Polaris Inc (PII) 2008 Q4 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris fourth quarter and full-year 2008 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 Jackie. Good morning and thank you for joining us for our fourth quarter 2008 earnings conference call. Today the call -- there will be a PowerPoint presentation that will provide additional information concerning the topics we will be discussing this morning. These slides are available for viewing at our website at www.Polarisindustries.com/irhome.

The speakers today are Scott Wine, our Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. During the call today we will be discussing certain topics including product demand and shipments, sales and margin trends, income and profitability levels and other matters including more specific guidance on our expectations for future periods which should be considered forward-looking for the purposes of the Private Securities Reform Act of 1995.

Actual results could differ from those projected in any forward-looking statements which by their nature involve risks and uncertainties. Additional information regarding factors that may influence results can be found in Polaris' 2007 annual report and in the 2007 Form 10-K which are on file with the SEC. Now, I will turn it over to Scott. Scott?

Good morning. Thank you for joining us and for your interest in Polaris.

Earlier today we reported results for both fourth quarter and full-year 2008. In spite of an increasingly challenging economic environment in the fourth quarter, Polaris delivered earnings per share on target which contributed to record full-year earnings per share of $3.50, up 13% for 2007. Full-year sales were also a record at $1.948 billion, up 9% from the prior year.

Our strong product portfolio led by our RANGER and RZR Side X Side products enabled us to to deliver 6% growth in the United States. However, it was our Canadian and international business that really led the way with strong 18% growth for the year.

As Bennett will discuss, our Side X Side products performed very well, providing a positive sales mix and more than offsetting the steep declines in our core ATV business. The overall revenue picture for 2008 shows the breadth of Polaris sales and growth. We had growth in most product lines last year with the exception of Victory and core aTV's Although even they managed to gain share in a difficult retail environment.

Polaris did not entirely escape the weakness in power sports markets as noted by our 2% volume decline. We did benefit from the transition to higher priced Side X Side products, robust PG&A sales and higher pricing, all of which combine to drive sales up 9%.

I'm also very pleased to announce that our largest division, the off-road vehicle or ORV business which has been combined by creating our core ATV and Side X Side units into a single division, achieved the number one market share position in North America for the first time in 2008. Full-year net income of $117.4 million was up 4% from 2007, contributing to our record earnings per share. The drop in net income margin was largely driven by the decline in financial services income although higher commodity cost also contributed a 30 basis point decline in margin.

Polaris delivered solid results in the challenging fourth quarter with sales of $523.6 million and earnings per share of $1.11. The 3% decline in revenue was below our expectations but reflects our proactive reduction in shipments that were initiated to improve dealer order inventory levels.

Given the very difficult economic environment that we faced, the 4% EPS growth in the fourth quarter is perhaps more impressive than the double-digit performance we have delivered in many prior quarters. We were able to fully leverage our flexible manufacturing model and maintain tight control on variable cost to meet expectations in spite of lower revenue. In many ways, Q4 served as a full contact practice for the real game in 2009.

Retail sales activity for Polaris products was actually up in the month of October but slowed significantly in November and December resulting in a 19% overall decline in the fourth quarter. Our off-road vehicle division showed decline in revenue for the first time in six quarters. It was a very slow quarter for our Victory motorcycle division and Bennett will discuss the actions we are taking to accelerate Victory retail sales in 2009.

Canada continued to perform well throughout the quarter which is in contrast to our international business where the positive trends we had experienced throughout the year changed quickly and revenue declined by 15% in the quarter. The snowfall in much of North America supported by strong 19% growth in our snow business, conversely for the first time in 2008 we experienced negative currency impact from the Canadian dollar, the euro and other currencies. As Mike will discuss, we expect these currency headwinds to continue through most of 2009.

Net income was $36.2 million for the fourth quarter, down 5% from $38 million in the prior year period. This yielded 4% improvement in earnings per share in line with expectations. Net income margin was down slightly to 6.9% on continued erosion of our financial services income.

The North American retail sales environment was not kind to the power sports industry all year. While retail sales declined more rapidly in the final three months of the year, overall industry sales were down double-digits even in the first three quarters.

Polaris gained market share in all product lines which paid dividends throughout the year enabling us to bear the overall market decline. The chart shows the accelerated retail sales decline for both the industry, down 25%, and Polaris in Q4. The 19% decline in Polaris retail sales in the fourth quarter is generally in line with our overall expectations for 2009.

One of the key stakeholders in our business is our dealer network and we worked hard in 2008 to help them prepare for and managed through this downturn. The most important thing we can do is provide the best-selling products in the market and we did that with our new RANGERs, RZR S, [Sportsman] and more.

We had a clear focus on dealer inventory and made consistent progress for the second year in a row, bringing dealer inventory down another 7% in 2008. We assisted our dealers in the fourth quarter, deferring shipments out of the quarter as retail slowed. This cost us in factory inventory but was the right overall business decision.

Our Max Velocity Program or MVP was successful in improving and managing inventory in about 180 or so test dealers last year and we plan to roll that out more extensively in 2009. To quickly summarize, we're very proud of the performance of our Polaris team and the business in 2008.

We stayed on strategy throughout the year delivering record sales and earnings per share the right way, with great products and strong execution. Our operational excellence initiative and focus on speed enabled us to bring a breadth of industry-leading products to market during the year which played a key role in our across the board share gains.

There were a few key disappointments in the year, namely the deterioration in the retail credit environment and the impact that had on our income from financing and ultimately on overall consumer demand. We reacted quickly to the slowdown in the fourth quarter which as noted had a negative impact on sales and factory inventory.

Despite strong performance, we also did not create value for shareholders in 2008. I believe you'll hear in both Bennett and Mike's comment that we're aggressively taking actions that will benefit shareholders in 2009 and beyond. Now I'll turn it over to Bennett for a more thorough review of operational excellence and an update on our business unit performance and outlook.

Thanks Scott. I'm going to begin with operational excellence. The fourth quarter capped an outstanding year for Polaris in the critical areas of speed and quality. The cost results continued to remain mixed.

Our speed to market improved by 15% in 2008 and we're now 36% faster than we were just two years ago. The speed is benefiting us everywhere. In new product development and innovation, in 2008 alone we brought five new key products market, a full model year earlier than what was possible just 24 months ago -- the RZR S, the Sportsmen XP and RANGER HD power steering models and the RZR 170; [they] all resulting in increased sales and market share, increased profitability and improved customer satisfaction.

With the 50% reduction in supply chain lead times we secured in 2008, we were able to immediately respond to the slowing external market conditions and make supply adjustments both up and down as the market required. In the fourth quarter alone we were able to commit to and execute significant build reductions thanks to this increased speed.

17% of our dealer volume is now in test on our Max Velocity Program or MVP. This allows Polaris and its dealers to have a retail and order discussion every two weeks. The early results continue to be very promising.

We're gaining share, lowering inventory levels and increasing dealer and customer satisfaction. Our expectations are to continue to expand the MVP penetration aggressively across our dealer network in the second half of 2009.

There's little doubt in my mind with all of these improvements that Polaris is now the fastest company in power sports which provides us an important competitive advantage particularly in this highly volatile environment. Our quality continues to improve significantly.

Our net promoter score as reported by our end customers improved in three to four businesses for 2008. We remain the industry leader for the fifth year in a row in Victory motorcycles and are number one in our critical Side X Side products. Our snow product quality improved by 20% and we are approaching industry leadership in both snow and ATVs. Our goal remains quality leadership in every business in which we compete in in 2009.

The cost environment was a challenge in 2008. The commodity environment was frankly brutal for most of the year, although the fourth quarter commodities fell precipitously and appear will be a significant opportunity for us in 2009.

A few of our innovative new products came in at higher cost levels than what we had targeted and as we worked to prioritize dealer inventory reductions, the factory inventory reductions that we had targeted did not materialize. Dealer inventories in North America declined by 7% and are now 40,000 units lower than where they were in 2006 but they missed our internal expectations and we believe further reductions are still important.

In part due to these and other improvements, our dealers generally are weathering the environment and our dealer count remains stable. Despite these challenges, as we move into 2009 cost opportunities are plentiful. With the volume reductions in our business, our increased speed and our focus on lean, I'm confident we can effectively run Polaris with significantly less factory inventory.

We expect double-digit percentage declines throughout 2009. We're planning similar level reductions in dealer inventory levels in 2009 to further assist our dealers and to respond to a lower demand cycle.

We have multi-year cost reduction teams very active and we expect to make significant improvement in product cost thanks to this focus and the lower commodity price environment. We've also made aggressive but prudent adjustments to our spending appetite, all of which will contribute to drive up our gross margin significantly for 2009.

Two years ago as we began this journey, we told you that operational excellence and our focus on quality, cost and speed would transform Polaris' competitive position. It is.

Our ability to deliver a record 2008 and manage through this difficult recession can be traced back in large part to our operational excellence improvements. Additional opportunities and improvements remain. Expect us to continue to make significant improvements and for our financial benefits to become even more compelling in 2009 and beyond.

All-terrain vehicles are now known as the off-road vehicle business. It had a decent quarter in a deteriorating external retail environment. Sales were down 5% in Q4 as we responded to the market slowdown with significant supply reductions.

For the year, sales increased to a record level and were up 9% versus 2007. The core North American ATV industry remained very weak with Q4 sales down over 35% for the quarter and 26% for the year.

Polaris modestly outperformed the industry and gained a little bit of share but we still saw retail sales declines that approached 25% on our core ATV business. As a result we made aggressive adjustments to supply in our ATV business throughout the year and in the fourth quarter in particular and further reduced shipments to continue to assist our dealers in reducing their inventory levels. ATV dealer inventory is down 18% year-over-year.

The new Sportsmen XP and XP's with power steering have been well-received in the marketplace for both dealers and consumers and will be very helpful as we head into 2009. Polaris Side X Side retail sales continued to grow in the fourth quarter, up mid-single digits but it slowed considerably from the hypergrowth we have seen in earlier quarters due to the challenging economy.

For 2008, Polaris Side X Side retail sales grew in excess of 35% driven by both RZR and base RANGER growth. We continue to gain a tremendous amount of market share and are the clear market leader in Side X Sides.

Our Side X Side business is now our largest business and represents just over 50% of our combined ORV business. Our new 2009 products have been very well-received led by the RZR S, the RANGER HD and the all-new RANGERs. Side X Side dealer inventory remains balanced and at a healthy level.

At the end of 2008 we consolidated our core ATV and Side X Side divisions into one single off-road vehicle division. We did this for a number of reasons; to better meet the changing market dynamics, the shifting product mix, to better attack cost and customer synergies and improve our marketing and distribution effectiveness.

As Scott said, in 2008 we achieved market share leadership in ORV in both North America and Europe for the first time ever. For 2009 we expect to continue to outperform the market but are forecasting demand to decline in both the ATV and Side X Side segments resulting in 2009 ORV sales expectations of minus 17 to minus 25% with Side X Side sales declines being much more modest than ATVs. We will offset much of this volume decline through mix and margin improvements, synergies, product cost reduction and continued innovation in the marketplace.

Snowmobiles. Polaris snowmobiles had good Q4, capping a solid 2008 with wholesale sales growth of 19% and 15% respectively. Despite very good snow conditions throughout most of North America, the snowmobile industry had a slow December and retail sales are down low-double digits season to date with Polaris retail sales performing better and us gaining some share. Dealers are reporting good used service and parts business but new unit sales remain a bit slow.

Dealer inventories remain in solid shape and are down 4% versus last season at this time. New product quality continues to improve and our 800's are running very well. Just last week we introduced our new newest snowmobile to the marketplace at ESPN's Winter X Games. It is called the Polaris Rush.

This snowmobile is the first snowmobile ever to have a truly progressive rate rear suspension designed to provide a bottomless suspension for riders that provides terrain-dominating control and comfort allowing them to ride harder, faster and longer. We're currently conducting consumer demos through February and expect to snow check the vast majority of this game-changing new snowmobile that will be available for delivery next fall.

With the economic headwinds and a slow December, we're being cautious with our snowmobile build. We will finalize this at the end of the riding season but right now expect double-digit declines in 2009 versus 2008.

Victory motorcycles. Fourth quarter wholesale sales declined 40%, capping a challenging 2008 where overall wholesale sales declined for Victory by 17% as we executed significant supply reductions to react to a deteriorating heavyweight motorcycle market.

Industry retail sales continued to weaken in the fourth quarter, down mid-teens percent and finishing down 9% for full-year 2008 in the segments in which we compete. Victory retail sales were very soft as well in the fourth quarter and for the year Victory gained market share for the fifth consecutive year. But for the first time in several years, our retail sales did not increase and we did not achieve our internal retail sales objectives for this strategically important business.

As a result, we're aggressively are reducing supply again. We're planning to reduce our 2009 build by roughly 25% and improve the dealer business model.

At the same time, we're making aggressive changes to our marketing for Victory so that we can accelerate retail sales significantly in 2009 and beyond based on the evolving marketplace. We have the most stylish bikes with the highest ownership satisfaction in the industry and we simply must do some things differently to find the next level of velocity and performance we expect.

For 2009 we expect the heavyweight motorcycle industry to decline by roughly 15 to 25% with Victory retail sales flats to down 10%. Victory wholesale sales are expected to decline by 25 to 40% as we deal with a tougher economy and improve our business model and reduce dealer inventory. Longer-term we expect to return to very strong double-digit growth.

Parts, garments and accessories. The PG&A division continued to outperform the (inaudible) divisions for the quarter, posting sales of down 2% for the fourth quarter.

This completed a record sales year for PG&A with sales up 17%. We had sales increases in each of our businesses and each of our geographies in 2008. So the growth is coming literally from everywhere which is encouraging.

PG&A remains our most profitable business and now represents 18% of Polaris sales. Polaris' continued focus on integration and innovation is paying dividends as both dealers and customers appear to be focusing more on this business in the tougher economy. We expect PG&A to continue to outperform our whole good businesses in 2009.

International. International had a challenging fourth quarter as the worldwide economic crisis hit Europe hard. Wholesale sales declined by 15% as industry retail sales slowed and fears increased around swift currency movements and credit concerns. For the full year, international wholesale sales achieved record levels and grew by 18%, driven primarily by the strength of our Side X Side products, particularly the RZR.

European ORV markets were weak in the fourth quarter and industry retail sales were down about 17% for the calendar year. Despite this, Polaris retail sales grew low-single digits for the year and we gained a significant amount of market share, becoming the market share leader in ORV in Europe.

European snow markets are down season to date, similar to what we're seeing in North America with Polaris down less by again gaining market share. Our new Spanish subsidiary is off to a very good start as are our early introductions of Victory into the Australian and German markets.

International remains a key growth area for the Company and at the end of 2008 we made some key structural changes to further enable us to grow both our EMEA or Europe, Middle East and Africa region and for the first time really begin to attack the rest of the world in international and start attacking business development. For 2009 we expect international to perform similar to the rest of the Polaris portfolio as global markets struggle with a difficult economy.

Adjacencies. Our military business had an excellent fourth quarter with our biggest single shipment quarter by a factor of two. Our military business continues to grow rapidly and profitably.

Sales for 2008 increased by 42% and operating profit increased by more. We've expanded our customer base to now over 200 customers and greatly increased our overseas penetration. The outlook for 2009 remains very encouraging and we expect to increase sales by a minimum of 50%.

We also expect to announce two new adjacencies in 2009, an outside power sports opportunity within the next 90 days and an off-road/outside power sports opportunity later in 2009. We have a number of interesting organic opportunities in our business development pipeline and we remain on the gas in investing intelligently in diversifying Polaris into the future. With that summary, I will turn it over to Mike.

Thanks Bennett and good morning to everyone. As Scott and Bennett stated, we're very proud of what we have accomplished in 2008 in achieving record sales and EPS levels in spite of the increasingly challenging external environment.

Scott and Bennett have already given you comments regarding current expectations for our industries and businesses as we navigate through the uncertain external environment in '09. So I will limit my comments to our 2008 reported results and our 2009 guidance.

As it did in 2008, income from financial services is expected to decline significantly for the full-year 2009 to about 50% of the $21 million of income earned in 2008. As you will recall, the Company's revolving retail credit provider, HSBC, eliminated the volume-based fee income payment to Polaris as of March of last year. This caused significant declines in our retail credit fee income throughout 2008 which will continue through the first quarter of '09.

For the full year 2008 we financed through our retail credit programs, both HSBC and GE combined, about 39% of Polaris products sold to consumers in the United States; slightly better than last year's 38% rate. Approval rates have remained consistently above the 50% level throughout the year.

Although these metrics have each trended a bit lower in the fourth quarter compared to earlier in the year, the approval rate of 51% and the penetration rate of 31% for the fourth quarter certainly remain acceptable given the overall uncertainties surrounding the consumer retail credit markets generally and we feel our retail credit relationships are relatively stable and actually will be broader and more flexible in 2009 with the recent edition of Sheffield Financial for installment loan offerings beginning in February.

At year-end 2008, the wholesale portfolio related to [floor plan] financing for dealers in the United States was approximately $710 million, a decrease of 2% from the end of last year, reflecting the decline in the dollar amount of dealer inventory. This decline of 2% is in dollars. The units outstanding in the portfolio in the United States are actually down 10% compared to last year due to the mix change to the higher priced Side X Side's as well as increased PG&A inventory.

Credit losses in the dealer wholesale portfolio remain very reasonable averaging well less than 1% of the portfolio, although we did see a modest increase in dealer failures and credit losses in the fourth quarter which is not surprising given the challenging economic environment. For the full-year 2009, our expectation is for the wholesale financing income generated from Polaris acceptance to be lower than the $13.3 million earned in 2008 due to the combination of expected lower dealer inventories, a lower interest rate environment and an extremely difficult funding cost environment for GE debt that finances the portfolio.

Total Company sales for the full-year 2009 are expected to decrease in the minus 15 to minus 23% range for the full year. Diluted earnings per share for the full-year 2009 are expected to be between $2.50 and $3.00 per share which is a decrease of 14 to 29% compared to the $3.50 per share earned for the full-year 2008.

Bennett already discussed the product line sales expectations for 2009 but I would like to summarize by saying that (technical difficulty) expect double-digit sales declines in each of our businesses during 2009 and the relative comparisons to be tougher in the first half of the year than in the second half. And similar to the last few years, we expect to generate a mix and average selling price benefit again in 2009 which will result in our percentage sales dollars decline being less than our percentage sales unit decline.

The actual gross profit margin percentage generated for the full-year 2008 of 22.9% and the fourth quarter of 22.8% each expanded 80 basis points from the prior year periods and met our guidance expectations. The gross profit margin percentage for the full-year 2009 is expected to expand again in spite of the lower volume expectations as favorable product mix changes continue to benefit gross margins as we sell a richer mix of Side X Side vehicles, which typically have higher margins as well as from significantly lower commodity costs, a full year of price increases enacted in midyear 2008 and lower warranty expenses as our product quality improves.

As we experienced in the fourth quarter of 2008, we expect the promotional environment particularly in core ATVs to stabilize on a per unit basis in 2009. And in fact, we expect our dollar spending to decrease significantly in '09 from the spending levels in '08 as our dealer inventories are lower and the mix of the models is improving.

Working against us in 2009, for both sales and gross margins are the currency movements in Canada, Japan and Europe which will create some headwind for us. All in, we expect gross margins to improve upwards of 130 basis points in 2009 over the 22.9% generated in '08. This expectation that gross margin expansion in a time of declining volume may surprise you but we're very confident given our flexible manufacturing and variable cost and compensation systems that we can generate and improve gross margin percentage in 2009.

Operating expenses are expected to decrease significantly in dollar terms in 2009 as we deal aggressively with the reality of the lower volume environment. We have right-sized our research and development and planned advertising expenses without impairing our ability to develop and market continually innovative products. However, operating expenses will increase as a percentage sales for the full year 2009 compared to last year.

The income tax provision was recorded at a rate of approximately 35.3% of pretax income for the fourth quarter and at a rate of 33.7% of pretax income for the full year 2008, each of which are slightly lower than last year due to favorable tax events during the 2008 periods. For the full year 2009, our current expectation is for the income tax provision rate to be in a range of 34.0 to 34.5% of pretax income.

Taking a look at some cash flow and balance sheet information for the 2008 year and 2009 expectations, during the fourth quarter 2008 we took a different approach to our share repurchase program given the uncertain overall economic environment. During the fourth quarter we repurchased only 150,000 shares which brings our total repurchases for the full year 2008 period to about 2.5 million shares for $107 million. Although we currently have 3.8 million shares remaining on our Board of Directors authorization, we continue to take a prudent and conservative approach to the stock buyback in 2009 until more clarity emerges for the longer-term economic outlook.

Net cash flow provided by continuing operating activities was $176 million for 2008 or a 17% decrease from last year. The decrease in cash flow was primarily due to a decrease in accrued expenses and an increase in accounts receivables in our growth businesses as well as the timing of estimated income tax payments in 2008. We expect cash flow provided by continuing operating activities to decrease for the full year 2009 approximately in line with the decline in net income.

Factory inventories at the end of the year were $222 million, a 2% increase from a year ago. We had anticipated to drive factory inventory levels lower by year-end but the retail sales weakness experienced in the fourth quarter caused us to miss our goal. We expect factory inventory levels to decline consistently throughout 2009 as we already have adjusted our production capacity and build schedules for the declining demand environment we expect to experience in 2009.

For the full year 2008, we made investments in the business through capital expenditures and new product development tooling, totaling $76.6 million which is 20% higher than a year ago due to the significant new product introductions in 2008. For 2009 we expect to moderate our appetite for capital expenditure spending and realize a significant decline to be in the range of 50 to $60 million.

However we will continue to invest in new product development tooling to fuel innovation in our growth businesses and capital projects to reduce our production costs and improve product margins. This is another area where we are carefully scrutinizing our spending during 2009 and utilizing our operational excellence initiative to get more leverage for our investments.

We expect depreciation for the full year 2009 to be in a range of 60 to $65 million. Last week we announced that our Board of Directors approved a 3% increase in the regular quarterly cash dividend to $0.39 per share per quarter which currently represents nearly a 7% yield. This is our 14th consecutive year of increasing dividend paid to shareholders, a record which we're very proud of and represents the confidence that we have in our flexible manufacturing systems and variable cost structure that we fully expect will continue to generate strong cash flow levels in spite of a declining sales volume environment in 2009.

Current debt levels finished at $200 million at the end of 2008, a result of the term loan utilized to complete the accelerated share repurchase transaction a couple of years ago. We continue to have borrowing capacity under our attractively priced $450 million banking arrangement comprised of a strong and stable corporate banking group. Debt to total capital was 59% at the end of the year compared to 54% last year.

EBITDA from continuing operations was $253 million for the full year 2008 up slightly from last year. We expect EBITDA to decrease in 2009 from 2008 levels but at a percentage rate slower than the decline in sales.

For the first quarter 2009 total Company sales are expected to decrease in the range of down 20 to 25% from the first quarter of 2008 due primarily to the weak industry trends for each of our businesses and geographic markets during the first quarter. Earnings are expected to be in the range of $0.15 to $0.25 per diluted share for the first quarter compared to $0.55 in the first quarter last year. Let me remind you that the comparables in the first quarter are pretty tough in that sales grew 22% last year and EPS grew 62% in the first quarter of 2008.

In conclusion, we feel that we have built a challenging but achievable plan for 2009 based on the harsh realities of the current external market environment. We are actively pursuing contingency plans to counterbalance a weaker than expected industry and/or retail sales environment if that were to occur and are confident that we can be nimble enough to adjust the production levels and cost structures appropriately.

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

Thanks Mike. As I wrap up our prepared comments, I want to spend a couple of minutes explaining why we have confidence in our ability to execute in what is sure to be a difficult and challenging 2009. I will then summarize the strategic objectives that we have developed to drive growth and profitability for Polaris well into the future.

First, we will stay on strategy through this downturn. We will manage very carefully and prudently. We have a solid and sound strategy that will continue to guide us in all that we do.

We remain committed to expanding our portfolio in terms of the products we sell, the markets we serve and the regions of the world where we compete. We're certainly not ignoring the immediate challenges of the market.

We've gone aggressively after cost in all areas of the business which as Mike noted will enable us to deliver margin expansion even in a down year. We will accelerate our operational excellence initiatives with a focus on getting faster and more productive in every aspect of our business.

Much of these efforts will yield results in 2009 but some of the more exciting projects are coming out of our engineering team for future year benefits. We will remain very focused on supporting our dealers and customers, providing them with superior products and service they've come to expect from Polaris.

We will drive down dealer inventory even further and continue to provide the best products in the marketplace. Overall, we are battle ready and prepared for a tough year. We've taken a sober look at the market and created what we believe is a prudent plan for 2009.

With so much uncertainty, we realize things could get worse. So we've developed contingency plans that ensure our business model holds up even in a more severe downturn than what is anticipated. While we prepared for what 2009 brings, it is important to note that this downturn will not last forever and Polaris has a plan for a great future on the other side of this crisis.

We will continue to play to win in our core power sports business and we see reasonable growth there over the long-term. As Bennet discussed, we're also working hard to accelerate Victory retail in 2009 and remain committed to and excited about the future of our Victory motorcycle business.

We're also committed to expanding into adjacent markets that offer growth in countercyclical segments to our core business. These opportunities are plentiful and we are excited about the value they can bring to Polaris and that we can bring to new customers.

We will focus more aggressively on expanding our international business. We have a great team in Europe and have challenged them to further accelerate growth while establishing a blueprint for other regions of the world. We've moved one of our more experienced and best growth leaders in the international business and we anticipate that he and the team will drive solid, profitable growth in the years ahead.

As previously mentioned, operational excellence is a key part of who we are and what we do. We expect the benefits from our lean efforts to create value and eliminate waste throughout our business in 2009 and beyond.

Finally, we are committed to creating shareholder value with strong financial performance. We will add a strong focus on net and operating margin expansion to our growth efforts with the expectation that we will deliver sustainable, profitable growth over the long-term. In summary, I am very confident about the future of Polaris. With that, I'll turn it back over to Richard.

Thanks Scott. Jackie, I think we're ready for Q&A. So if you could open up the lines for questions?

(Operator Instructions) Craig Kennison.

[Inaudible question - microphone inaccessible]

You there Craig? Go onto the next one, Jackie.

Greg (technical difficulty) Ed Aaron. Your line is open.

So I missed part of the call, so I apologize. But I wanted to just follow up a little bit on the financing environment. So the fact that the penetration rate came down but the approval rate didn't, is that only because the -- or mainly because the customers were not qualifying for the more promotional deals that you had out there?

I don't really know exactly how to interpret the data other than to say that the trends weakened somewhat in the fourth quarter from what we had experienced earlier in the year but that the approval rate still over 50% to me is very encouraging. That means over half of the people are still finding a way to get approved even though the credit criteria are tightening and stuff.

I think the penetration rate being a little bit weaker at 31% could be attributed to there are higher downpayment requirements and the deals aren't quite as attractive as they were before. So people might -- not as many people might be looking for financing to be able to purchase a product because the deals aren't quite as good as they were because it costs more to provide it in a more challenging environment. But even at 31% to me that certainly remains acceptable in a pretty volatile and uncertain environment.

Okay, and then I saw you're kind of bringing in Sheffield just as another source which makes sense. Have you considered any potential alternatives for the commercial floor plan as a contingency or are you less concerned about any future changes to your relationship there?

While our wholesale flooring relationship is with GE, we have had a joint venture relationship as you now called Polaris Acceptance with them for 12 or 13 years now. It is a strong relationship. It's a long-term arrangement. I think our deal goes to like 2012 with our contractual relationship. So I don't really worry too much about that. I that's a pretty solid and stable relationship.

Craig Kennison.

Well I did want to complement you on the call format and the slides. I think they are really value added.

First question was with respect to the MVP program. Dealers are telling us that they love the program because it minimizes their floor plan finance costs. But I'm just concerned to what extent you're going to see some de-stocking in 2009 as you roll that plan forward. Could you comment on that?

That is something that -- I think you see our approach. We're trying to be aggressive but prudent on that, make sure we understand exactly what we're getting into, that we can execute it, that our dealers can execute it. Because one of the things that maybe isn't heard as much about this program is that the dealers have to change their behavior on the front-end and really add what we would call a front-end processor science to how they monitor, drive and close customers as they come in the door. So both parties have got to be able to execute it.

There will be -- as inventory levels come down, there will be a little bit of an inventory reduction. But again as I think we've kind of laid out in our plans, we've built that into our guidance and expectations. So I think we're very comfortable with the speed with which we are going and the approach and our ability to execute that with the dealer network and for our shareholders.

Bennett, are you getting the behavioral change that you anticipated? Because I do realize that has been an important part of the program from Polaris' perspective.

As I said in the prepared remarks, we are encouraged. Again, when you deal with independent dealer operators -- and again there is some expectations. As good as this program is for them, they have to put a little bit of a science to their front-end process. And their ability to adapt to that and execute that consistently is something that we are monitoring closely and we have to work with them on it.

But I would tell you this is really our third and our first massive test into it. I am encouraged. It's not perfect. We are not perfect yet but the learning curve seems to be very fast on our side and I would say remarkably fast on the dealer side. So I am encouraged that we're getting the behavior on both sides of the relationship that we need to make this a success.

Thank you and then Scott you have had a chance to settle into your role a little bit. Could you comment on what you have learned that's either reinforced your views or maybe surprised you? Thanks.

Just quickly, I think one of the best learnings for me is I've spent time throughout the business, just the quality and depth of the talent in the organization. We have been able to outperform in a tough year and that's ultimately because we have great products but we have great products because we have people that are passionate about the industry.

That's probably been one of my key learnings. Really, I have to tell you the performance of the Company in '08 was great but I am equally pleased with the opportunities that I see for us to get better. Our operational excellence journey is really in the early stages. We can go a long way there.

Our international growth has been impressive. There is a long runway there. Our military business is off to a great start, still much more than we can do there. So really it is the talent, the focus on innovation.

Really the things that have made Polaris tick for so many years really give me confidence that we will weather this storm just fine and have a great future. So no big surprises. The way we have managed through the early stage of this downturn, really focusing on the retail environment, trying to manage through the inventory, quickly adjusting with our flexible manufacturing. It's part of the reason we have confidence in the plan we just discussed.

Greg Badishkanian.

Just two quick questions here. First is just maybe a little bit of color, ATVs and Side x Side, just a little bit of color in terms of October and November, December, January; kind of what retail sales trends were you seeing based on discussions with dealers? And I know you said things slowed down as well as any regions. Is there any kind of takeaways or color that could help us from a modeling perspective for 2009?

I will try to take a crack at that, maybe not exactly everything you want, but I will take a shot. As we said, fourth quarter was slower I would characterize because we had a number of our traditional seasonality around fall programs and new product introductions. October was actually better than expected. November and December were slower.

And I would say those trends were pretty consistent in every business and I would really attribute that to the economic headwinds. January, I know again, generally we don't talk about it but January has been slightly better than we expected. So, I think that from a modeling standpoint which we don't like to help you with, I think the guidance we give you on the prepared remarks, I think is appropriate.

Also you mentioned that the promotional environment might get a little bit better in 2009. Where does it kind of -- where does it stand now in terms of ATVs as well as Side X Side just over the last two or three months?

I think it's pretty similar. We have seen -- on the ATVs it remains within our expectations. It is aggressive I think in all honesty because of the more expensive cost of financing. Some of the cost of promotions for both us and competitors are rising. That is driving more of what we would call the cost of the offer versus what the consumer sees.

So we have actually been moderating our promotions as our new innovative product hits the market, as our inventory levels have lowered and frankly we were able to gain share as we frankly moderated our promotions competitively. That is our expectation as we go forward into 2009. So we are encouraged.

Side X Sides, the industry has gotten a little bit more aggressive really around the cost of financing and maybe Yamaha being a little bit more aggressive as we have kind of probably taken clear leadership. But again nothing crazy, nothing that we are particularly panicked about as we head into '09.

Mr. [Lackey].

This is Joe [Lackey] at Wachovia. First of all congratulations. Great year in a very difficult environment. Congrats on that.

I wanted to see if you could provide any details on the mix in your ORV segment. I want to confirm first of all you said that in 2008 I guess Side X Side made up just over 50%. Can you provide any additional details on that, maybe get an idea of what you expect that to be by the end of 2009?

I will handle that. In Bennett's comments, he said that Side X Sides are now over -- a little over half of our total ORV business. Remember that is in dollar terms, not units. And I think he also said that we expect the declines to be less painful in Side X Side ATVs as we look into 2009. So that percentage should grow a little bit in 2009 as we go forward.

What percentage of ORV sales were from the military in '08?

It's very small. We haven't quantified the dollar amount of the military sales but it is very small relative to the total but as Bennett, growing rapidly.

And if you look internationally, your mix in the ORV segment, is it similar, 50-50, Side X Side, core or can you provide any breakdown on the international segment?

You know, international's tended to trial trail North America on kind of trends in this business and we are more predominantly an ATV or kind of a quadracycle business although again with the introduction of the RZR a year ago, we have seen a significant increase in our Side X Side sales. Both product lines frankly experienced growth last year, both what we would consider core ATVs as well as Side X Side. So I think that is encouraging.

Real quick on Victory, we get the feeling that there is quite a bit of carryover model year '08 and earlier inventory in the dealer channel. Can you give maybe a percentage breakdown of how much of the dealer inventory is model year '08 and older?

Joe, we're probably not going to disclose all of that. I would tell you from our standpoint, you heard the remarks. We're pretty committed to improving the business model.

Our Victory dealer inventories actually were reduced significantly this year, down about 17 or 18% from where they were a year ago. So we made some progress on dealer inventory levels.

What we are most focused on which helps solve the problem is improving our retail velocity. And so we can control the business model as far as our supply. So you're going to see us continue to be aggressive on that. And then we're going to work on the velocity part which will solve I believe the carryover stuff.

We don't have the programs on the street yet but you will see us be much more aggressive than we have been traditionally around our noncurrent product which we believe will resolve any kind of angst around noncurrent inventories prior to heading into the dealer meeting the summer. (multiple speakers)

But it is fair to say -- this is Mike -- it is fair to say that our dealer inventories are higher in Victory than they should be and relative to our other businesses, they are higher than our other businesses especially as it relates to the noncurrents. And we are committed with the volume adjustments that Bennett talked about, we're committed to fixing that in the near-term.

Just two more quick questions here. Foreign exchange, have you done any hedging here in the fourth quarter for 2009 and at what levels? And then if you could talk a little bit about your input cost, materials, transportation, you know when those should start taking in.

Sure, the currencies as you know turned significantly in the fourth quarter pretty much across the board. That impacts us significantly in the Canadian dollar, the Japanese yen and the euro-based currencies. As one of the slideshow in the fourth quarter that impacted our total sales by about 4% negatively.

So we were down 3% for the quarter in sales and 4% of that was due to currency. So that is a big number. Fortunately we had some of that hedged related to the Canadian dollar. So the bottom line impact wasn't as bad as that 4% might indicate on the top line.

Going forward into 2009, we don't have a lot of hedges. We have the Canadian dollar hedged for a portion of the first half of the year and that is about it. So the currencies move quite a bit and they're at what I would say punitive levels right now to our gross margins and as such we have been a little reluctant to lock in those punitive rates.

So we expect the currency to hurt throughout 2009 if they stay at current levels. Fortunately from the commodities perspective, that's also changed significantly positively and although we didn't get a whole lot of benefit from that in the fourth quarter, it stopped the bleeding that we saw earlier in the year and it was more or less flattish in the fourth quarter. And starting here in the first quarter throughout 2009, we expect significant gross margin benefits from a lower commodity cost environment and transportation cost environment which should help our gross margins significantly in 2009.

Is the input enough to offset the Forex?

Not quite. That is based on the current levels of the exchange rates. So right now if you kind of map things out for the full year, the Forex is a little bit more than the commodities but that can change obviously depending on the rates.

James Hardiman.

A couple -- I think most of my questions have been answered. A couple of quick questions just to close the loop on the previous conversation about currency in the international business. The guidance that you gave for 2009 that you expect it to be in line with the rest of your business, I'm speaking of the international business, is that on a currency neutral basis or does that already factor in the negative impact that you're expecting to get from currency?

Yes, that is factored in.

So you expect international to be a little bit better on a currency neutral basis in 2009 than the rest of your business?

Right, yes.

And then in terms of Sheffield Financing to close that loop as well, can you give us a little bit more detail? It seems like a big win for you guys in terms of just creating some redundancy in terms of your financing partners. Just give us a little bit more detail what role they are going to play, revolving versus term loans. Is there any fee income that you're going to get from that relationship and is the idea that they will be more of a GE-like player within the relationships that you guys have and sort of what kind of confidence do you have that GE is going to be here long-term? I know it's a lot.

That's fine, that's fine. Related to the Sheffield, we just signed that this week. So we really haven't communicated that broadly yet. We will be doing that very shortly because they're going to be up and running in February providing installment loans, fixed-rate installment loans to our customers in the United States.

So as you know, we have an exclusive relationship with HSBC to do revolving loans. That won't change. That will remain. But now Sheffield will be an alternative to GE for our customers and our dealers on the installment side and we view it as that. It's an alternative. So as you know the whole retail credit environment has gotten tougher and we think that adding another alternative to the mix is a big win for our customers and our dealers to have another potential source for financing.

And you were getting just a nominal amount of income on the GE loans. Will that be the same case with Sheffield?

Yes, it will be very modest and that is baked into the minus 50% expectation for our income from financial services. Our expectation is for very, very modest profitability coming from retail credit.

Right and that 50% decline -- the vast majority of that is going to take place in the first quarter it sounds like given -- last year, that was the only quarter in which you were getting any of that fee income from HSBC. Sort of final three quarters of the year, what are the puts and takes -- I realize that wholesale is going to be down based on the inventory. Is there anything else that is going to be a negative factor outside of just sales in general during the final three quarters of the year?

No, although I would tell you that our expectation for the penetration rate in 2009 is more modest than the 39% that we achieved this year. So our plan is built off of say mid-30% expectation rather than upper-30% expectation on penetration rate. As you say, as we go throughout the year, we will see the wholesale credit profitability decline each quarter. So we will be lower every quarter from our financial services income in '09.

Great, and then just one last clarification question and I'm sure you answered this but I apologize. I think somebody mentioned a great level of detail in terms of the presentation you guys have provided us and the prepared remarks.

Snowmobiles, strong fourth quarter in terms of wholesale but you're saying retail was actually not as strong as you would've liked? What is the discrepancy there? Just a new product introductions thing?

No, I think -- I just think that December is a pretty important month and it was with I think really the reality of just you know consumer confidence and the economic headwinds, it just didn't meet our expectations. I don't think it had anything to do with products.

The whole industry saw that. We saw it as well. January is better. Snow is good. So inventories are down year-over-year at least at the end of December.

So pretty much what we told you. I don't think there's any reason. We're not panicking about this. It's just the reality is that usually snow trumps economy. This year it looked like economy trumped snow a little bit. January is better than we expected so far so we will see how the last couple of months go. But we're doing okay.

Bob Evans.

First can you comment on inventory? I'm not sure if you had given this but by the end of year what type of inventory targets do you have in terms of what type of decline are you hoping to attain?

I think what I said, double-digit declines in dealer inventory as we go through 2009. So we're planning on taking a significant number of [boxes] out of the channel. Some of that will be driven by MVP but a lot of that's just driven frankly by our build and supply plans. So we expect that (inaudible) in virtually every business.

And the MVP program, I think you said there were 18% of the dealers signed up thus far?

They're not signed up. They don't get to sign up (multiple speakers)

Not signed up but using the system?

17% are currently on test right now.

Right, and where would you expect that to be by the end of the year?

I'm not going to disclose a number but I would tell you as we get to the second half of the year, our plan is to aggressively expand the penetration of our volume at around the model year transition.

Okay and Mike you had commented on SG&A being still higher as a percentage of sales but down. Can you give us any -- on an absolute basis, can give us any sense of how much down on a -- percentage-wise on an absolute basis?

Well I think (inaudible) greater than $10 million. I would expect it will be down significantly as we adjust our cost structure through a number of levers. We're pretty good at that and we're very flexible and we're attacking costs very aggressively.

Final question. The currency impact on your '09 guidance to revenue and earnings, can you -- I know you don't have a lot of hedged for this, just wondering what does that reflect, what type of decline in revenue and earnings given your currency assumptions?

As I discussed earlier with a question, it is significant pretty much across the board with the currencies that matter to us. So that's a significant headwind to us in our sales and in our gross margins.

Can you quantify significant?

No, I'm not going to do that. But on the gross margins, obviously we're going to offset that and as we talked about, there's way more factors that are moving in our favor as opposed to the currency going against us. So we're going to be able to offset the currency impact on our gross margins.

Joe Hovorka.

Actually one question on your gross margins going into 2009. In your fourth quarter earnings call for 2005, you actually forecast 100 basis point plus increase in gross margins for '06 and you cited pretty much many of the same things. The declining commodity cost environment, declining warranties, you know your production efficiencies.

You ended up having gross margins down about 30 basis points. The revenue decline that we're looking at it '09 is probably twice what we saw in '06. What can we draw from the two comparisons that would either give you confidence that we're going to be able to make the 130 basis points or maybe put that at risk like it was an '06?

Okay, I will take a shot at that. Actually, that year we were relatively pleased to have an 11% decline in sales and only a modest decline in our gross margins. I think that example even though it was a declining gross margin percent, speaks to our significant variable cost structure.

We did miss our expectations in 2006. If we want to go back and talk about ancient history, we can do that. But we were out running the Company significantly different today than we did back than. Back then we were late to recognize the slowdown in our ATV business.

We had unprecedented levels of dealer inventory that we had to work through and we took our medicine hard in late 2006 to deal with those issues. So I think we're managing the Company significantly different today. We're adjusting production on the fly as we see weakness in the retail markets.

We have got a significant amount of operational excellence initiatives that Bennett talked about with our speed to market and our new fresh product that we're getting benefit from. So I think 2009 is significantly different than 2006 and we're very confident in our ability to grow gross margins.

I didn't mean that to be confrontational. I agreed that 2006 performance was pretty exceptional which was a 30 basis point decline on 11% decline in revenue. But from your comments there it sounds like a big part of the difference citing inventory that you had to cut and things like that in 2006 that you're not it '09 that the promo line is going to be a big part of that. Is that a wide difference between now and '06?

Yes, absolutely. I mean we tried to signal that.

Sure, I heard you say that it was down. But I'm just trying to -- we're talking about a fairly wide difference in performance between the two years.

Yes, sales promotions is big. We saw the benefit from that -- a big benefit from that in the fourth quarter.

Are we talking a couple hundred basis points benefit in '09 from that or is it larger than that, less than that.

I'm not going to quantify that for you Joe.

Okay. That's fair.

I think Mike (technical difficulty) answered it frankly (technical difficulty) it's a good question. The other thing that I think is pretty material from three years ago is our snowmobile business is dramatically healthier than it was. We were still working through (inaudible) issues some of which might capture -- our snowmobile business is much, much healthier and that is a significant difference from where we were during that period as well which gives us more confidence that we will be able to expand our gross margin.

Jackie, we have got time for one more question.

Edward Williams.

Just a quick question on international. Can you just let us know or remind us what sales were, international sales were in the fourth quarter and for 2008? And then if you can talk a little bit more about the relative significance of each of those territories, Canada and Japan and what have you, the euro markets on a going forward basis.

International sales (technical difficulty) fourth quarter were $68 million which was down 15% from a year ago. For the full year it was $304 million which is up 18% from a year ago. The second part of your question was kind of maybe

(multiple speakers) how the markets are doing or different countries are doing?

I think as we have said, we are predominantly -- most of our international sales generally fall in the European region. But I would tell you that most of our growth in 2008 frankly came from other regions of the world.

Europe and Russia did grow low-single digits and we saw pretty significant growth in places like Middle East and Africa, Latin America and even Asia-Pacific. Even though they're smaller parts of our business we saw very, very nice growth. And those trends were pretty consistent throughout the year. So Europe is the big dog but it was the slowest growth area even though it did grow for the year and Europe was down in the fourth quarter.

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

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