Polaris Inc (PII) 2008 Q3 法說會逐字稿

Good morning. My name is Yazi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Edwards, you may begin your conference.

Thank you. Good morning, and thank you for joining us for our third quarter 2008 earnings conference call. The speakers today are Scott Wine, our new 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 Litigation Reform Act of 1995.

Actual results could differ from those projected in any forward-looking statements, which by their nature involve risk and uncertainties. There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning those factors can be found in our 2007 Annual Report and 2007 Form 10-K, which are on file with the SEC.

Before Scott Wine gives his remarks, Tom Tiller, our former CEO, will lead off with a few comments. Tom?

Thanks, Richard. Good morning everyone. Before we get to the meat of the program, the actual earnings announcement, I would like to begin by doing two quick things.

First, I wanted to let you you all know that the management transition is going well. Scott began work on September 2nd, and is rapidly coming up to speed. He, Bennett, and the rest of the management team are running the business well, amid a very turbulent environment, and I am assisting whenever needed. Secondly, I wanted to say thanks to all of the Polaris shareholders. This will be my final earnings announcement, and I wanted to say how much I have enjoyed your support over the last 10 years.

With that, I would like turn it over to Scott Wine, our new CEO, to comment on a terrific third quarter. Scott?

Thank you, Tom. Good morning everyone. Tom, first I would like to thank you for the introduction. But more importantly, thank you for handing over such a strong Polaris business, which is run by such a dedicated and experienced team. There is no better testament to the state of the business you have handed over than the record sales and earnings per share that Polaris delivered in the third quarter.

Earnings for the quarter were $1.13 per share, up 6% from $1.07 per share in the prior year period. Sales were a record $580 million in the quarter, up a solid 7% from the third quarter of 2007.

Despite a difficult and declining external environment, Polaris continues to outperform. I have gained an appreciation for the strength of the team, and their passion to win in my first six weeks on the job. Our success is clearly a result of the strong execution of the strategy that Bennett and the team have lead. To win in the core, drive operational excellence, and target key growth opportunities.

I met with several dealers recently, and they confirmed that our strategy is working. Like us, they are concerned about the macroeconomic environment, and specifically the credit markets, and Mike Malone and I will speak to that today. But they also remain positive on our improved order management system, and our aggressive new product introductions.

We are leveraging our operational excellence initiatives to respond to the changes in the market faster and more efficiently than our competitors, and are being rewarded for it by our customers. Dealers and many other customers participated in our Annual Dealer Show in Vegas in July. It was certainly one of the highlights of the quarter for Polaris. We launched more than 14 new products, including the all new Sportsman XP lineup, and more than five new upgraded RANGER models.

The Limited Edition 10th Anniversary Victory Vision was also launched at the Show, selling out in record time, and setting the stage for dealer orders, that exceeded our expectations in all product categories. Both our international business and our parts garments and accessories business were up nicely in the third quarter, more than 31% and 20% respectively. Side-by-side sales continued to be very strong for Polaris, and we are proud to maintain our market share lead in this increasingly competitive segment.

The success of the RANGER business is in contrast to the core ATV market, which posted weaker than projected retail sales in the quarter, down nearly 28%. In response we quickly reduced ATV production, which enabled us to drive dealer inventory down from the prior year period, despite the lower retail demand.

When I started with Polaris in early September, it seemed that the declining ATV market would be the primary concern for the remainder of 2008. While we are still working to manage that appropriately, the credit crisis is clearly a key focus for us now. As most of you know, we have a very strong and experienced CFO in Mike Malone, and it is comforting to know that he is guiding our corporate finances through this period.

Polaris has always operated with a conservative approach, and our balance sheet is strong. We are also comfortable with our retail credit positions, both revolving and installment, although we are maintaining a close watch on rates and approvals. In the past few weeks, we have worked closely with GE and HSBC, and look forward to maintaining our relationships with them through the contract terms in 2011 and 2010 respectively.

They have both confirmed their commitment to Polaris, and we will continue to work with them to ensure our dealers and customers have access to credit. As Mike will detail later, our data from the third quarter shows penetration and approvals running better than the third quarter of 2007. Our input suggests that biggest impact on dealers right now, is that they are getting approvals, just not at the lower rates that customers expect.

We are closely monitoring the direct and indirect impacts of this unprecedented financial crisis, and are prepared to act as necessary, to ensure that Polaris continues to perform well, ahead of our peers. We will use our strong business positions and productivity gains, to continue to invest in product development and innovation, which will strengthen our competitive position. These are uncertain economic times, and we will be appropriately cautious, but we will continue to play offense in places where it makes sense, while also strengthening our defense.

In this dynamic market it is important to balance the news with the facts. Despite the disappointing economic news that is prevalent, the facts are that Polaris continues to outperform. As a result, we are again raising and narrowing our earnings guidance for the full year to $3.47 to $3.50 per share. This represents a $0.07 increase in the lower end of our range, and an increase of $0.02 in the upper end.

With that, I will hand it over to Bennett for a more detailed review of our operating performance in the quarter. Before I turn it over though, I would like to address a question that I have been asked by many Polaris employees, and also discussed with several shareholders, and that is how will Bennett and I operate together. I can assure everyone that this relationship is good for both of us, and good for Polaris.

I can say this with confidence because in the first six weeks, we have spent significant time working through some fairly difficult issues. It has been both natural and easy. Our styles are similar, and our skill sets are largely complementary. Most importantly, we are aligned on what needs to be done, and will partner together to lead Polaris efficiently and effectively into the future.

Bennett. It is all yours.

Thanks, Scott. I wanted to formally thank Tom from the entire Polaris team for all he has done for Polaris over the past 10 years. There is no question, we are a much stronger company and team thanks to his vision and his leadership, and I would concur with what Scott said as he takes the helm. Scott and I and the team have already developed some very, very nice traction, and we are looking forward to working with Scott to take Polaris to the next level.

So let me begin with operational excellence. We continue to make substantial progress in improving our quality, cost, and speed. This has become essential as the external world has become more challenging and unpredictable. We continue to work relentlessly on our speed to market. On the last call, we discussed supply chain lead time reductions of 25%.

We have further reduced supply chain lead times in our ATV and side by businesses by another 25% this past quarter, and we have now reduced our lead times by half in just under a year. That is fantastic progress. Our product development process has been further leaned out, to be 25% quicker than where it was just a year ago.

At our recent Las Vegas Dealer meeting, we were again able to bring key new products to market, a full year earlier than what was just possible 18 months ago. And we have successfully rolled out a large regional test of our Max Velocity program, our new business model with our dealer network, which enables the retail and order management process to be done 2 times a month, versus 2 times a year in the past.

We will evaluate and learn from this regional test quickly over the upcoming months, with the goal of having the right product at the right time for our customers, with less system-wide inventory. As we gain experience and become smarter, we would expect to expand this initiative more broadly across our dealer network.

Factory inventory was down 4% from the previous quarter, but up 4% from September 2007 on sales growth year-to-date of 15%. We remain on track to reduce factory inventory by year-end. Dealer inventories remain down year-over-year, even with the weak third quarter ATV industry. With that said, inventory remains a cost and speed opportunity, particularly in ATVs and Victory. We can and we will run this Company effectively with less system-wide inventory.

The cost environment remains challenging. Our gross margin percentages were off of our plan, and flat with the prior year period, due primarily to continued commodity cost pressure. The Polaris team and our supply chain have done an admirable job of driving out waste and offsetting much of the commodity cost increases. Commodity prices have recently begun to moderate, but they still remain elevated, especially when compared to a year ago levels, and we still expect some pressure on product costs in the upcoming months.

Operational excellence and our focus on quality cost and speed, is transforming Polaris and improving our competitive position. Just as we said it would over a year ago. Competing and coming to market the old way is no longer sufficient in this tougher, faster, more unpredictable world. Operational excellence is touching every aspect of Polaris. Our supply chain, our product development process, our manufacturing operations, and even the dealer network, and it is driving much of our competitive successes.

But there is much more progress to be made, and the outside world and our customers are demanding it. Speed and waste reduction provides Polaris the ability to adapt and respond to changing market and customer conditions faster and more effectively than our competitors, so expect us to stay on the gas in this critical area, to drive our current and future success at Polaris.

Let's move to All-Terrain Vehicles. Our ATV business had another solid quarter, with sales up 5% despite a weak domestic core ATV industry, driven by continued demand for our industry-leading side-by-side products. The core ATV industry has weakened further over the past 90 days. Third quarter sales were down 28% hurt by the macroeconomic uncertainty. 2008 year-to-date North American industry sales are now down 22% versus 2007. We expect the ATV environment to remain weak for the foreseeable future, and have proactively further reduced our build and ship expectations in the third quarter, for the remainder of 2008, and into 2009.

Polaris retail results are similar to the industry, and year-to-date our share is essentially flat. The Canadian core ATV market is much stronger than the US, down low-single digits with Polaris winning share. Dealer inventories remain down year-over-year in ATVs as we have continued to aggressively assist our dealers with reduced shipments. So overall we believe Polaris and our dealers are relatively well-positioned, as we continue to work through this challenging core ATV environment. It is important to remember that US core ATVs represent only about 20% of our total ATV business gross margin.

The Dealer Meeting in Las Vegas exceeded both our and our dealer network's expectations. Despite dealer concern about the power sports industry in general and the overall economy, they came into the meeting in a good frame of mind, as a result of the consistent efforts and improvements we have made to the order process and their inventory levels.

We unveiled compelling model year '09 product news. After 13 years of industry-recognized leadership with the original Sportsman, we introduced two all new Sportsman XPs, representing extreme performance in both 550 and 850 engine displacements. The new 850 Twin is the most powerful production ATV in the world, and both models come with available power steering options. The Sportsman has defined the ATV since it's introduction in 1995, and the all new Sportsman XPs are without a doubt the most advanced and capable ATVs ever built.

We expect to grow market share in the segments they compete in the upcoming quarters. Overall, ATV orders received from the dealers for the six month order cycle, slightly exceeded our grounded expectations. However, we will be closely monitoring retail to make sure that in this challenging environment, we continue to make progress on balanced core ATV supply and demand.

Our Military business continues to deliver very nice year-over-year growth, in both new customer accounts and orders. Year-to-date, Military sales are up 83%, and we have received new orders from 200 new customers in 2008 alone. Our focus remains on business development, through our unique products and the compelling solutions they provide our growing military customer base. It is still early, but this investment is clearly delivering.

Polaris side-by-side business remains very strong, with Q3 retail sales and shipments both up well over 20%, against stout comparables with the RZR volume anniversary. RZR and base RANGER retail sales both continue to grow nicely in Q3, and we believe we continue to gain market share. Dealer inventories continue to be balanced, and I would characterize our dealer's side-by-side businesses as very healthy.

The Dealer meeting was a home run for our side-by-side business, and dealer orders exceeded our expectations. We unveiled an all new redesigned RANGER platform, with improved handling and suspension, a new rider ergonomics package, and a dramatic new design. The flagship for our platform is our hardest work, smoothest riding RANGER ever, the RANGER HD which stands for Heavy Duty, that have power steering, self-load leveling shocks, and new hydraulic heavy duty work accessories.

We also did not stand still with our industry-leading recreation platform, the RZR. We introduced a complementary RZR S that has higher horsepower performance, a much wider 60-inch stance, and much longer suspension traveling ground clearance, to better meet the needs for our riders in the dunes and the wide open spaces. Initial dealer and customer response to the new RANGERs and RZRs has simply been fantastic.

Earlier I discussed the competitive weapon that speed is becoming for Polaris, and nowhere is this more evident than in our side-by-side business, where our new RZR S and RANGER HD were developed and brought to market about a year earlier, to meet the emerging needs of our customers. While our competitors are trying to develop a response to the RZR and our traditional RANGER, we have raised the bar and our lead, expect more of this from Polaris in the future.

Snowmobiles. As we head into the fall, the snowmobile season is off to a good start. Third quarter wholesale sales were up about 3%, reflecting a slightly improved mix of models sold compared to the third quarter of 2007. Season to date North American industry sales are up mid-single digits, with Polaris retail sales up more. So we are gaining some share early.

Consumer interest and attendance at the fall shows has been strong. Early season industry retail sales are good but remember, they represent a small percentage of the overall season sales. The next 120 days, as they do every year, will be the critical retail months for the industry and Polaris. Dealer inventory of the industry and Polaris snowmobiles is lower than it was a year ago at this time, and our hotly demanded 800 Cleanfire IQs and RMKs are now shipping.

We remain cautiously optimistic about the upcoming snowmobile season, but as it does every year, it will come down to in-season weather and competition. It is simply too early to call the 2009 snowmobile outlook. We will know more at the end of the fourth quarter.

Victory motorcycles. The US heavyweight Cruiser and Touring motorcycle market segments that Victory compete in remain slow. Year-to-date, 2008, the segments are down high-single digits. Victory retail sales are actually up modestly, continuing to outperform the market, but remain well below our internal growth targets.

Third quarter wholesale shipments to dealers were down slightly, consistent with our commitment to manage supply cautiously, in light of the challenging external economic environment. The Las Vegas Dealer Meeting was also a success for Victory. Dealer orders for model year '09 met our more grounded order expectations, and we expanded our 106-cubic inch Freedom V-Twin engine,into our premium muscle cruisers, while introducing a few key Limited Edition models, highlighted by our 10th Anniversary Victory Vision.

We are clearly picking up momentum with Victory in the international marketplace. We introduced Victory in Australia during the third quarter, and we announced at the Intermot International Motorcycle Show in Cologne, Germany earlier this month, our intention to enter the German and other European Union markets during 2009, with our EU compliant model year '10 Victories.

Victory remains a key strategic growth priority for Polaris in becoming more diversified and more on road in the future. In the short-term, through model year '09, expect Victory wholesale sales growth to be muted. To ensure that we manage supply and demand aggressively to protect our dealer network, and the premium brand image we have worked so hard to attain with our customers, in this tougher, more uncertain market. Longer term we expect to return to strong double-digit growth.

Parts, garments, and accessories. The PG&A division had another very strong quarter. In fact, the third quarter was a record sales quarter, with sales up 20%. Perhaps the most encouraging aspect of our success is that sales growth remains strong across our entire PG&A product portfolio, with growth contributions from every product line and every geographic region of the world. We also had perhaps our best PG&A new product launch in our history at the Dealer meeting, with over 260 new accessory items introduced, highlighted by several new side-by-side cab systems, and a bunch of new winches.

Our investment and effort in PG&A the past several years is paying off. As the market has slowed, Polaris dealers are more focused and capable of delivering on the entire customer experience. Increased PG&A sales are a result. We will wrap up with international. Our international sales growth remained very strong in the third quarter, with sales up 31% for the quarter, and are 33% year-to-date. European core ATV industry sales remained down, but remain relatively better than the US market.

The key to continued Polaris success remains three-fold. First, it's market share expansion in a more fragmented competitive marketplace. Year-to-date we have grown our core ATV market share to the #1 position in Europe. Secondly, the expansion of our side-by-side business, driven largely by the RZR. RZR demand remains strong internationally, and we continue to make progress on balancing our international supply with demand. And third, geographic expansion in growth markets outside of Europe, such as Russia, the United Arab Emirates, and central Europe to name a couple.

We introduced some exciting new model year '09 products, specifically for our international customers. A Sportsman 800 6x6 with IRS, a Sportsman 500 designed specifically with required tractor-like features for the northern European market, and an on-road RZR S Quadricycle. We also officially opened our newest subsidiary in Spain, the fourth largest European market, and we are excited about this new market opportunity.

Overall dealer and distributor inventories internationally are balanced, and we are well-positioned competitively in each of our businesses. We remain encouraged about our international opportunities, even takes global economy has become more uncertain.

With that summary, I will hand it over to Mike.

Thanks, Bennett, and good morning to everyone. As Scott and Bennett have stated, we are pleased with the record third quarter operating results, that we have generated in a very challenging external environment.

As we stated in the press release, although we are not immune to the deteriorating macroeconomic environment, given the orders that we have in hand from our dealers for the fourth quarter, and the continued strength in our side-by-side, international, and PG&A businesses, we are increasing and narrowing 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 10 to 11% range over 2007. For full year 2008, we now expect diluted earnings per share from Continuing Operations to be in the range of between $3.47 and $3.50, which is an increase of 12 to 13% compared to the full year last year.

Updated expectations for sales growth for the full year 2008 by product line are as follows. For ATVs, we now expect sales to grow in the 10 to 11% range for the full year 2008. The core ATV shipment to dealers in North America are expected to continue to be significantly lower than last year during the fourth quarter, due to the continued weakness of the overall North American core ATV industry that Bennett talked about. As it has throughout 2008, the fourth quarter decline in the core, will be more than offset by increased shipments of core ATVs to the international and military markets, and continued double-digit increases in RANGER side-by-side vehicles.

For snowmobiles, our guidance remains unchanged, as we have the orders in hand from our dealers for model year 2009 snowmobiles, and continue shipping to those orders. Snowmobile sales for the full year 2008 are expected to increase in the mid-teens percent range compared to last year. Given a continued weak heavyweight Cruisers and Touring motorcycle segments in the US,, sales for Victory motorcycles for the full year 2008 are now expected to decline in the mid-teens percent range, which is slightly lower than our previously issued guidance. We will protect our premium brand that we have built over the past 10 years, by closely monitoring dealer inventories, and making adjustments to production and shipments accordingly.

And we continue to expect our PG&A business to grow at a faster percentage rate pace than the overall company sales for the full 2008 year. For the fourth quarter 2008, total company sales growth is expected to be in the range of flat to up 2% compared to the fourth quarter last year, driven primarily by increased side-by-side vehicles, snowmobiles, and international sales, offset by lower core ATVs and motorcycle sales. The anticipated fourth quarter percentage sales increase is less than we have experienced in the first three quarters of this year, as we have now anniversaried the initial shipments of the RZRs, which makes the comparables more difficult. And we continue to reduce shipments of core ATVs, as the overall ATV market remains weak.

Earnings from Continuing Operations for the fourth quarter are expected to be in the range of $1.07 to $1.10 per diluted share, compared to earnings per share of $1.07 in the fourth quarter last year. If we are able to achieve our guidance for the fourth quarter, which we feel very confident in achieving, the full year 2008 will be a record year in both sales and earnings per share for the Company in a very tough external world.

The gross profit margin percentage for the full year 2008 is expected to improve up to 80 basis points for the full year 2008, unchanged from our prior guidance. Product mix change 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 higher than average growth margin percentages, as well as the impact of selected price increases on many model year '09 products.

These gross margin improvements are offset somewhat by increased commodity costs that we have been experiencing in each of our businesses, particularly related to input costs like steel, aluminum, and plastic resins, as well as diesel fuel, transportation costs. Although these commodity costs have moderated somewhat most recently, it takes a while for the benefit to be realized in our operating results, given the contracts and price lock arrangements we currently have in place with many of our key suppliers. In addition, foreign currency impacts to sales and gross margins, which have been favorable through the first nine months of this year, are now expected to be slightly unfavorable in the fourth quarter, compared to the fourth quarter last year.

We continue to expect operating expenses to increase in dollar terms, and to 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 introduction of our new products. Additionally, general and administrative expenses are expected to be higher for the full year 2008, due to increases in performance based incentive compensation expenses, as the Company's performance has improved in 2008 compared to last year.

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 last year. As we have discussed in previous calls, this decline is primarily driven by the impact of the changes made by HSBC, of discontinuing the financing of non-Polaris products in Polaris dealerships a year ago, and eliminating the volume based fee income payment to Polaris earlier this year. However, the availability of revolving and installment retail credit to our consumers, remains at acceptable levels, as measured by approval and penetration rates.

During the third quarter 2008, the approval rates for customers in the United States for GE and HSBC combined was above the 50% approval rate level, improved over the third quarter of 2007. This improved overall approval rate is a result of a dramatically higher mix of secured fixed rate installment loans through GE during 2008, which usually generates higher approval rates than the unsecured variable rate revolving credit card loans.

During the third quarter of 2008, the penetration rate which is a percentage of our retail customers in the US that are financing their unit purchases through either HSBC or GE, that penetration rate was at 41%, better than the 37% penetration rate achieved in the third quarter of last year. In fact, for the month of September alone, the most recent data that we have, so for September alone, each metric, both approval rates and penetration rates, were stronger in 2008 than in the month of September of last year.

These measures are encouraging, given the uncertainty in the credit markets to date. So in general, our customers have found that retail credit has been available to purchase our products. To summarize our position as it relates to retail credit financing for our customers in the US, our strategy is to try to maximize the access to capital for our customers.

As we move forward, we will continue to use the combination of HSBC for revolving, and GE for installment retail financing for our customers on a national basis, supplemented with local banks and credit unions. However, given the uncertain overall retail credit market, we have been exploring contingency alternatives, in order to maintain retail credit availability to our customers, if the current situation were to change.

Turning to wholesale financing, at the end of the quarter our wholesale portfolio related to floor plan financing for dealers in the United States was approximately $673 million, down 3% from last year, at the end of the third quarter, 2007. The total units outstanding in the portfolio are actually down quite a bit more than the 3% dollar decline. The dollar amount did not decline as much as the units financed, due to the strength of our PG&A sales in the third quarter, 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 third quarter. Credit losses in this dealer portfolio remain very reasonable, averaging well less than 1% of the portfolio, with no material changes experienced lately.

Interest expense of $2.6 million for the third quarter 2008 is less than last year, as a result of the lower interest rates in our bank borrowings during the third quarter. However, our LIBOR based interest rates on our debt have increased in the past few weeks, which will have an impact on the fourth quarter if these unusual LIBOR rate trends continue. We do have those expected higher interest rates included in our current guidance.

It is important to recognize that we do have plenty of borrowing capacity on our $450 million banking arrangement, with debt of just $220 million recorded at the end of the third quarter. The income tax provision was recorded at a rate of approximately 29.3% of pretax income for the third quarter this year, compared to 30.8% in the third quarter of last year. The lower income tax rate in the third quarter of '08, is primarily due to favorable tax events this year, including a favorable settlement of certain income tax examinations.

For the full year 2008, our current expectation is for the income tax provision rate to be approximately 33% of pretax income, slightly better than previously guided. During the third quarter, we repurchased 380,000 shares under our share repurchase program at a cost of $17 million. Bringing the year-to-date shares repurchased to 2.4 million shares, at a cost of $103 million.

We expect to continue to be active in this repurchase program in the fourth quarter, given the very weak stock price. We currently have approximately 4 million shares remaining on the Board of Directors' share repurchase authorization. Full year 2008 capital expenditures are expected to be in the range of 68 to $73 million, as we continue to invest in new product development tooling and capital projects. We expect depreciation for the full year 2008 to be in the range of 63 to $66 million.

So to recap, our full year 2008 revised guidance, total sales for the year are now expected to increase in the range of 10 to 11% over last year, with EPS from Continuing Operations growing to a $3.47 to $3.50 per diluted share range for the full year, an increase of 12 to 13% over last year. Fourth quarter 2008 sales are expected to be flat to up 2%, with earnings per share expected to be in the $1.07 to $1.10 per diluted share range, compared to the fourth quarter last year.

At this time, I would like to turn it over to Scott for some final comments.

Thanks, Mike. Before we wrap up, I want to offer some quick and early qualitative thoughts about 2009. As I stated earlier, we will stay very close to the market, to understand the implications for the year ahead and adjust our business as necessary. We will not, however, fundamentally change our strategy.

We will still be assertive in 2009. The three-pronged approach of operational excellence, winning in the core, and targeting new growth, has guided Polaris and will continue. Although it is fair to expect that I will throttle up in certain areas, and tap the brakes in others. We will accelerate and expand our operational excellence efforts, and use it as a competitive weapon in this rapidly-changing retail environment.

I am confident that we can leverage this initiative to drive improvements in quality, speed, margin expansion, and inventory reduction. We will not take shortcuts to deliver dramatic short-term improvements, but we will do the hard work, to deliver consistent, sustainable improvements year after year.

We will also continue to play to win in the core businesses. Our product lineup is strong and getting stronger, and we will continue to work closely with our dealers, to win the competitive battle. The market is weak for everyone. We are mindful that the share battle is not just for up markets, it can also be won in hard times.

Growth will remain a priority for Polaris, with an increased focus on profitable growth. By the time we meet again in January, we expect to announce an exciting adjacency relationship, to accelerate our growth outside of power sports. We have new products in development, that will allow us to enter new market segments and expand our on-road presence. Acquisitions will continue to evaluated, as we look for opportunities to accelerate growth and expand margins.

In summary, we are very pleased with the record third quarter results, and our ability to raise full year guidance. We are certainly balancing the current economic environment against the strength of Polaris business. We will manage prudently in the months ahead, and into 2009, to ensure that our customers, shareholders, employees, and others, continue to benefit from our focus on results.

At this time, we will take any questions the analysts may have. Diazi, could you please open up the line for questions?

(OPERATOR INSTRUCTIONS). Your first question comes from Ed Aaron.

Thanks, operator. Welcome, Scott, and nice work everybody on the quarter.

Thanks, Ed.

Scott, just maybe you could share a little bit of your background, in terms of your ability to perhaps help move the international and military businesses forward, more than what has been done today?

Sure, I will give a quick background. After spending seven years in the Navy following my graduation from the Naval Academy, I went to work for Honeywell in the Aerospace and Defense business. My last assignment with them was running their European business and Aerospace repair overhaul, based out of Raunheim, Germany, just outside of Frankfurt.

So did that for approximately two years, and then decided I didn't want to be an aerospace and defense executive, so I transitioned over to Danaher Corporation, which actually might have given me better international experience, as I helped several of their businesses expand into the Asian markets, and did a lot of work in South America as well.

So good international experience, obviously my time in the military as a Supply Officer has already proven to be beneficial in this role, as we look at military as an exciting growth opportunity, and while not my favorite past experience, the fact that I joined that European business eight days before 9/11, I am also familiar with taking over a new business and dealing with a crisis. Again, I am here with a very strong management team.

Great. Thanks. And then maybe for you, Mike, just on the gross margin impact, on the positive side for mix, can you give us like a rough sense, just a basis point contribution from that, just so we can have a better understanding of how big of a drag the commodities and the discounting was on the margin?

Well, Ed, I am not going to share specifics on the margin impacts on the attributes and gross margin. I would tell you the trends in the third quarter were similar to the trends that we experienced earlier in the year.

There is significant margin benefit from the increased side-by-side and PG&A business, and as we have talked about our international businesses, is higher profitability than the core US business. The commodity pressures were real in the third quarter. As you know, the commodity pressures have eased, which is really good news going forward. But we didn't realize much or any of that benefit in the third quarter.

It takes a while for that to work its way through inventory on the balance sheet, and through the price lock arrangements that we have in place. So we should see some easing of the commodity pressure starting in the fourth quarter, and then if the commodity prices maintain where they are at, it will be helpful sequentially, certainly as we roll into 2009.

Okay. Great. And then the last question, just on the PG&A business, in light of what is happening in the credit markets, I know that maybe approval and the penetration rates, have if anything gotten better. One thing, we have seen sort of across the space is the advanced rates changing, which I think is in some categories made it harder for dealers to sell more parts and accessories, and that sort of thing. Do you have any concerns about that, as it relates to the sustainability of the growth rates on the PG&A side?

Ed, we hear some of that same stuff, we read about that, but we really haven't seen that translate into our business yet. Our PG&A business obviously was very strong in the third quarter. Our orders from the dealers on their program orders for the fourth quarter met or exceeded our expectations.

The what we call daily sales, which are the reorders that we get from our dealers, are meeting our expectations in the third quarter, and into the fourth quarter. So it is interesting. You read about it and you are concerned about it, but the reality is we haven't really seen that impact dramatically in our PG&A business.

Ed, this is Bennett. I would just jump in too. I actually think we are seeing almost a contrary effect to that, in the sense that as the market has gotten tougher, the aftermarket business relatively is stronger.

Dealers as they are seeing tougher battles for consumer traffic, are focusing more on the consumer experience as I mentioned in my remarks, and they are doing a better job of upselling, and moving those value-added PG&A items onto existing products. So we are pretty encouraged, actually, what we are seeing from a trend standpoint on PG&A as we go forward in this tougher environment.

Thank you, everybody.

Thanks. Next question.

Your next question comes from Craig Kennison.

Good morning, and congratulations everybody on your fine performance as well. Bennett, you mentioned that inventory was down in just about every category, but also sales are down in many categories. Can you give us sort of a sales adjusted inventory metric, that would make us comfortable that days of inventory are actually lower?

We usually avoid, Craig, trying to get down to talking about days supply. I will try to give you some qualitative comments to comfort you. We have taken a tremendous amount of inventory out of our system over the last couple of years, and have continued to do that successfully in 2008 in all of our businesses. And I think overall, our days supply across all our businesses is down sequentially from where it was a year ago.

Despite our efforts in ATVs, that is a battle, when you see the market down 28% in the third quarter, and 22% year-to-date, even with significant reductions, it is hard to increase your velocity on days supply, but that is why we are moving to the programs like MVP, where you can see where we're going to real operational excellence model, where we are taking orders and managing retail two times a month versus two times a year, and as we spread that across the dealer network, we expect that we will see significant reductions.

But I would tell you in snowmobiles, our inventory position is better than it has been from a DSO as well as inventory position in years. Side-by-side, arguably if you talked to many dealers they would say we are too tight on a number of products almost. ATVs we continue to work our way down. In Victory, we have making some progress, but I would tell you our DSO is not yet where we would like it to be. So we are making some progress, but the tougher economy is slowing some of what we would have thought would have been spectacular progress otherwise, and then again, longer term MVP we are excited about what that will do for us.

Thanks, Bennett. That is very helpful. Mike, you mentioned that you are looking at some contingent alternatives for the financed piece of your business. Can you give us a sense of what you are looking at, and the extent to which you would be willing to use your balance sheet?

Yes, as I have said, there is a fair amount of uncertainty in the retail credit market right now. We have had assurances from both HSBC and GE that they are committed to Polaris, and they are committed to our existing relationships with revolving and installment retail credit, but there is uncertainty. So we are trying to be prudent in looking at if things change, what might we do different.

So we are looking at certain regional or second tier financing providers to develop a relationship with. There aren't very many other national providers other than the two that we are working with, and they have a very large share within our industry. So regional or second tier providers would be a source.

We have already started developing an assistance program, and a training program for our dealers, to help them tap into the local banks and credit unions more effectively. That is a relatively big source of financing today for our dealers, and there are ways that we can help the dealers leverage that opportunity going forward. So we are going to pursue that. And there are other things that we could consider as well.

Would you rule out using your balance sheet, and underwriting some of these loans?

As I stated before, we are not very interested in that at all. We think that it is best to have this outsourced or partnered, and we are not interested in bringing that onto our balance sheet.

Great. Thanks, Mike.

Thanks very much.

Thanks, next question.

Your next question comes from Scott Hamann.

Actually, I am all set. Thanks.

Your next question comes from Tim Conder.

Thank you. First of all, Scott, welcome aboard. Tom, you have put together a great team and have a great track record there, and it appears that it is going to be continuing on. A couple of items here, gentlemen.

Just a clarification, the down 28% on ATVs in the third quarter, that was both industry and Polaris, a clarification question? And then Mike, anything, any assistance that you are giving to, besides the subsidy with HSBC, any other assistance on the financing that occurred during the third quarter?

Okay. Tim, I will take the first one on the clarification on the third quarter sales. Yes, North America sales were down 28%, and essentially Polaris was essentially right there. We were actually a tad weaker on that, because we were up a little bit a share going into the third quarter, and frankly, most of that is in all honesty, it is timing with how we run some of our different promotions, we expect we will get that back here as we move into October and November.

Okay.

All right. Second question, Tim, as related to assistance in retail credit financing in the quarter. We have these relationships with HSBC and GE, and we have promotions at any point in time running with our dealers and our consumers, where we offer cut rate financing, or discounts and those kinds of things on the financing costs. We participate in those financing costs, and we did so in the third quarter, and that really rolls into the whole promotional environment, which is at elevated levels as we talked about. But I would not say that there is anything unusual or different in the third quarter than historically, as it relates to our participation in those financing programs.

Okay. Okay. And then could you comment sort of along the same vein there, are side-by-sides, is there a higher percentage or less than percentage financed versus the core ATVs, and then also on the side-by-side, if you could give us any additional color on what that was as a percent of your total ATV business in the third quarter?

Okay. I don't know that I know specifics on side-by-side percentage of customers financing versus core ATVs.

The demographics for a side-by-side buyer are a little better. Generally, they are a little bit older and a little bit higher income, so intuition would tell you that perhaps it is a bit lower on the percentage being financed than side-by-sides, but I frankly don't have that data in front of me.

Okay.

As far as the percentage of side-by-sides to our total ATV business, as you know, we haven't been very specific with that in the past. Last year, for the full year, side-by-sides were about 40% of total ATV sales dollars. This year, it has obviously expanded significantly with core ATVs being down quite a bit, and side-by-sides being up quite a bit. So this year what we would say is that it is side-by-sides will be more than half of our total ATV reported sales for the year.

Okay. And then a question related to the foreign exchange, Mike you had mentioned that it is going to be a little bit of a headwind in the fourth quarter.

Looking into '09, just on an early basis, Scott you gave us a little bit of a peak into '09, but how do you look at, or what have you already locked in, I guess I should say, from a hedging standpoint, and at this point, assuming where you are hedged and where currencies are trading at this time, how do you see FX for '09, with the Euro, pound, Canadian dollar, and so forth?

Right now, Tim, we have no hedges for 2009.

Okay.

Currency has been moving around quite a bit lately, along with everything else the last few weeks. If things were to stay where they were at right now, we would feel pressure on top line sales, as both the Euro and the Canadian dollar are at more punitive rates for our top line sales, than they were for the full year 2008. We would also have pressure from the yen versus where we are, and purchase our engines at this year.

So we expect to have headwinds from currencies in the fourth quarter, which is baked into our guidance that we issued today. And right now, if currencies stay the way they are we would expect there to be headwind as we go into '09.

Okay. Thank you, gentlemen.

Okay, next question.

Your next question comes from James Hardiman.

Good morning. Couple of quick questions for you guys. First, can you give us the numbers, you gave us the year-to-date number in terms of heavyweight motorcycles. Can you just give us the number for the quarter, and how you guys compare to the industry number, US? If you have it.

We are looking.

We will come back to that.

Okay. And then, again, I am not sure how much visibility you get on this, but can you sort of walk us through the last sort of four weeks at retail, I mean, everybody sort of knows that things have been extremely tough, in terms of core ATVs really all year, but that the back half of September was completely a different animal, that things got a lot worse. Have we gotten back to at least August and early September weakness, as opposed to what we saw at the end of September, or seeing things continuing to be really tough here sort of mid-October?

I will take this, James, this is Bennett. I will take a crack at both of those. The motorcycle data for the third quarter was essentially in the heavyweight Cruiser and Touring, they were down low-single digits, and Polaris was up high-single digits, so we gained some share, the market actually didn't deteriorate in the third quarter from a heavyweight standpoint in the industry, which was encouraging, but we still would characterize it as relatively challenging still.

Okay.

In regards to what we have seen in the last four weeks, I am not sure this is going to be what you want to hear, but frankly the trends that we have seen in the last four weeks are no different than what we have been reporting to you all year. Where we have seen strength in our businesses in places like snowmobiles, side-by-sides, PG&A, and international, even as the world kind of got crazy here over the last four weeks, our retail sales continued to be up over the last four weeks, and month to date. We are still seeing growth.

In the areas where it had been pressured, we saw more pressure, and it actually slowed a little bit more. Talking qualitatively or anecdotally to our dealer network, which is always dangerous, I mean, they are telling us that they have seen a downturn in traffic. It has gotten a little bit worse here under these uncertain times here over the last few weeks, but not way, way more awful than what we were seeing, per se, in August and September. August and September were fairly challenging months I think from an industry traffic standpoint. But again, with our product and our product innovation, we continue to do I would say remarkably well in this environment. So we are encouraged.

That is great. And then you sort of touched on this, international I think you said was up 31% for the quarter. That seems great. So you are not seeing any material slowdown if you sort of momentum through the quarter, is that a pretty consistent 31% number sort of through the quarter, and no real concerns heading into the fourth quarter?

I would tell you that, again, we have been pleasantly surprised because certainly at least what we read in the papers, and seeing from an overall European economy, there has been greater uncertainty, and there are more concerns out there. It has not as of yet certainly through the third quarter and early into the fourth quarter, affected our retail sales. Our subsidiaries and our distributors had one of their strongest months ever in September.

We are going to continue to watch that very, very prudently as we go forward, to see if we see signs of weakness but so far, so good, and I would tell you realistically, even over the last three, four, five months, we've seen Europe starting to slow, but we have not seen signs of that yet in our business.

We were just over at Intermot, which is the international motorcycle show in Cologne, Germany, and we had fantastic response to our Victory launch going into Germany next year, and again, there is tremendous interest in Polaris products in general over there, so again, we are knocking on wood.

We are watching it closely. We will try not to be looking at it through rose-colored glasses, but we can only report what we have seen from a factual basis so far, and so far the facts are saying our business and retail is holding up remarkably well.

Guys, this isn't completely unprecedented for those of you that have followed the company for a long time. You will recall after September 11th when there was a tremendous concern around confidence, and where the country is going, and so forth. Polaris business was quite strong following that, and I think that surprised an awful lot of people, and I think the guys have said many times we are watching carefully what is happening at the retail level, but we haven't seen any dramatic changes certainly over the last few weeks, as the financial markets have been so volatile.

Great. Thanks, guys.

Your next question comes from Greg Badishkanian. Your line is open.

Yes, great. Thanks. Hey, guys, great quarter, first of all. Just two questions. First, in terms of Europe, just following up on that, demand for the RANGER RZR products, and kind of what type of shipping volumes and do you have in that market, because last time we talked I think at your Analyst Day, Investor Day, it was really well underpenetrated and there was some pent-up demand. Just wondering how that is looking?

This is Bennett. We made some nice progress on that really over the last couple of quarters. We have gotten RZR out in what I would call significant volume here over the last two quarters, and while I wouldn't necessarily say we have completely caught up with demand, we made what I would call tremendous progress, so we are much closer to a balanced supply and demand situation, and most of the RANGER growth that we saw internationally has really been driven by RZR.

RZR even more so than in the US, I think will be kind of a game-changing product for the international marketplace. There is tremendous interest in that, and that product looks like it has a lot of legs as we move into the future, so we are encouraged that we will continue to see some nice growth in RZR over the upcoming quarters.

Good. And just kind of moving over to new product innovations, you had mentioned that the orders at the show exceeded expectations, that dealers and consumers are starting to have some good reaction. Could you give us a little bit of color, what dealers are telling you in terms of how consumers are reacting, particularly to the new RANGER innovations, and is it a lot more excitement than, say, last year when you rolled out new products?

Yes, we are really encouraged. Obviously, the side-by-side market is a much stronger, hotter market right now and the consumer reaction is already translating to significant retail on some of the new RANGER products and the new RZR S. It is way too early to declare in anything like a RZR phenomenon, but the RZR S sell-through rate through the end of the third quarter far exceeded our expectations, so we are very, very encouraged about that new product, and dealers are reporting that the new '09 RANGERs as they see the new products are in hot demand.

We have a similar phenomenon on the ATV side with the Sportsman XPs. Those really did not hit the quarter until much later. We had some shipments in the third quarter, but really the last couple weeks really of the quarter, so they have not hit the marketplace in significant quantities. I mean, I know when Scott was out last week, that is one of the things that dealers were frustrated with. They wanted those XPs in their dealerships, and so there is some pent-up demand for those new, innovative products.

I think that it is a formula that Polaris has proven itself in a tough environment over the last year or two. I mean, innovation sells and it sells pretty well in generally any environment, and that continues to be one of the playbooks that we are running.

Absolutely. Keep up the good work. Thanks.

Next question.

Your next question comes from Hayley Wolff.

Hi, guys. Most of my questions have been asked already. Just a few things. One, can you just give us a little color on how the Max Velocity program is doing, what kind of early signs you are seeing, in terms of improved sell-through, improved matching of retail inventories. And then second, could we get some details on the LIBOR reset, and when in fact it does reset on your credit line?

Hayley, this is Bennett. I will give you a little bit of color on MVP. As we have talked about in previous calls, what we have done is here over the last 60 days is gone to a regional test with a significant number of dealers, over 150, and frankly it is just way too early to talk about any kind of metrics of success, other than that the dealers are thrilled they are on the program, people are raising their hands tremendously, they are up and running, they are starting to establish the retail processes where our DSMs are in there a couple of times a month, and the early returns after 30 days were encouraging, but to talk about any kind of success or failure with that group of dealers is premature.

We have had a couple of other tests that we ran in another district that we have been in place for the last year, and another handful of dealers, and in both of those cases we saw significant dealer inventory reductions, we saw share gain, and we saw increased dealer and customer satisfaction as a result of that. So for those that we have been up for more than a year, it is pretty encouraging. Obviously we are in a period right now where we are testing, and we are trying to learn very quickly, and then change and adapt as we go to more dealers.

This is Scott. Just to put a little more color on it, I had a chance to get out to Denver, which is one of our test markets and meet with six of our dealers, and across the board that were elated with the MVP program.

They spent as much time talking about their desire to have more XP ATVs, and continue to praise the MVP program, and I asked every dealer what it was that the other OEMs were doing that we could learn from, and despite my repeated requests, it all came back to they wished other dealers, or other OEMs, would pursue the MVP program. So getting high marks and specifically because Polaris has put some infrastructure behind it, to make it easy for dealers to adapt the new processes, so very strong reviews, and we will look forward to rolling it out further.

Hayley, I will answer the second question related to the LIBOR reset. Our credit line allows either prime or LIBOR based borrowings. Currently, we have $75 million of our outstandings on a swap, so it is actually fixed rates, and they are not variable rates for $75 million. The balance is variable, and as I said, we can either choose prime or LIBOR. Generally, you want to do LIBOR.

Today, and over the last week or so, prime has actually been lower than LIBOR, so we have been actually borrowing at prime, which is very, very odd. Generally, historically, we do LIBOR locks for short periods of time, 30 days, 60 days, something like that. So to answer your question, it is kind of constantly resetting on a short-term basis, other than the $75 million which is fixed.

What is your current rate, versus what you were paying for the average rate in the third quarter?

Well, the current rate, prime is 450, so that is what we are borrowing at today, because LIBOR is higher than that. And our rate for the third quarter, I don't have that in front of me, but I would suspect that it is closer to 3.25ish, someplace in that range.

Okay. Thanks a lot.

We have time for a couple more questions.

Your next question comes from Bob Evans.

Bob, are you there? We will go to the next one.

Okay. Your next question comes from Bob Simonson.

Looks like a slow day for the Bobs.

(laughter). Okay. Joe, let's ask Joe Morgan, do you have a question, Joe? Otherwise we are going to end it here.

Open up Joe's line.

Okay. His line is open.

Hello? Yes, Joe? Oh, you can hear me? Yes, go ahead. Just a clarification. There were two comments regarding the heavyweight motorcycle market. The first one I think you said that year-to-date it was down high-single digits? And then the comment later was that the third quarter actually showed no deterioration, it was only down I believe you said mid-single digits?

Yes, Joe.

But if I recall correctly, the first six months were only down low single digits.

That is probably my mistake in the sense that I don't have all of the data in front of me. What we have been trying to report here recently is the segments directly we compete in which is generally 1400CCs and up, and Cruisers and Touring, so that was the data that we reported specifically on the remarks, when we asked for clarification of where the third quarter was, all we had was the 900CCs and up for Cruisers and Touring. That might be why you see a little wobble in that number. But in general, the third quarter did not show deterioration from where we were in the first six months.

So it sounds as if the larger the bike, the weaker the market?

I think in general, that has been true.

Okay. Great. Thanks for the clarification.

Okay. I think that is all the questions we have. We want to thank everyone again for participating in the call this morning, and we will look forward to talking to you next quarter. Thanks again. Good-bye.

This concludes today's conference call, you may now disconnect your lines.