we're going to go out and get it. That is a little bit different approach I think than most people are taking in this market.

Tom, do you think that the product margins within your better performing segments, like side-by-sides and PG&A, can improve from here even with cost headwinds? I understand core ATV margins are probably going to be lower with the tough environment and higher commodity, but just curious about the product margins in the better performing categories?

Pretty hard to say in the short-term. Mike gave some guidance there that we might be up 80 instead of up 100 for the year. The key thing are these commodity costs. If you can tell me what the price of oil is going to be, I can give you a much better answer to that question. We certainly didn't have forecasted $145 a barrel or wherever the heck it is this morning. So that is the part that makes it pretty tough.

I think if you look at the productivity effort I feel really good about that. The innovation in being able to deliver value for customers. And the mix shift, if you look at what is growing, it is high margin, high profit stuff, side-by-sides generally, RANGERs, Crews, RZRs, PG&A business. Those are all very positive trends. The one real wild-card is what the heck is going to happen to the input costs. And we managing those as best we can, but that is kind of day by day, week by week deal. We work with our supplies and tied to offset the cost. And the single business biggest one of course is the diesel fuel. Just the cost of transporting the product around has just skyrocketed.

There's not a lot we can do about that. We've got to just keep working on our operational excellence stuff, and it is going great. So we will see.

You asked a question on dealer holdback. I will answer it. At the end of the second quarter our holdback reserve on the balance sheet and accruals is about $72 million. That is an relatively normal level. A year ago it was significantly lower than that. What we normally do is pay holdback to the dealers twice a year in the first and third quarters. So it is a high level at the end of June. A year ago we made a onetime early quarterly payment during the second quarter to the dealers that lowered accrual balance a year ago. But the balance today is more normalized.

Tim Conder, Wachovia.

Gentlemen, again, congratulations on the great execution in a very challenging climate. A couple of things here. You have given some commentary in your prepared remarks regarding the side-by-sides. Could you repeat those numbers? I thought I heard a 50% number. Was that Polaris, which that is what I thought I heard? And then did you give an industry number?

We did not give an industry number. This is Bennett. What we said was our retail and our wholesale shipments are up well over 50% year-to-date, from a retail sales standpoint and a shipment standpoint, and that is across the world.

We don't have -- the industry data of course as you know, there's no industry data collected, but we would guess it is nothing like up 50%.

As a guesstimate, somewhere half of that, with a 2 in front of it?

Less than that I think. I don't know. I will guess 0 to 10%.

We did get 2007 data when we got the market share data. It was very close to what we said. We were guiding you I think last year that we've got the side-by-sides market in 2007 was going to be up around 15%. The data actually came in around 11%. We think that from what we know the market is still growing, but it is slower than where it was last year. I think what Tom just gave you I think is a pretty good guidance range there. We are ripping market share from our competitors is the takeaway you should take from that.

Ripping, stealing, slicing, whatever (multiple speakers).

Maybe I should be careful with that.

I think we are increasing our market share (multiple speakers).

It is a good political phrase. A couple of things, gentlemen, obviously again you are executing well, but given we have just seen this morning a bankruptcy of a Spanish housing manufacturer, and things that are going on as things are spreading a little bit to Europe, and Europe is a key part to your driver here. How can you balance that versus it appears your penetration rate, especially in the side-by-side is very low. Can you give us a little more color there, and maybe rank your top five countries as far as sales importance year-to-date?

I can try to do that. Again, one thing you may be taking our remarks a little too far is the European markets are relatively stronger. We're not doing back handsprings from a standpoint that they are growing rapidly. The ATV market in Europe is down mid single digits. So they are relatively better markets.

We're watching the European markets closely because we know there often can be a future correlation with a U.S. slowdown. Again, what is allowing us to win is we're are innovating, and we have very strong global teams. So we're winning market share battles. We're starting to develop European or internationally-based products for the first time, which need the specific needs of those customers a little bit more effectively than perhaps the U.S.-based products we have had in the past. That is what is giving us some confidence along with phenomenal RZR grows.

Let me give it a shot here, a little bit longer term. I don't know what the news was out of Spain this morning, but let's look over the last 10 years and kind of project forward. Ten years ago our sales outside of North America would have been about 5%. I think in the second quarter our international sales as a percentage of the total was about 20%. So four times higher, right? Significantly higher.

The reason is we have built, as Bennett talked about, a team in the local markets. We have been in seven international subsidiaries. We're adding Spain, as Bennett talked about. And whether the economy is good or bad this week or next week really doesn't affect our decision too much. It is over the long run do we see a potential there, and we do in Spain.

We're going to continue to invest in building the brand and building distribution. We're adding additional products in the international market. RZR is this week's sensation, but we are going to be adding Victory in Australia, as Bennett talked about, eventually in other markets as well. And then we're opening new markets. An example of a very rapidly growing market right now that we're really just getting going in is Russia at phenomenal growth rates.

Just all the room and the world to ride operational vehicles. We have that upper income customer that wants to buy expensive American toys, and we're just building a very nice distribution model there. If you saw the Victory stores in Russia you would just be amazed, probably the nicest in the world.

So international sales are up 40% in the quarter. There's always going to be markets or individual countries that might be a little bit stronger, a little weaker. But I think over the next 10 years the idea of growing more global, more onload, more outside powers sports is a winning idea. And we want to get that international percentage over the next several years up to the number like 25% of our total.

Gentlemen, thank you for that. One clarification there. Bennett, the mid single digit down in Europe, is that everything ATVs or is that similar to the U.S. MIC?

Generally speaking, the way the international markets have reported, they reported -- it includes Asian competitors, so there is quite a big difference there. And in many of the markets it can include side-by-sides as well.

There's not a uniform standard of reporting. It would take us 15 minutes to explain it.

Not a problem. Tom, what type of timetable -- can you give us a little update as to naming a permanent replacer to yourself? And then just a couple of housekeeping items. The end of quarter, 6/30 share count, and then the Forex benefit to sales, EBIT, EPS in the quarter?

Maybe I will try the first one, and I will leave the hard question for Mike. I think what we had said 90 days ago, and when we announced this thing, is that we expect that 2009 to be -- 2008, I'm sorry, 2008 to be my last year with Polaris, and we were going through a comprehensive search. That search is going well. We're pleased with the progress. I think in the first quarter call we also talked about you wouldn't hear a whole bunch of communication. I think we used the example of a little bit like electing a new Pope; when you see the smoke, you will know something happened. So there's no smoke to report this morning. I think everything is on track, and we will let you know when we are ready.

One follow-on on that. I know they are worlds apart, the Vatican and Vegas, different ends of the spectrum. Could Vegas be a little bit of how a white smoke?

I don't know. You'll have to go there to see I think. Nothing to announce this morning.

On the balance sheet, you'll see in the equity section on the common stock we show that there is 32,666,000 shares outstanding at the end of June. So I think that is the answer to your first question.

The next one was the impact on the foreign exchange?

Yes, in the quarter.

On sales. So the Forex impact on sales, of our 21% increase in sales for the quarter, about 3% of that was related to movements in currencies.

Anything at the EBIT line?

We don't give specifics there, but there was a net benefit of currencies on the gross margin line, and a modest improvement on bottom line from currencies in the second quarter.

Craig Kennison, Robert W. Baird.

Congratulations again everyone. And most of my questions have been addressed. But in the last call you mentioned the pilot program to make -- have dealers make smaller, more frequent orders. And you seem to hint at that as an announcement in Vegas. Could you just talk in general about the structure of that relationship or the change in that relationship?

While we would endorse it wholeheartedly, what are you really giving up? Are you giving up some visibility in terms of your own manufacturing footprint and what you're going to build? Thank you.

This is Bennett. We're probably not going to get into a tremendous amount of specifics for competitive reasons, and the fact that we're really just expanding the test. We will be talking about that a little bit more in Vegas for those of you that come.

As I alluded in my prepared remarks, we do think that this is a significant improvement to the powers sports business model. As you deal with more uncertain, volatile, a smaller global marketplace you need to be able to respond much more quickly and efficiently to consumers and marketplace demands, both from our side and from our dealers' side.

And the advantages to Polaris in the dealer network is you're obviously quicker to market, you're nimble, you drive out a tremendous amount of waste and forecast error. And I think you can focus on making sure you get the right product to the right customer at the right time.

The trade-offs that you give up as a company, and that is why you see us working so hard behind the scenes, is you have to really fundamentally change and transform our behind the scenes business model. You have to get your entire supply chain to be able to react faster. You have to reduce your product development leadtimes. You have to change your manufacturing footprint so you can build in smaller lots much more quickly and effectively. And as we deal with the external community, if you can't manage market share and demand effectively, you potentially run that risk of a little bit of predictability at least of your wholesale orders for a longer period of time.

That is why we're being very, I don't want to say deliberate, but controlled on how we go about and learn as we go with this process. We will talk a little bit more about it in Vegas.

That is exactly what I was looking for. Thank you again, and congratulations.

Bob Evans, Craig-Hallum.

Good morning and I would like to reiterate, great execution this quarter. Can you comment a little bit more in terms of -- similar to your comments before, Tom, looking two, three years out, your RZR -- or your side-by-side segment, where do you see the percent of gross margin dollars being say now say three years out? And then the same with U.S. core ATVs? Obviously that mix shift has changed a lot over the last three years, where do you see it going in the next three years?

If you look, we have really -- three years ago if you looked at -- I think this is even on our website -- if you look at 2004 versus 2007, for example, and you looked at the percentage of gross margin in our ATV business that came from core ATVs, three years ago that number was approaching 50%. 2007, round numbers it is 20%. So just a tremendous shift away from the dependence on so-called core ATVs.

I guess if there's one thing about this Company that is probably the single most misunderstood thing is that we are all going to die here if the ATV industry is soft. It reminds me of ten years ago we are all going to die when the snowmobile industry was soft because we were a snowmobile only company.

We have diversified significantly away from U.S. core ATVs. That trend, I suspect if the current trends continues, with side-by-sides really just with runaway growth and the ATV market contracting, that percentage is just going to get smaller and smaller and smaller. We have seen that. We saw it in snowmobiles. It used to be 100% of our sales, today it is 10% of our sales.

Polaris is a very, very adaptable Company. And I think our speed to move into emerging segments and sometimes predict where those segments are going to go correctly really differentiates ourselves from our competition. There are people going in the side-by-side business now. Honda, for example, is going in the side-by-side business now. You know we did it ten years ago. So trying to figure out what has been to grow out in the future, and putting yourself in a position to win before all the growth happens is kind of a key, key thing.

As you look forward and you think the next two, three years, we have laid it out on a piece of paper. I don't know how we can be more clear about it, that where we're going to go. We're going to try to grow in the growth initiatives. That means Victory. We want a motorcycle business that is four or five times the size of our motorcycle business ten years from now.

We want to dominate the side-by-side market. Our international business, as we talked about, we think can be a significantly bigger part of what we do. We think military is a great growth opportunity. We've got some very exciting things happening there right now. And we have this new adjacent market.

We have laid out our cards on the table for investors and everybody else to see where we think we had go. And we feel real good about the choices that -- the investment choices that we have made over the last few years, particularly given this tough market.

Thanks. Can you also comment -- I'm not sure if you laid this out for international growth -- but can you give us what the ATV growth was internationally?

We don't disclose that by product, but our ATV business did grow internationally in the second quarter. And we feel good about it.

Total ATVs would be -- I think we said international was up 40%. Total ATVs, including core ATVs and side-by-sides, would be -- that is the vast majority of that 40% number. So it is not going to be dramatically different from that. It is relatively small snowmobile quarter. Victory is a pretty small part of the total, so that is directionally pretty close, I think.

That is what I was wondering. Probably a little bit better than the average for that number. And Richard, the heavyweight cruiser number, I apologize, but you cut out there. What was it down in Q2?

It was about flat in Q2 for the industry.

Flat for the industry. Okay. Final question, where is -- in terms of the European opportunity for RZR right now where -- if you were going to pick an inning, what inning are you in terms of getting that product out there?

First, second.

Really? Okay. All right, thank you. Congrats again.

We have got time for one more question.

Mark Mulholland, Matthew 25.

I really want to thank you for the great job you guys are doing. I know everyone keeps saying it, but in this environment I think it is outstanding.

Mike, you had said to one of the questions that you don't give out EBITDA estimates, is that correct?

The question was the currency impact on EBITDA that I didn't give any specifics to. Our EBITDA for the quarter in my prepared remarks was -- or year-to-date -- excuse me, year-to-date is about $100 million.

Does that put you on pace for about $275 million for a full year?

I haven't given specific guidance to that. EBITDA will grow in '08 over '07.

Well the second half is typically stronger, correct?

Yes.

One thing guys, if I have my numbers right, I have your total cap now, market value stock, and bonds like under 5.5 times EBITDA. It just amazes me for how good a job you guys do. How seriously -- has any equity partnerships tried to buy you or made offers to guys? Or do you guys seriously consider ever going private?

There's nothing going on we're going to announce this morning or anything like that. From time to time over the years we have looked at that idea. As you know, being a long-term shareholder, the market's interest in companies like Polaris does tend seem to fluctuate. We kind of fall out of favor and then fall in favor. You know, the overall sector right now, I don't know that I have seen it in my tenure, the overall sector being so far out of favor. You look at some pretty high-quality companies that are doing relatively well in a tough consumer environment, and just the stocks have just gotten beaten up.

I think from a practical point of view, what are we going to do in the short-term is continue to buy back the stock very aggressively. And if the situation were to persist for a meaningful period of time, would we look at other alternatives? Sure. But I don't see anything happening this week, this month, kind of a thing that we would overreact to. But if the situation didn't get changed, and we didn't think that we could move the ball down the field with the current structure, sure, it would be something that we would potentially examine.

Thanks for the way you guys do everything, and thanks for staying public, at least for now.

That is all the time we have this morning. We want to thank everyone for participating in today's call. We look forward to seeing many of you next week in Las Vegas. Thanks again for listening. Goodbye.

This does conclude today's conference call. You may now disconnect.