Polaris Inc (PII) 2009 Q1 法說會逐字稿

Good morning. My name is Justin, and I will be your conference operator today, at this time to welcome everyone to the Polaris first-quarter earnings results conference call. (Operator Instructions). Thank you, Mr. Edwards. Begin your conference.

Thank you Justin, and good morning and thank you for joining us for our first quarter 2009 earnings conference call. During the call today there will be also a PowerPoint slide presentation that is accessible at our website at www.PolarisIndustries.com/IRhome, which will provide additional information for this morning's call.

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. Additional information regarding factors that may influence results can be found in Polaris's 2008 annual report and in the 2008 Forms 10-K which are on file with the SEC.

Now I will turn it over to Scott. Scott?

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

Earlier today we reported results for the first quarter of 2009. Our end markets were weak as expected, but we are pleased that results came in at the high end of our guidance. Polaris delivered earnings per share of $0.26, down 53% from the prior-year period. It is important to note this result includes an $0.18 non-cash impairment charge for the write-down of our investment in KTM.

Sales for the quarter were $312 million, down 20% from the first quarter of 2008. Our dealers reported slow -- slower traffic throughout the country, reflecting a weak consumer demand seen in many other areas of the economy. Retail credit availability continued to be tight for prospective buyers, with higher credit scores and down payment requirements limiting our finance penetration. Mike Malone will cover that more when he discusses the financials.

Overall I'm pleased with where we are three and a half months into 2009. We came into this year with a well-thought-out and prudent plan, and the demand environment has played out largely as we expected. The Polaris team has performed at an extremely high level, allowing us to deliver a respectable quarter and put us in a solid position for the remainder of 2009.

The value of our flexible manufacturing systems and overall business focus on speed played a key role in improving our gross profit margin percentage and maintaining our strong balance sheet in the quarter. We will leverage these tools throughout 2009 and are maintaining our full-year sales and earnings per share guidance. Sales are expected to decline 15% to 23%. Earnings are expected to be between $2.50 and $3.00 per share.

Looking inside the overall 20% sales decline, you can see that we had weak results in every product line and also in every region of the world. We held our own in market share, once again gaining share in our off-road vehicle division, but that did not prevent a 19% decline in ORV sales in the quarter. As expected, the economic environment and very difficult prior-year comparables put the brakes on our side-by-side growth, with sales down somewhat more than expected in the first three months but well within our range of full-year expectations.

We had a high percentage decline in Victory sales in the quarter largely resulting from our sharp focus on working with dealers to improve their inventory and inventory mix in 2009.

With whole goods shipments down in each business, it was not surprising that we saw a 15% decline in our parts, garments, and accessories sales. While the majority, 31%, of the sales decline was volume related, we also had an $18 million topline currency hit in the quarter mostly from the stronger Canadian dollar.

Our international sales were also down significantly with both Europe and Canada down more than 25% year-over-year.

I believe the good news in the sales report is actually that we just planned for it and were prepared for it. There were no real surprises.

Net income was also down significantly for the quarter in part due to the $9 million pretax KTM impairment charge. While it is still unrealized, the charge reflects proper accounting and provides a more reasonable carrying value for our investment in KTM. If you look at Q1 performance without that one-time charge, we posted a 25% decline in net income, which is more in line with our revenue decline.

Importantly -- and as we communicated in our full-year guidance -- gross profit margins expanded for the quarter, up a healthy 180 basis points. This marks the second quarter in a row where we have expanded gross margins in the face of significant volume declines. Our flexible manufacturing processes are designed to support changing volume, and we have quickly adjusted our capacity and our cost structure to the new demand environment.

We also cut more than $6 million out of operating expenses but took a hit there on net income margins. A few more puts and takes, but the key is that our core operations -- or operating margin income margins before income from financial services -- was only down 20 basis points despite the 20% volume decline.

Overall retail trends for Polaris were down throughout the quarter, off 23% versus the first quarter of 2008. While the numbers are weak, we actually saw a slight movement from the final two months of 2008. Side-by-side demand was below the fourth-quarter results and at the low end of our expectations, and we have adjusted our manufacturing and marketing plans accordingly. ATV retail continued to show double-digit declines despite easier prior comparables.

We are not expecting any improvements -- and for clarity, by improvement I mean less weak, not a return to growth -- until the second half of the year where we expect to see improvement to stem from new model year 2010 products, better comparables, and perhaps even a slightly better demand environment.

As we have often said, we feel we have a competitive advantage with our strong dealer network, and maintaining that through this economic cycle is an important part of our 2009 plan and long-term strategy. We continued to reduce North American dealer inventory in the quarter, down 7% from the first quarter of 2008 and 8% below the fourth-quarter results from last year.

Both our dealers and Polaris believe dealer inventory is still too high, and we are committed to working with them to further reduce inventories throughout the year. MVP -- or our max velocity program -- is going to gain momentum, and Bennett will talk more about that in a few minutes.

We've recently developed a more sophisticated process to evaluate the economic viability of our dealers, working closely with GE Capital and Polaris Acceptance to better predict where we may see dealer stress. We are finding that both dealer receivable balances and credit losses are well within our acceptable ranges.

Dealer count also remains healthy. We have stated that we expect to lose approximately 5% of our dealers this year, which keeps us relatively stable with recent historical levels. As the chart indicates, we lost only 13, or less than 1%, of our dealers in the first corner, which is down from the fourth quarter of last year, and this provides confidence that our loss projection is about right.

With that, I will turn it over to our Chief Operating Officer, Bennett Morgan, who will provide more color on our operations and business unit performance.

Thanks Scott. Let's begin with operational excellence. Our operational excellence initiatives continue to deliver. Scott has already reported on the positive dealer inventory results quarter to date. In addition, factory inventory decreased year-over-year by $34 million or 12%. We expect to continue to improve our factory inventory percentage improvement as we move throughout the year using our speed and flexible manufacturing capability to run Polaris at lower levels of factory inventory.

Our improved speed and cost reduction focus are starting to pay nice dividends in gross margin expansion, up 180 basis points in the first quarter of 2009. We are having good success in this environment in finding opportunities to reduce our costs and improve our quality simultaneously through the efforts of our engineering and supply-chain partners.

Commodity costs have come down nicely, giving us a strong one-two punch on the cost side.

Our focus on rightsizing and reducing waste resulted in operating expense reductions of 10% year-over-year in Q1, and we remain confident in our guidance on gross margin expansion for fiscal year 2009.

Our MVP -- or the max velocity program test -- with our dealer network, which is essentially a new way to do business in power sports, continues to perform to our expectations. In this test we are having a retail and order discussion every two weeks with our dealers versus the traditional two times a year discussions. The objective of the test group of dealers is to continue to grow market share while operating with much lower levels of inventory. As is the case with most tests, we are learning very rapidly, with much more wins than losses so far. Our internal process improvements on MVP and learnings continue, and we remain optimistic that we will expand this program further in 2009.

Off-road vehicles. Our ORV business performed to our expectations in the first quarter with sales down 19%. The economic headwinds continue to dampen retail demand pretty much everywhere. The North American ATV industry was down just over 30%. And while we don't have clear industry data for side-by-sides, as we believe it was also down double-digits for the first quarter. And our international ORV market also remains slow.

Our innovation continues to drive market share gains year-over-year. The new Sportsman XP 850 was recently awarded ATV of the Year from ATV Magazine. This is the second year in a row we have won this prestigious and coveted award. The 850 also won ATV of the Year from a leading European publication.

Our side-by-side business also continues to gain share due to the strength of our RZR, our new RZR S, and the new RANGER platform. However, first quarter industry and Polaris side-by-side sales were a bit weaker than we have anticipated due to the economy.

Dealer inventories continue and improve, both year over year and sequentially, from year end with North American ATV inventory specifically down 17% year over year, and side-by-side dealer inventories -- which have been healthy -- remaining at appropriate levels.

Industry ORV promotion levels are up year over year but remain within our expectations. Polaris has had success moderating its ATV promotion spending, and we expect to continue this trend going forward.

We are making good progress on ORV cost improvements in both operating and product cost areas, helping offset the lower demand environment we are in. The spring dealer order session for ORVs met our volume expectations, and our ORV shipment guidance for full-year 2009 remains unchanged.

Snowmobiles. The Polaris snowmobile business concluded another solid season. The industry experienced good snowfall across the snowbelt for the second consecutive year, which as the economy improves will no doubt be helpful. First-quarter industry retail sales stabilized, and for the year the industry declined low double digits as did Polaris retail sales. Polaris remains number-two in market share.

Dealer fundamentals remain solid for Polaris snowmobiles. Polaris North American dealer inventories are the lowest in the industry, and our dealer inventory is essentially flat year-over-year and what we would characterize as an acceptable level.

The launch of our innovative new RUSH snowmobile PRO-RIDE suspension, the industry's first and only progressive rate rear suspension, is going extremely well. Consumer activity and interest in the RUSH is very high at the industry sneak previews that we are seeing throughout the country.

Dealer orders are still being finalized as preseason snow check orders are still in process, but at this time North American orders look like they will meet our expectations, though we may see a modest adverse impact due to model mix. For 2009 we still expect snowmobile sales to decline by 10% to 20%, but we will finalize this for you once worldwide dealer orders are complete.

Victory motorcycles. Our Victory business had a decent start to 2009 in a challenging economic environment. First-quarter sales declined 49% as we aggressively reduced shipments, as we had previously communicated, to assist dealers in reducing inventories; and we also came up against some tough 2008 comparables with the Vision launch.

Dealer inventories continue to be worked down very nicely, down 24% from a year ago.

Polaris and industry retail sales were soft but about as we had expected, with industry retail sales in heavyweight cruisers and touring segments down low double digits in the first quarter of 2009, and Polaris just a little bit weaker than that.

We have made some significant adjustments to our marketing strategy, highlighted by an industry-leading five-year warranty promotional offer with the key message that the industry's best bike now has the industry's best warranty. Consumer and dealer response to our changes have been favorable. March retail sales actually grew year-over-year for Victory motorcycles, and we are encouraged and looking forward to the key spring and summer selling months ahead.

Parts, garments, and accessories. PG&A sales declined 15% in the first quarter due primarily to lower sales in ORV accessories due to lower ORV retail sales. Our most profitable margin business successfully expanded gross margin percentages in the first quarter even with lower volumes. Our guidance for 2009 remains unchanged that our PG&A business should modestly outperform our overall Polaris business portfolio.

International. International sales were down 28% in the first quarter as Polaris and its distribution partners adjusted to the global economic slowdown and currency shifts that we saw late in 2008. The European ORV market continues to be soft, down low 20s percent, but Polaris continues to gain market share, and we remain number-one in Europe.

We had a mixed season in our international snow business. The Scandinavian market was down only mid-single digits with Polaris down a little bit more, so we lost a little bit of share for the full season. We continue to see weakness in the formerly fast-growing Russian market, and we expect this will continue throughout 2009. The new RUSH however is generating a lot of international excitement and with that early model year '10 order feedback looks solid, except for the weakness we are seeing in Russia which may impact our overall quarter level modestly.

Our strategic commitment to growing globally continues to progress, and we made a few key hirings and some structural changes in the first quarter in both our EMEA and Asian geographies that we believe will accelerate our future growth globally.

Adjacencies. Our growing military business had a solid quarter. We continue to have success penetrating new customers, particularly international opportunities. Our new customer quote activity and our order backlog both grew significantly year-over-year, which is encouraging.

Our new strategic alliance with Bobcat is off to an excellent start, and the engineering teams are currently working together on our phase 1 project of a line of highly differentiated Bobcat branded vehicles which will come to market in the second half of 2010.

We remain very optimistic with the long-term growth opportunities of combining the strengths of the number-one off-road vehicle manufacturer with those of the number-one compact construction equipment manufacturer and our respective distribution networks to bring new and exciting products and solutions to new customers as we go forward.

We also remain on-track to announce a second adjacency later this year.

With that, I will turn it over to Mike Malone, our CFO.

Thanks Bennett, and good morning to everyone.

As Scott and Bennett mentioned, our first-quarter results finished in line with our previously issued guidance in a very difficult economic environment. Scott and Bennett have already provided significant detail about the first-quarter results, so I will limit my comments to our 2009 guidance with some specific reference to actual first-quarter results and highlight a few specific points.

I'll begin with our financial services business. As it did in 2008, income from financial services is expected to decline significantly for the full year 2009 to about half of the $21 million income earned last year. This guidance is unchanged from our previously issued guidance. As discussed in previous calls, the decline is primarily due to our revolving credit provider -- HSBC -- eliminating the volume-based fee income payment to Polaris as of March of last year. No income is expected in 2009 from HSBC.

For the first quarter 2009, we financed through our retail credit programs HSBC, GE, and Sheffield combined, about 31% of Polaris products sold to consumers in the United States, which is the same penetration rate that we experienced in the fourth quarter of 2008 but lower than the 39% penetration rate experienced for the full year 2008. The approval rate in the first quarter of 2009 declined to 44% compared to 51% for the fourth quarter and 53% for the full year last year.

Both the penetration rate and the approval rate are somewhat lower than historical levels and somewhat weaker than desirable, due to the credit tightening by our retail credit providers, and no doubt is having some impact on our retail sales levels. We continue to feel our retail credit relationships are relatively stable given the overall uncertainty in the consumer retail markets, particularly with the addition of the third alternative in Sheffield, which is now providing installment loan offerings to our consumers.

For the first quarter '09 the wholesale portfolio related to floor plan financing for dealers in the United States was approximately $651 million, a decrease of 2% from the end of the first quarter last year, reflecting the decline in the dollar amount of dealer inventories. This decline of 2% in dollars compares to the units outstanding in the portfolio, which are actually down 10% compared to last year due to the mix change to higher-priced side-by-side inventory.

Credit losses in the dealer wholesale portfolio remain very reasonable, averaging well less than 1%. During the first quarter of '09 we did see a modest number of dealer failures and credit losses, similar to the fourth quarter of '08; but these issues were well within our expectations.

For the full year of 2009 our expectation for the wholesale financing income generated from Polaris Acceptance remains unchanged and is expected to be somewhat lower than the $13 million earned in 2008 due to a combination of the expected lower dealer inventories, a high -- a lower interest rate environment, and a difficult funding cost environment for GE's debt that finances the portfolio.

We are pleased with our long-term wholesale financing relationship with GE and our joint venture structure of Polaris Acceptance and do not expect any significant dealer credit capacity issues to materialize in 2009.

The actual gross profit margin percentage generated for the first quarter '09 was 24.5% compared to 22.7% in the first quarter last year, a 180-basis-point improvement. Our quick capacity and cost structure adjustments and flexible manufacturing processes helped minimize the fixed cost absorption impact of the lower volumes during the first quarter.

The gross margin percentage in the first quarter benefited from commodity and transportation cost decreases, higher selling prices, lower ATV sales promotion costs, and a positive product mix change. These gross margin benefits were somewhat offset by currency movements in Canada, Japan, and Europe, which created some headwinds for us in the first quarter and will likely continue throughout the remainder of the year.

The mix of positives and negatives experienced in the first quarter combined with our aggressive product cost reduction efforts are expected to continue to generate gross margin percentage expansion throughout the remainder of the year. Thus we continue to expect the gross profit margin percentage for the full year of 2009 to improve upwards of 130 basis points over the 22.9% generated last year, which is unchanged from our previously issued guidance.

We have heard some skepticism regarding our ability to expand the gross margin percentage while volumes are declining. But hopefully our successful results over the last two quarters will give many of you more confidence that we can expand our gross margins in a declining market, resulting in a large part from our flexible manufacturing and variable cost and compensation structures as well as aggressive cost reduction efforts.

Moving now to our balance sheet and liquidity profile for 2009, our total debt levels finished at $244 million at the end of the first quarter, which is a $16 million improvement, lower than a year ago. We continue to have adequate borrowing capacity under our attractively priced $450 million banking arrangement comprised of a strong and stable corporate banking group. Debt to total capital was 64% for both quarters ended March of this year and last year.

For the first quarter of '09 we made investments in the business through capital expenditures and new product development tooling totaling $13.7 million, which is 31% lower than a year ago. For the full year '09 we expect to continue to moderate our appetite for capital expenditure spending and realize a significant decline to be in the range of $50 million to $60 million for the year. 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.

We continue to expect depreciation for the full year '09 to be in the range of $60 million to $65 million.

Operating cash flow used for operating activities was $33.1 million for the first quarter of '09, or a 5% increase from the first quarter a year ago. The decrease in net income in the first quarter is the primary reason for the increased use of cash flow in this historically seasonally weak cash flow period. We continue to expect cash flow provided by operating activities to decrease for the full year '09 in line with the decline in net income. But notably cash flow generated will remain well above the net income levels.

Factory inventories at the end of March were $245 million, a 12% decrease from a year ago. We expect factory inventory levels to decline consistently throughout 2009 as we have adjusted and will continue to adjust our production capacity and build schedules for the challenging demand environment we expect to experience throughout the year.

As I explained on our previous earnings call, we are taking a different approach to our share repurchase program given the uncertain overall economic environment. During the first quarter of '09 we repurchased only a nominal number of shares. Although we currently have 3.8 million shares remaining on our Board of Directors' authorization, we will continue to take a prudent and conservative approach to the stock buyback in 2009 until more clarity emerges for the longer-term economic outlook.

As you know, during the first quarter of '09 we pay a cash dividend of $0.39 per share, which represents a 3% increase over the first quarter of last year, and we expect to continue to pay the dividend at that rate for the remainder of 2009.

Given that our first quarter '09 results were in line with our expectations, and our outlook on market demand trends has not changed significantly, our full-year 2009 guidance remains unchanged. Total Company sales are expected to decline 15% to 23% with the individual businesses performing as follows -- off-road vehicles down 17% to down 25%, snowmobiles down 10% to 20%, Victory motorcycles down 25% to 40%, and PG&A down 9% to 13%.

Gross margins are expected to expand up to 130 basis points for the reasons explained earlier, and operating expenses are expected to decrease significantly in dollar terms for the full year 2009 as we continue to deal aggressively with the reality of a lower-volume environment. We have made a number of very tough decisions on personnel and other operating expense categories without impairing our ability to compete and innovate in our respective market segments. Operating expenses will increase as a percentage of sales for the full year '09 compared to '08, primarily due to the lower sales.

The income tax provision was reported at a rate of approximately 33.9% of pretax income for the first quarter of '09, which is lower than last year due to the federal research and development tax credit, which had not been extended by the US Congress in the first quarter of '08. For the full year '09 our expectation is for the income tax provision rate to be in the range of 34% to 34.5% of pretax income, which is unchanged from our previously issued guidance.

Diluted earnings per share for the full year '09 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 last year.

As we have said, during the first quarter we recorded a non-cash impairment charge on securities held for sale of $9 million pretax, or $0.18 per diluted share. This charge represents the determination that the decline in the market value of our KTM investment as of the end of March of '09 was other than temporary, and therefore we were required to take a non-cash charge against earnings in the income statement under the fair value accounting rules.

Although the magnitude -- or the certainty that an impairment charge would be required was not specifically known when we issued the original guidance in late January, we planned conservatively and expected the KTM market value decline to continue well into 2009. So in other words, we more or less contemplated the impending impairment charge when we gave our initial guidance. As a result, we are maintaining our previously issued full-year 2009 guidance range for earnings per share.

Guidance for the second quarter of 2009 is as follows. Sales are expected to decrease in the range of down 25% to down 30% from the second quarter of a year ago, due primarily to weak -- continued weak industry trends for each of our businesses and geographic markets during the second quarter.

Earnings are expected to be in the range of $0.40 to $0.50 per diluted share in the second quarter compared to $0.72 in the second quarter of last year. Let me remind you that the comparables in the second quarter are pretty tough, in that sales grew 21% and EPS grew 16% in the second quarter of '08.

The second quarter '09 sales guidance reflects the reductions in our end of the model year 2009 build schedule for both ORV and Victory, which we have already made in response to the weak demand environment and the dealer order patterns.

In conclusion, we feel our plans for 2009 remain achievable in the current, challenging external market environment. We continue to actively implement contingency plans and are confident that we can adjust production levels and cost structures appropriately.

At this time I will turn it back to Scott for some concluding comments.

Thanks Mike. Overall it was a solid start to the year for Polaris. Hopefully between our first quarter results and comments this morning, you can see that Polaris is well prepared to deal with the reduced consumer demand that is part of this major recession we find ourselves in. We do not know whether we will see a decline or improvement in retail demand in the quarters ahead, but we are certainly ready to act fast and make adjustments to keep our business and our dealers strong.

I want to be very clear however that merely weathering the storm is not our goal. We continue to make important investments in our business to ensure that we can execute our strategic priorities and emerge from this period a stronger, more profitable Company. I continue to be impressed by the ingenuity and work ethic of this entire Polaris team and look forward to speaking with you again next quarter to talk about our progress. Richard?

Thanks Scott. Jason, we are ready for the questions from anyone in the audience.

(Operator Instructions). Edward Aaron, RBC Capital Markets.

Nice job on the quarter.

I wanted to ask a little bit about Victory. I know I'm probably preaching to the choir when I say this, but the market share performance there is just -- it's kind of frustrating to see it kind of settle at this level considering how much you've invested there over the years and how strong the product is. And Scott, I was wondering if maybe you could give us an update on kind of what you are doing strategically to try to take that business to the next level?

That's a good question, Ed. Clearly we're not happy with our current market share levels, but let's be clear. We have a great product line here, and there's lots of upside as we go forward. We are not actually playing a market share game this year. We are extremely committed to fixing the channel, and by that I mean reducing the mix of non-currents at our dealers and helping the retail sell-through. So that's where we put our efforts.

Early signs in March -- as Bennett pointed out -- we actually had year-over-year sales growth. But we're not in a position where we are going to play the very aggressive promotion game that we see some in that industry playing. Long-term we have actually scaled back a little bit of our research and development in Victory and shifted some of those resources and funding to the front end of our business, and we expect to see results from that throughout the year.

So yes, we are disappointed with where we currently are, but we do feel like we will use 2009 to get the business model better suited to support long-term growth.

Thanks. And then I was hoping you could also elaborate just on the promotional environment a little bit. I know it was a positive contributor to your financial performance. But just anecdotally, when you kind of look at what's going on in the channel, it seems noticeably higher. And I know that a lot of that is coming from the core ATVs, which are a smaller part of your business now than they once were, but I'm just -- I'm trying to get my head around -- there seems to be a little bit of a disconnect there.

Yes. I think one of the things you are seeing , Ed, is the benefit we have from having the best products in the industry. Bennett pointed the Sportsman, the 850 XP with ATV of the Year. That helps. As we have better products, we have to promote a little bit less.

Actually the Canadian currency helped a little bit as well. As we saw strength in the dollar, it required us to promote a little bit less in Canada. But overall -- Bennett, do you want to comment on the overall promotional environment? But it's not terribly different or more difficult than we saw last

Yes, Ed, it is up year-over-year in both categories, but from what we saw in the fourth quarter, frankly the dollars -- and when you average them out across the overall portfolios for both -- for the industries are relatively at similar levels, so they are within our expectations. And as we had mentioned in our remarks, we have moderated our ATV promotions down, and we are still able to gain share in the first quarter. So we are encouraged.

We expected it to be more aggressive in this lower-demand environment. Some of our competitors are probably dealing with some non-current issues and different things like that so we had planned for a more aggressive environment in both ATVs and side-by-sides, and that's largely what's playing out.

Thanks. And then, Mike, maybe one for you. You made some comments I think. I didn't quite catch them. But I think you mentioned something about the commercial floor plan and feeling pretty comfortable about how that's going to shake out for the rest of the year. Can we be reasonably certain that we are not going to see any meaningful changes in the terms at which dealers are flooring their product?

Yes, Ed. They're -- GE is making a lot of changes in a lot of parts of their business obviously. We have seen changes to some of the dealer relationships in other parts of the world. We haven't seen changes yet in the US. But in Europe for instance in the fourth quarter, there were some pressure on dealer credit lines that were pressured. Now that's eased up a little bit in the first quarter, so that appears to not be as significant an issue for us as it was in the fourth quarter.

In Canada the dealer rates for flooring have actually gone up during the first -- or actually here in the second quarter, throughout the industry including Polaris and our dealers in Canada. That hasn't happened yet in the US. It is occurring in other industries, for dealers to being pressured with higher rates. I suspect it's going to happen in power sports, and whether it happens to Polaris or our dealers is yet to be unseen, but at this point there are no changes.

Hayley Wolff, Rochdale Securities.

Just a couple of questions. First, can you give a little more detail on the ORV inventories in the channel? In the press release it indicates they are down 19%, your shipments were down 19%. So I'm just trying to understand the flows.

And then secondly, what have you seen thus far in April that gives you a feeling that your 2Q sales will be down on a slightly greater rate than what your first quarter sales were down?

I'll take the second part of the question first and let Bennett cover the channel inventory on ORV.

Obviously we don't like to react to weekly or even monthly changes, but what we're seeing early in April is a positive. We think we see a little bit of improvement, and that's important as we see seasonality coming in. So on balance I think the second quarter -- we've issued guidance, it's going to be tight on the shipment side as we try to manage inventories, but we feel like what we're seeing across the product lines in April -- obviously we've factored that into our guidance.

And the other thing I would add to that -- this is Mike. The other thing I would add to that is that in the second quarter here we have reasonable visibility of dealer orders for the balance of our model year '09. And as I said, for ORV and Victory we have got production pretty well set and dialed down toward the end of the model year, and that model year obviously ends at the end of the second quarter here. So based on the dealer orders and our production levels, we've got second quarter pretty well dialed in.

And Haley, this is Bennett. On the inventory levels -- just to clarify and make sure we -- you got your numbers right. Overall ORV inventory for the quarter was down 7%. We're down year-over-year in ATVs -- which has really been our focal point for the last several quarters -- is actually down year-over-year 18%. Side-by-sides have been basically lower, healthy levels really for the past several quarters, and those remain at acceptable levels. We didn't work those down, but that wasn't the objective going into the quarter. So in our lowest demand quarter we actually were able to lower inventory within the quarter, so we are frankly quite pleased with that performance.

So to clarify, on the second quarter the ORV and the Victory shipments, it sounds like as you roll through the end of this model year, you are just going to ship what you are shipping and leave the markets a little bit -- maybe short but so it works down inventory and sets you up for the model year changeover?

Yes. That's exactly right.

Greg Badishkanian, Citigroup.

I just wanted to follow-up on some improvements that you saw in April. If I heard you correctly it sounds like things got a little bit better. That sounds encouraging. Is it retail? Is it -- how about the promotional environment over the last month or two, is that kind of stabilized? By your competitors?

You know, like I tried to indicate, Greg, I don't -- we're not going to react very much to 15 days or 16 days of retail information. It's nice to see when it doesn't continue to deteriorate. But I -- as Bennett talked about the promotional environment, it is about where we expected it to be. We haven't seen many changes as we have gone throughout the year. It's playing out about like we expected.

Bennett, do you want to add any color to that?

No. I think that's -- these are key selling seasons as we go forward, so spring season is important to us, and we like what we see in the first 15 days, but I -- as we've tried to indicate, we are going to be conservative and balanced about this and not get too high or too low based on weekly or monthly shifts in demand.

Yes. So I think April is an important month as a starting selling season. So that's helpful to get that color.

Also just, Scott, now that you've been with the Company for some period of time, is there anything that kind of differed from your initial expectations prior to joining, either on the positive or negative side? I know you joined at a pretty tough time in terms of how the macro environment has been going, but anything that kind of surprised you one way or the other so far?

I mean, I think there's two kinds of surprises, and I think both of them are ultimately positive. First -- and you pointed out that I happen to have the appropriate timing of coming in right as the market started to turn, but that really allowed me to see the strength of this team and the benefits of our flexible manufacturing processes. The way we reacted and were able to adjust to the lower demand environment, take the costs out, and maintain the focus on dealer inventories, I really got a great chance from Bennett and Mike on down to see how strong this team is and give us the ability to react.

The other thing, which I see as a positive, is we did not have as strong a focus on margins as I would like to have seen, and I think we have an opportunity over time -- as I've previously communicated -- to not only expand gross margins but also start over time to expand operating and net income margins as well.

So really what you know about the business is the strength of our innovation. I think we started the year off strong with the launch of the RUSH snowmobile. I think you'll see continued strong model year '10 product coming out.

So no, no real surprises. I never had a single regret about the decision.

And just finally, Europe. That seems to be tough for consumer in general. It's really kind of took a dip down in the first quarter for -- Harley just talked about it on their call. What are you kind of seeing there? And are there any particular markets that are better or worse? And has it kind of stabilized throughout the quarter would you just say, just in general?

Europe was tough. They actually lagged a little bit. In November and December when we started to see the US market fall off, Europe held up a little bit stronger. As Bennett pointed out, Russia -- which is an important market for snowmobiles; it had done well for us -- really started to come down.

I'll let Bennett provide a little more color on it because he can talk about how we're doing from a share perspective there, which is a positive. But really, as I talked about the overall business, we have a very, very strong team in Europe. And they have helped us get the number-one position in ATV market share, and we've [got] a lot of confidence in their ability to execute in a difficult market.

The only thing I would add is, obviously for us the international market was very, very strong last year for most of the year. And so relatively -- people don't feel great about it, but again to put it in perspective, the EU markets, while down and soft, are still performing on a whole better than what we're seeing in North America right now. So they are weaker, as we saw in the fourth quarter.

I [would] (technical difficulty) characterize what you said is that they have stabilized through the first quarter. But relatively speaking they are a little bit healthier than what we are seeing from year-over-year comps in North America in every business we compete; whether it's ORV; whether it's snowmobile; or whether it's the Victory, which we are really just getting into the business so it's a little tougher to compare.

The only other insight I would add is that our subsidiaries -- we seem to be performing at a pretty high level where our subsidiaries are in markets, which is encouraging to us.

The other thing I would point out is that we are down 28%, which is about $20 million quarter over quarter. Almost half of that is currency related. There's -- the currencies have moved significantly around the world, and quarter over quarter it's -- around $9 million or so of that departure is currency related.

Tim Conder, Wells Fargo.

Gentlemen, the by the way the slides are great and a good addition here to the overall presentation.

Mike, just a clarification on the forex comment you made. $9 million, and Scott referenced an $18 million number earlier on revenue? Did I miss something there? We you talking EBIT or --?

No, no. They are both sales. Canada is about half of it, and the other half is our international business, mostly which is in Europe.

Okay. And then on the EBIT line, any color there as far as the forex on the EBIT?

No. We don't disclose that, Tim. It's harmful obviously. In sales it's harmful in gross margins significantly, and as you work your way down the P&L, it gets diluted somewhat.

Okay. We'll keep asking the question.

A couple of other items, gentlemen. And Mike, just staying on that forex line, any new hedges that you guys put on during the first quarter for 2009?

Yes. We have been adding hedges on both the yen and the Canadian dollar gradually. Right now we are -- I would say about a third of our remaining exposure for the year for both the yen and the Canadian dollar are hedged at rates that are near our expectations or near our budget or near our guidance, I would say. So about a third is protected through hedges for the balance of the year.

Okay. And again, you are referring to second quarter. The balance of the three quarters overall?

Yes. The balance of the year.

Okay. And then just two other clarifications, both with the ORV. Scott or Bennett, either one, if you could just circle back and clarify, at retail in the first quarter, side-by-side versus core ATVs in the US or North America -- however you want to frame it? And then the same question in the international markets.

This is Bennett. In the ORV market at retail in the first quarter, the trends are very similar to what we've seen in the past. All markets were down, which was kind of a change for side-by-side. Side-by-sides relatively were stronger than ATVs, as they have been for the last several quarters. So ATVs -- core ATVs were weaker than side-by-sides. We've said down double-digits in side-by-sides, and the market was down around 30% for ATVs in North America.

Internationally. Again, we don't have quite as good of month-to-month detail, but the trends are again largely similar to what we saw in North America, except that relatively the market was only down low 20s.

Gentlemen, thank you. And keep doing a good job in a very difficult environment.

Bob Evans, Craig-Hallum Capital.

Can you comment on the Bobcat deal? Is that something that you see -- or that relationship -- seeing going international? And if so, in what kind of time period?

We've commented, Bob, that we like the long-term potential of that, and obviously we're not going to see anything until the second half of next year, but it is an important part of our overall growth strategy. We see it supporting our adjacencies in the military. We do see international opportunities for that. We like the long-term potential of what we can do partnering with Bobcat.

And when we think about adjacencies, should we be thinking along those lines? Or any other color you might give?

We're pretty open with what you want to think about where we're going with adjacencies, Bob. As Bennett talked about, we'll likely make another announcement around the dealer show, sometime thereafter.

And on the floor plan side again -- I think, Mike, you had made a comment that you would expect -- or it very may well happen that the power sports business sees some rate increase there. Is that something that you've accounted for as it relates to your guidance?

Yes.

Okay. And from a new product standpoint, can you give us a sense of where you are putting your -- most of your resources right now? Or given the economic environment, maybe how have things changed and where is your focus?

Yes, Bob. This is Bennett. I will try to give you a little bit, not too much -- obviously for competitive reasons. As we've said, even as we've gone to this tougher, lower-demand environment, we are staying on the gas in innovation. That's clearly been a key, key element of our success over the last couple of years. And we feel really, really good about where we are on innovation with the RUSH, with the RZR -- the 170, with the Sportsman XP, with the RZR S.

And model year '10 shouldn't be significantly different. We have some key innovative products that will be coming to market. We think we are essentially number-one in off-road vehicles -- and you will see us continue to focus a lot of focus in side-by-side. There will still be continued focus in ATVs, and I think you'll see some nice Victory innovations as well.

So we are an innovation Company, and you will continue to see us innovate aggressively. And we also believe we've got some nice innovation coming in this adjacency that we are not talking about as well. So we got lots of good stuff for you, Bob.

Good. We'll look forward to seeing it. And on the margin trends graphs, nice margins on the quarter. And it looks like your confidence level remains pretty high for the balance of the year. If you look at the components, what components give you the greatest confidence that you are going to be able to maintain improved margins?

Well, as our chart indicates, there's a lot of positive arrows here that are helping us over the last couple of quarters, and our expectation is that many of those will continue. So it's pretty much the things I talked about. The commodity and transportation cost environment seems to have stabilized. It continues to improve quarter over quarter for us, and it's kind of stabilized sequentially. So I expect that that will continue to provide significant benefit. We (multiple speakers)

Mike, is that the biggest component in terms of improvement? I guess that's what I'm trying to get is what are the biggest one or two components? And then I assume currency is the biggest negative.

Yes, currency clearly is the biggest negative. There's lots of positives. I would put currency -- or commodity and transportation up there. I would put the promotional environment improving for us up pretty high. The selling prices has -- there's quite a bit of an impact.

And just our focus on aggressive cost reduction is clearly having an impact. We've put a lot of very talented engineers on an objective of taking costs out, and we're starting to see some real good benefits of that, and as we move into model year '10 in the second half of the year, we'll see even more benefits.

Joe Hovorka, Raymond James.

I actually think most of my questions have been answered, so I guess I don't have anything.

I do appreciate the comments though regarding the gross margin to those investors who may have been skeptical of you increasing them.

Any idea who those might be, Joe?

I'm not sure, but if you have any clarity on that, I would appreciate it as well. Thanks guys.

Craig Kennison, Robert W. Baird.

Most of my questions have been addressed as well. But maybe, Bennett, if you could comment on the channel fill opportunity related to the Bobcat program?

Yes, Craig. Really from a -- as we talked about in phase 1, the phase 1 relationship with Bobcat will be a highly differentiated Bobcat vehicle through the Bobcat distribution channel. They have had a utility vehicle in the past that wasn't a significant volume contributor for them. So we view it as a -- what I would call a material but modest opportunity for us through the Bobcat channel really as a supplier in that front. And then longer-term, a few more years out, we see more substantial opportunities frankly within our own channel as we work on our co-developed products with Bobcat and Polaris, which we are very excited about.

And lastly, could you comment on the lead ban in the youth products as it relates to your youth ATV business?

Yes. That actually drove a little bit of your year-over-year sales increase in the first quarter as we worked with our dealers to get some of that inventory out of there. We are very discouraged by the way the combination of CPSC and Congress are working. We've actually been working very closely with several of the Senators with the National Association of Manufacturers and the CPSC. We've started to see a little bit of movement there. We heard something yesterday, that Congressman Waxman may introduce legislation soon that would mostly make this better for us.

But it's very disappointing. It's not a real material issue from a -- we're working it multiple angles, and we are working on -- as I just discussed -- the legislative angle. We're also -- have the engineers trying to design around it, so we feel like we're going to be able to get through this one, but it's disappointing that we have to.

Agreed. Well, thank you.

Assia Georgieva, Infiniti Research.

A couple questions. First of all on the RUSH snowmobile, what are your expectations in terms of second-half sales given that the 2010 model year will be at (technical difficulty)

Yes. This is Bennett. The -- specifically speaking of the Russian snowmobile market, as we've seen in all of Russia with a lot of the currency devaluations and the difficulty that they are going through in the environment, we expect our -- the market and Polaris snowmobile sales to be down in 2009. We have a very strong partner there, strong distribution. We feel good about it long term, but in 2009 -- as I said in the remarks -- I expect that it will be down and down reasonably significantly. It won't be super material to us in the overall context of our snowmobile business, but that is -- been a nice growth market for us the last couple of years, and so we look like we're going to deal with at least a year or so of retrenching in Russia as they get their economy straightened out.

I appreciate that, but my question was more for the RUSH -- R-U-S-H -- snowmobile that you've been introducing.

Oh, RUSH. I'm sorry.

Yes. But I appreciate the [other] answer (multiple speakers) as well.

It was a darn good answer to a question you didn't ask.

Exactly. This is great.

The RUSH snowmobile, we are very excited about that. We expect to have a large percentage of those presold through snow check and the -- or the snow flies. The interest has been outstanding both in North America and internationally. We've got a pretty unique product. We really only have it in one of the products, so it is a -- it's still only a reasonably modest part of our portfolio this year. But we do believe that will be a pretty material piece to our preseason snow checks and our sales going forward. So we are very encouraged by the RUSH acceptance so far from consumers and dealers.

And I imagine that the average selling price there is quite a bit higher than what the rest of the snowmobile (multiple speakers)

It is. It has a 600cc power plant, so that's kind of in our heart of the market type of products. Our 800s are more expensive. But compared to other 600s, it is more expensive. So the average selling price is up on that product.

Then my other question was on -- it's very subjective; I realize that. But the ATV dealer mood over the past three months, since you have been doing a lot more checking in with your dealers, do you see any changes? And again, I realize April -- two weeks of April is not enough, but can you see any change from the November/December very depressed I would say levels?

When we've spent time out with the dealers recently -- as I indicated in my comments -- floor traffic is light. I think the overall lower consumer demand environment is the biggest issue. We hear a lot from our dealers about retail credit and the availability of financing. You saw that our penetration numbers were lower. That's a concern.

On a positive side, two areas where I think our ATV customers -- our dealers specifically like what we're doing is on the innovation. They like having the best product in the markets to sell. And secondly, the ones that are -- the 17% or so that are on the MVP program like the way that we are helping them manage their inventory. So they are looking for the market to turn around, but our dealers have their head in the game. We like that.

And at this point you are not seeing any sort of turnaround, even modest levels of it (inaudible)

In dealer attitudes? Or in ATV retail? What's the question?

ATV retail and dealers. I would just imagine that retail would help dealer attitudes.

Yes. I would tell you that I don't think the dealers have seen anything that's a significant, sustained turnaround that would give them reasons yet for optimism at all right now. So as Scott said, their head's in the game, but it's tough out there for them. There's no question about that.

I understand. One last question. Maybe, Mike, you could help me with this. Any specifics on your KTM strategy longer-term? Any thoughts on exiting that investment or continuing to work with them on any R&D projects?

Yes. We're -- we'll continue to hold our investment. We have about 5% of KTM held by Polaris. We will continue to hold the investment, particularly given the low price. We continue to source engines from them. We continue to work together on engine projects. And so I think the relationship is stable and is consistent with what we have experienced the last year or so.

Okay thanks. I want to thank everyone for participating. We are out of time this morning. We look forward to speaking with you next quarter. Talk to you [soon] (technical difficulty) Bye.

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