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Executives

Richard Edwards – IR

Tom Tiller – CEO

Scott Wine – New CEO

Bennett Morgan – President & COO

Michael Malone – CFO

Analysts

Edward Aaron - RBC Capital Markets

Craig Kennison - Robert W. Baird & Co.

Timothy Conder - Wachovia Capital Markets

James Hardiman - FTN Midwest Securities

Gregory Badishkanian - Citigroup

Hailey Wolf – Unspecified Company

Analyst

Polaris Industries Inc. (PII) Q3 2008 Earnings Call October 14, 2008 10:00 AM ET

Operator

Good morning, I would like to welcome everyone to the Polaris Industries third quarter 2008 earnings conference call. (Operator Instructions) Mr. Edwards, you may begin your conference.

Richard Edwards

Good morning and thank you for joining us for our third quarter 2008 earnings conference call. The speakers today are Scott Wine, our new Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Michael Malone, our Chief Financial Officer.

During the call this morning we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels and other matters including more specific guidance on our expectations for future periods which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements, which by their nature involve risks and uncertainties.

There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning those factors can be found in our 2007 Annual Report and 2007 Form 10-K which are on file with the SEC.

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

Tom Tiller

Thanks Richard, good morning everyone. Before we get to the meat of the program, the actual earnings announcement, I’d like to begin by doing two quick things. First I wanted to let you all know that the management transition is going well.

Scott began work on September 2 and is rapidly coming up to speed. He, Bennett and the rest of the management team are running the business well amid a very turbulent environment and I’m assisting whenever needed.

Secondly, I wanted to say thanks to all the Polaris shareholders. This will be my final earnings announcement and wanted to say how much I have enjoyed your support over the last 10 years.

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

Scott Wine

Thank you Tom and good morning everyone. Tom, first I’d like to thank you for the introduction but more importantly thank you for handing over such a strong, Polaris business which is run by such a dedicated and experienced team.

There’s no better testament to the state of the business you’ve handed over then the record sales and earnings per share that Polaris delivered in the third quarter. Earnings for the quarter were $1.13 per share, up 6% from $1.07 per share in the prior year period.

Sales were a record $580 million in the quarter, up a solid 7% from the third quarter of 2007. Despite a difficult and declining external environment Polaris continues to outperform. I have gained an appreciation for the strength of the team and their passion to win in my first six weeks on the job.

Our success is clearly the result of the strong execution of the strategy that Bennett and the team have led; to win in the core, drive operational excellence and target key growth opportunities.

I met with several dealers recently and they confirmed that our strategy is working. Like us they are concerned about the macroeconomic environment and specifically the credit markets and Michael Malone and I will speak to that today.

But they also remain positive on our improved order management system and our aggressive new product introduction. We are leveraging our operational excellence initiative to respond to the changes in the market faster and more efficiently then our competitors and are being rewarded for it by our customers.

Dealers and many other customers participated in our Annual Dealer Show in Vegas in July. It was certainly one of the highlights for Polaris. We launched more than 14 new products including the all new Sportsman XP lineup and more than five new upgraded RANGER models.

The Limited Edition Tenth Anniversary Victory Vision was also launched at the show, selling out in record time and setting the stage for dealer orders that exceeded our expectations in all product categories.

Both our international business and our parts, garments and accessories business were up nicely in the third quarter; more than 31% and 20% respectively. Side-by-side sales continue to be very strong for Polaris and we are proud to maintain our market share lead in this increasingly competitive segment.

The success of the RANGER business is in contrast to the core ATV market which posted weaker then projected retail sales in the quarter; down nearly 28%.

In response we quickly reduced ATV production which enabled us to drive dealer inventory down from the prior year period despite the lower retail demand.

When I started with Polaris in early September, it seemed that the declining ATV market would be the primary concern for the remainder of 2008. While we are still working to manage that appropriately the credit crisis is clearly a key focus for us now.

As most of you know we have a very strong and experienced CFO in Michael Malone, and it is comforting to know that he is guiding our corporate finances through this period.

Polaris has always operated with a conservative approach and our balance sheet is strong. We are also comfortable with our retail credit positions, both revolving and installment although we are maintaining a close watch on rates and approvals.

In the past few weeks we have worked closely with GE and HSBC and look forward to maintaining our relationships with them through the contract terms in 2011 and 2010 respectively. They have both confirmed their commitment to Polaris and we will continue to work with them to ensure our dealers and customers have access to credit.

As Michael will detail later our data from the third quarter shows penetration and approvals running better then the third quarter of 2007.

Our input suggests the biggest impact on dealers right now is that they are getting approvals, just not as the lower rates the customers expect.

We are closely monitoring the direct and indirect impacts of this unprecedented financial crisis and are prepared to act as necessary to ensure that Polaris continues to perform well ahead of our peers. We will use our strong business positions and productivity gains to continue to invest in product development and innovation which will strengthen our competitive position.

These are uncertain economic times and we will be appropriately cautious but we will continue to play offence in places where it makes sense, while also strengthening our defense.

In this dynamic market it is important to balance the news with the facts. Despite the disappointing economic news that is prevalent, the facts are that Polaris continues outperform. As a result we are again raising and narrowing our earnings guidance for the full year to $3.47 to $3.50 per share.

This represents a $0.07 increase in the lower end of our range and an increase of $0.02 in the upper end. With that, I’ll hand it over to Bennett for a more detailed review of our operating performance in the quarter.

Before I turn it over though, I would like to address a question that I’ve been asked by many Polaris employees and also discussed with several shareholders and that is, how will Bennett and I operate together?

I can assure everyone that this relationship is good for both of us and good for Polaris. I can say this with confidence, because in the first six weeks we have spent significant time working through some fairly difficult issues.

It has been both natural and easy. Our styles are similar and our skill sets are largely complimentary. Most importantly we are aligned on what needs to be done and will partner together to lead Polaris efficiently and effectively into the future.

Bennett Morgan

Thanks Scott, I wanted to formally thank Tom from the entire Polaris team for all he’s done for Polaris over the past 10 years. There’s no question we’re a much stronger company and team thanks to his vision and his leadership and I would concur with what Scott said as he takes the helm.

Scott and I and the team have already developed some very, very nice traction and we are looking forward to working with Scott to take Polaris to the next level.

So let me begin with operational excellence, we continue to make substantial progress in improving our quality, cost and speed. This has become essential as the external world has become more challenging and unpredictable.

We continue to work relentlessly on our speed to market. In the last call we discussed supply chain lead time reductions of 25%. We have further reduced supply chain lead times in our ATV and side-by-side businesses by another 25% this past quarter and we have now reduced our lead times by half in just under a year; that’s fantastic progress.

Our product development process has been further leaned out to be 25% quicker then where it was just a year ago. At our recent Las Vegas dealer meeting we were again able to bring key new products to market a full year earlier then what was just possible 18 months ago.

And we successfully rolled out the large regional test of our max velocity program, our new business model with our dealer network which enables the retail and order management process to be done two times a month, versus two times a year in the past.

We will evaluate and learn from this regional test quickly over the upcoming months with the goal of having the right product, at the right time for our customers with less system wide inventory.

As we gain experience and become smarter, we would expect to expand this initiative more broadly across our dealer network.

Factory inventory was down 4% from the previous quarter but up 4% from September, 2007 on sales growth year-to-date of 15%. We remain on track to reduce factory inventory by year end.

Dealer inventories remain down year-over-year even with the weak third quarter ATV industry. With that said, inventory remains a cost and speed opportunity particularly in ATVs and Victory. We can and we will run this company effectively with less system wide inventory.

The cost environment remains challenging. Our gross margin percentages were off of our plan and flat with the prior year period due primarily to continued commodity cost pressure. The Polaris team and our supply chain have done an admiral job of driving out waste and offsetting much of the commodity cost increases.

Commodity prices have recently begun to moderate but they still remain elevated, especially when compared to a year ago levels and we still expect some pressure on product costs in the upcoming months.

Operational excellence and our focus on quality cost and speed is transforming Polaris and improving our competitive position just as we said it would over a year ago. Competing and coming to market the old way is no longer sufficient in this tougher, faster, more unpredictable world.

Operational excellence is touching every aspect of Polaris; our supply chain, our product development process, our manufacturing operations, and even the dealer network and it is driving much of our competitive successes.

But there is much more progress to be made and the outside world and our customers are demanding it. Speed and waste reduction provides Polaris the ability to adapt and respond to changing market and customer conditions faster and more effectively then our competitors.

So expect us to stay on the gas in this critical area to drive our current and future success at Polaris.

Let’s move to all-terrain vehicles, our ATV business had another solid quarter with sales up 5% despite a weak domestic core ATV industry driven by continued demand for our industry leading side-by-side products.

The core ATV industry has weakened further over the past 90 days. Third quarter sales were down 28% hurt by the macroeconomic uncertainty. The 2008 year-to-date North American industry sales are now down 22% versus 2007.

We expect that the ATV environment to remain weak for the foreseeable future and have proactively further reduced our build and ship expectations in the third quarter for the remainder of 2008 and into 2009.

Polaris retail results are similar to the industry and year-to-date our share is essentially flat. The Canadian core ATV market is much stronger then the US, down low single-digits with Polaris winning share.

Dealer inventories remain down year-over-year in ATVs as we’ve continued to aggressively assist our dealers with reduced shipments. So overall, we believe Polaris and our dealers are relatively well positioned as we continue to work through this challenging core ATV environment.

Its important to remember that US core ATVs represent only about 20% of our total ATV business gross margin. The dealer meeting in Las Vegas exceeded both our and our dealer networks’ expectations.

Despite dealer concern about the power sports industry in general and the overall economy they came into the meeting in a good frame of mind as a result of the consistent efforts and improvements we’ve made to the order process and their inventory levels.

We unveiled compelling model year 2009 product news. After 13 years of industry recognized leadership with the original Sportsman, we introduced two all new Sportsman XPs, representing extreme performance in both 550 and 850 engine displacements.

The new 850 twin is the most powerful production ATV in the world. And both models come with available power steering options. The Sportsman has defined the ATV since its introduction in 1995 and the all new Sportsman XPs are without a doubt the most advanced and capable ATVs ever built.

We expect to grow market share in the segments they compete in the upcoming quarters. Overall ATV orders received from the dealers for the six month order cycle slightly exceeded our grounded expectations.

However we will be closely monitoring retail to make sure that in this challenging environment we continue to make progress on balanced core ATV supply and demand.

Our military business continues to deliver very nice year-over-year growth in both new customer accounts and orders. Year-to-date military sales are up 83% and we received new orders from 200 new customers in 2008 alone.

Our focus remains on business development through our unique products and the compelling solutions they provide are growing military customer base.

It is still early but this investment is clearly delivering.

Polaris side-by-side business remains very strong with Q3 retail sales and shipments both up well over 20% against stout comparables with the RZR volume anniversary. RZR and base RANGER retail sales both continued to grow nicely in Q3 and we believe we continue to gain market share.

Dealer inventories continued to be balance and I would characterize our dealer side-by-side businesses as very healthy.

The dealer meeting was a homerun for our side-by-side business and dealer orders exceeded our expectations. We unveiled an all new redesigned RANGER platform with improved handling and suspension, a new rider ergonomics package, and dramatic new design.

The flagship of the platform is our hardest working smoothest riding RANGER ever; the RANGER HD which stands for heavy duty that has power steering, self load level and shocks and new hydraulic heavy duty work accessories.

We also did not stand still with our industry leading recreation platform, the RZR. We introduced a complimentary RZR S that has higher horsepower performance, a much wider 60 inch stance and much longer suspension travelling [ground] clearance to better meet the needs for our riders in the dunes and the wide open spaces.

Initial dealer and customer response to the new RANGERs and RZRs has simply been fantastic.

Earlier I discussed the competitive weapon that speed is becoming for Polaris and no where is this more evident then in our side-by-side business where our new RZR S and RANGER HD were developed and brought to market about a year earlier to meet the emerging needs of our customers.

While our competitors are trying to develop a response to the RZR and our traditional RANGER, we have raised the bar and our lead. Expect more of this from Polaris in the future.

Snowmobiles, as we head into the fall the snowmobile season is off to a good start. Third quarter wholesale sales were up about 3% reflecting a slightly improved mix of models sold compared to the third quarter of 2007.

Season to date, North American industry sales are up mid single-digits with Polaris retail sales up more. So we are gaining some share early. Consumer interest and attendance at the fall shows has been strong, early season industry retail sales are good but remember they represent a small percentage of the overall season sales.

The next 120 days as they do every year, will be the critical retail months for the industry and Polaris. Dealer inventory of the industry and Polaris snowmobiles is lower then it was a year ago at this time and our hotly demanded 800 clean fire IQs and RMKs are now shipping.

We remain cautiously optimistic about the upcoming snowmobile season but as it does every year it will come down to in season weather and competition. It’s simply too early to call the 2009 snowmobile outlook.

We will know more at the end of the fourth quarter.

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

Third quarter wholesale shipments to dealers were down slightly consistent with our commitment to manage supply cautiously in light of the challenging external economic environment. The Las Vegas dealer meeting was also a success for Victory.

Dealer orders for model year 2009 met our more grounded order expectations and we expanded our 106 cubic inch Freedom B twin engine into our premium muscle cruisers while introducing a few key Limited Edition models highlighted by our Tenth Anniversary Victory Vision.

We’re clearly picking up momentum with Victory in the international marketplace. We introduced Victory in Australia during the third quarter and we announced at the Intermot International Motorcycle Show in Cologne, Germany earlier this month our intention to enter the German and other European union markets during 2009 with our EU compliant model year 2010 Victorys.

Victory remains a key strategic growth priority for Polaris and becoming more diversified and more on-road in the future. In the short-term through model year 2009 expect Victory wholesale sales growth to be muted to ensure that we manage supply and demand aggressively to protect our dealer network and the premium brand image we have worked so hard to attain with our customers in this tougher more uncertain market.

Longer term we expect to return to strong double-digit growth.

Parts, garments and accessories, the PG&A division had another very strong quarter. In fact the third quarter was a record sales quarter with sales up 20%. Perhaps the most encouraging aspect of our success is that sales growth remains strong across our entire PG&A product portfolio with growth contributions from every product line and every geographic region of the world.

We also had perhaps our best PG&A new product launch in our history at the dealer meeting with over 260 new accessory items introduced highlighted by several new side-by-side cab systems and a bunch of new winches.

Our investment and effort in PG&A the past several years is paying off. As the market has slowed Polaris dealers are more focused and capable of delivering on the entire customer experience and increased PG&A sales are a result.

We’ll wrap up with international; our international sales growth remained very strong in the third quarter with sales up 31% for the quarter and 33% year-to-date. European core ATV industry sales remain down but remain relatively better then the US market.

The key to continued Polaris success remains threefold, first its market share expansion in a more fragmented competitive marketplace. Year-to-date we have grown our core ATV market share to the number one position in Europe.

Secondly the expansion of our side-by-side business driven largely by the RZR, RZR demand remains strong internationally and we continue to make progress on balancing our international supply with demand.

And third geographic expansion in growth markets outside of Europe, such as Russia, The United Arab Emirates and Central Europe to name a couple.

We introduced some exciting new model year 2009 products specifically for our international customers; a Sportsman 800 6X6 with IRS, a Sportsman 500 designed specifically with required tractor-like features for the Northern European market and an on-road RZR S quadracycle.

We also officially opened our newest subsidiary in Spain, the fourth largest European market and we are excited about this new market opportunity.

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

With that summary, I’ll hand it over to Michael.

Michael Malone

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

As we stated in the press release although we are not immune to the deteriorating macroeconomic environment given the orders that we have in hand from our dealers for the fourth quarter and the continued strength in our side-by-side, international and PG&A businesses, we are increasing and narrowing our full year 2008 total company sales and earnings guidance.

Total company sales for the full year 2008 are now expected to increase in the 10% to 11% range over 2007. For full year 2008 we now expect diluted earnings per share from continuing operations to be in the range of between $3.47 and $3.50 which is an increase of 12% to 13% compared to the full year last year.

Updated expectations for sales growth for the full year 2008 by product line are as follows. For ATVs we now expect sales to grow in the 10% to 11% range for the full year 2008. The core ATV shipments to dealers in North America are expected to continue to be significantly lower then last year during the fourth quarter due to the continued weakness as the overall North American core ATV industry that Bennett talked about.

As it has throughout 2008 the fourth quarter decline in the core will be more then offset by increased shipments of core ATVs to the international and military market and continued double-digit increases in RANGER side-by-side vehicles.

For snowmobiles our guidance remains unchanged as we have the orders in hand from our dealers for model 2009 snowmobiles and continue shipping to those orders. Snowmobile sales for the full year 2008 are expected to increase in the mid teens percent range compared to last year.

Given a continued weak heavyweight cruisers and touring motorcycle segments in the US, sales for Victory motorcycles for the full year 2008 are now expected to decline in the mid teens percent range which is slightly lower then our previously issued guidance.

We will protect our premium brand that we have built over the past 10 years by closely monitoring dealer inventories and making adjustments to production and shipments accordingly.

And we continue to expect our PG&A business to grow at a faster percentage rate pace then the overall company sales for the full 2008 year.

For the fourth quarter of 2008 total company sales growth is expected to be in the range of flat to up 2% compared to the fourth quarter of last year driven primarily by increased side-by-side vehicles, snowmobiles and international sales offset by lower core ATVs and motorcycle sales.

The anticipated fourth quarter percentage sales increase is less then we have experienced in the first three quarters of this year as we have now anniversaried the initial shipments of the RZRs which makes the comparables more difficult and we continue to reduce shipments of core ATVs as the overall ATV market remains weak.

Earnings from continuing operations for the fourth quarter are expected to be in the range of $1.07 to $1.10 per diluted share compared to earnings per share of $1.07 in the fourth quarter last year.

If we are able to achieve our guidance for the fourth quarter which we feel very confident in achieving, the full year 2008 will be a record year in both sales and earnings per share for the company in a very tough external world.

The gross profit margin percentage for the full year 2008 is expected to improve up to 80 basis points for the full year 2008 unchanged from our prior guidance. Product mix change continues to benefit gross margins as we sell more side-by-side vehicles and growth continues in our international and PG&A businesses each of which enjoy higher then average gross margin percentages as well as the impact of selected price increases on many model year 2009 products.

These gross margin improvements are offset somewhat by increased commodity costs that we have been experiencing in each of our businesses, particularly related to input costs like steel, aluminum and plastic resins as well as diesel fuel transportation costs.

Although these commodity costs have moderated somewhat most recently it takes awhile for the benefit to be realized in our operating results given the contracts and price lock arrangements we currently have in place with many of our key suppliers.

In addition foreign currency impacts to sales and gross margins which have been favorable through the first nine months of this year are now expected to be slightly unfavorable in the fourth quarter compared to the fourth quarter last year.

We continue to expect operating expenses to increase in dollar terms and to be about flat as a percentage of sales for the full year 2008 compared to last year. Operating expenses in dollars have and will continue to increase primarily due to increases in research and development and advertising expenses to support the design and introduction of our new products.

Additionally general and administrative expenses are expected to be higher for the full year 2008 due to increases in performance based incentive compensation expenses as the company’s performance has improved in 2008 compared to last year.

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

However the availability of revolving and installment retail credit to our consumers remains at acceptable levels as measured by approval and penetration rates. During the third quarter 2008 the approval rates for customers in the United States for GE and HSBC combined was above the 50% approval rate level, improved over the third quarter of 2007.

This improved overall approval rate is the result of a dramatically higher mix of secured fixed rate installment loans through GE during 2008 which usually generate higher approval rates then the unsecured variable rate revolving credit card loans.

During the third quarter of 2008 the penetration rate which is a percentage of our retail customers in the US that are financing their unit purchases through either HSBC or GE, that penetration rate was at 41%, better then the 37% penetration rate achieved in the third quarter of last year.

In fact for the month of September alone, the most recent data that we have, so for September alone each metric, both approval rates and penetration rates were stronger in 2008 then in the month of September of last year.

These measures are encouraging given the uncertainty in the credit markets to date. So in general our customers have found that retail credit has been available to purchase our products.

To summarize our position as it relates to retail credit financing for our customers in the US our strategy is to try to maximize the access to capital for our customers. As we move forward we will continue to use the combination of HSBC for revolving and GE for installment retail financing for our customers on a national basis, supplemented with local banks and credit unions.

However given the uncertain overall retail credit market we have been exploring contingency alternatives in order to maintain retail credit availability to our customers if the current situation were to change.

Turning to wholesale financing, at the end of the quarter our wholesale portfolio related to floor plan financing for dealers in the United States was approximately $673 million, down 3% from last year at the end of the third quarter 2007.

The total units outstanding in the portfolio are actually down quite a bit more then the 3% dollar decline. The dollar amount did not decline as much as the units financed due to the strength of our PG&A sales in the third quarter as well as the mix of products that are being financed as more higher priced RANGERs and Victory Vision models are included compared to last year’s third quarter.

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

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

We do have those expected higher interest rates included in our current guidance. It is important to recognize that we do have plenty of borrowing capacity on our $450 million banking arrangement with debt of just $220 million recorded at the end of the third quarter.

The income tax provision was recorded at a rate of approximately 29.3% of pre-tax income for the third quarter of this year, compared to 30.8% in the third quarter of last year. The lower income tax rate in the third quarter of 2008 is primarily due to favorable tax events this year including a favorable settlement of certain income tax examinations.

For the full year 2008 our current expectation is for the income tax provision rate to be approximately 33% of pre-tax income slightly better then previously guided.

During the third quarter we repurchased 380,000 shares under our share repurchase program at a cost of $17 million bringing the year-to-date shares repurchased to 2.4 million shares at a cost of $103 million.

We expect to continue to be active in this repurchase program in the fourth quarter given the very weak stock price.

We currently have approximately 4 million shares remaining on The Board of Directors share repurchase authorization.

Full year 2008 capital expenditures are expected to be in the range of $68 million to $73 million as we continue to invest in new product development tooling and capital projects. We expect depreciation for the full year 2008 to be in the range of $63 million to $66 million.

So to recap, our full year 2008 revised guidance, total sales for the year are now expected to increase in the range of 10% to 11% over last year with EPS from continuing operations growing to $3.47 to a $3.50 per diluted share range for the full year, an increase of 12% to 13% over last year.

Fourth quarter 2008 sales are expected to be flat to up 2% with earnings per share expected to be in the $1.07 to $1.10 per diluted share range compared to the fourth quarter of last year.

At this time I’d like to turn it over to Scott for some final comments.

Scott Wine

Thanks Michael, before we wrap up I want to offer some quick and early qualitative thoughts about 2009. As I stated earlier we will stay very close to the market to understand the implications for the year ahead and adjust our business as necessary.

We will not however fundamentally change our strategy. We will still be assertive in 2009. The three pronged approach of operational excellence, winning in the core and targeting new growth has guided Polaris and will continue.

Although it is fair to expect that I will throttle up in certain areas and tap the brakes in others. We will accelerate and expand our operational excellence efforts and use it as a competitive weapon in this rapidly changing retail environment.

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

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

Growth will remain a priority for Polaris with an increased focus on profitable growth. By the time we meet again in January, we expect to announce an exciting adjacency relationship to accelerate our growth outside of power sports.

We have new products in development that will allow us to enter new market segments and expand our on-road presence. Acquisitions will continue to be evaluated as we look for opportunities to accelerate growth and expand margins.

In summary we are very pleased with the record third quarter results and our ability to raise full year guidance. We are certainly balancing the current economic environment against the strength of Polaris business.

We will manage prudently in the months ahead and into 2009 to ensure that our customers, shareholders, employees, and others continue to benefit from our focus on results.

At this time we’ll take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Edward Aaron - RBC Capital Markets

Edward Aaron - RBC Capital Markets

Maybe you could share a little of your background in terms of your ability to perhaps help move the international and military businesses forward even more then what’s been done today?

Scott Wine

I’ll give a quick background, after spending seven years in the Navy following my graduation from the Naval Academy; I went to work for Honeywell in the aerospace and defense business. My last assignment with them was running their European business in aerospace repair and overhaul based out of Rounheim, Germany just outside of Frankfurt.

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

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

Edward Aaron - RBC Capital Markets

On the gross margin impact, on the positive side for mix, can you give us a rough sense, the basis point contribution from that so we can have a better understanding of how big of a drag the commodities and the discounting was on the margin?

Michael Malone

I’m not going to share specifics on the margin impacts on the attributes and gross margin, I would tell you the trends in the third quarter were similar to the trends we experienced earlier in the year. There is significant margin benefit from the increased side-by-side and PG&A business and as we talked about, our international business is higher profitability then the core US business.

The commodity pressures were real in the third quarter. As you know the commodity pressures have eased which is really good news going forward but we didn’t realize much or any of that benefit in the third quarter.

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

Edward Aaron - RBC Capital Markets

On the PG&A business in light of what’s happening in the credit markets, I know that the approval and the penetration rates, one things we’ve seen across the leisure space is the advance rates changing which I think in some categories made it harder for dealers to sell more parts and accessories, do you have any concerns about that as it relates the sustainability of the growth rates on the PG&A side?

Michael Malone

We hear some of that same stuff, we read about that, but we really haven’t seen that translate into our business yet. Our PG&A business obviously was very strong in the third quarter. Our orders from the dealers on their program orders for the fourth quarter met or exceeded our expectations. What we call daily sales which are the reorders that we get from our dealers are meeting our expectations in the third quarter and into the fourth quarter.

It’s interesting, you read about it and you’re concerned about it, but the reality is we haven’t really seen that impact dramatically in our PG&A business.

Bennett Morgan

I actually think we’re seeing almost a contrary effect to that in the sense that as the market’s gotten tougher the after market business relatively is stronger, dealers as they’re seeing tougher battles for consumer traffic are focusing more on the consumer experience as I mentioned in the remarks and they’re doing a better job of up selling and moving those value added PG&A items onto existing products.

We’re pretty encouraged actually what we’re seeing from a trend standpoint on PG&A as we go forward in this tougher environment.

Operator

Your next question comes from the line of Craig Kennison - Robert W. Baird & Co.

Craig Kennison - Robert W. Baird & Co.

You had mentioned that inventory is down in just about every category but also sales are down in many categories, can you give us sort of a sales adjusted inventory metric that would make us comfortable that days of inventory are actually lower?

Bennett Morgan

We usually avoid trying to get down to talking about days supply. We’ve taken a tremendous amount of inventory out of our system over the last couple of years and have continued to do that successfully in 2008 in all of our businesses and I think overall our days supply across all our businesses is down sequentially from where it was a year ago.

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

But I would tell you in snowmobiles, our inventory position is better then it’s been from a DSO as well as an inventory position in years, side-by-side arguably if you talk to many dealers, they’d say we’re too tight on a number of products almost, ATVs we continue to work our way down and Victory we’ve made some progress.

But I would tell you our DSO is not yet where we would like it to be. We’re making some progress but the tougher economy is slowing some of what we would have thought would have been spectacular progress otherwise and then again longer term MPV, we’re excited about what that will do for us.

Craig Kennison - Robert W. Baird & Co.

You had mentioned that you’re looking at some contingent alternatives for the finance piece of your business; can you give us a sense for what you’re looking at and the extent to which you’d be willing to use your balance sheet?

Michael Malone

There is a fair amount of uncertainty in the retail credit market right now. We’ve had assurances from both HSBC and GE that they’re committed to Polaris and they’re committed to our existing relationships with revolving and installment retail credit.

But there is uncertainty so we are trying to be prudent and looking at if things change what might we do different. So we are looking at certain regional or second tier financing providers to develop a relationship with.

There aren’t very many other national providers other then the two that we’re working with and they have a very large share within our industry. So regional or second tier providers would be a source. We’ve already started developing assistance program and a training program for our dealers to help them tap into the local banks and credit unions more affectively. That’s a relatively big source of financing today for our dealers and there’s ways that we can help the dealers leverage that opportunity going forward.

We’re going to pursue that. And there’s other things that we could consider as well.

Craig Kennison - Robert W. Baird & Co.

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

Michael Malone

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

Operator

Your next question comes from the line of Timothy Conder - Wachovia Capital Markets

Timothy Conder - Wachovia Capital Markets

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

Bennett Morgan

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

Michael Malone

Related to assistance in retail credit financing in the quarter, we have these relationships with HSBC and GE and we have promotions at any point in time running with our dealers and our consumers where we offer cut rate financing or discounts and those kinds of things on the financing costs. We participate in those financing costs, and we did so in the third quarter and that really rolls into the whole promotional environment which is at an elevated level as we talked about.

I would not say that there’s anything unusual or different in the third quarter then historically as it relates to our participation in those financing programs.

Timothy Conder - Wachovia Capital Markets

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

Michael Malone

I don’t know that I know specifics on side-by-side percentage of customers financing versus core ATVs. The demographics for a side-by-side buyer are a little better. Generally they’re a little bit older and a little bit higher income so intuition would tell you that perhaps it’s a bit lower on the percentage being financed then side-by-sides. But I frankly don’t have that data in front of me.

As far as the percentage of side-by-sides to our total ATV business, as you know we haven’t been very specific with that in the past. Last year for the full year side-by-sides were about 40% of total ATV sales dollars. This year it’s obviously expanded significantly with core ATVs being down quite a bit and side-by-sides being up quite a bit.

This year what we would say is that its, side-by-sides will be more then half of our total ATV recorded sales for the year.

Timothy Conder - Wachovia Capital Markets

Related to the foreign exchange, you’d mentioned that its going to be a little bit of a headwind in the fourth quarter, looking into 2009, just on an early basis, you gave us a peak into 2009, but how do you look at or what have you already locked in from a hedging standpoint and at this point assuming where you’re hedged and where currencies are trading at this time, how do you see FOREX for 2009 with the Euro, pound, Canadian dollar and so forth?

Michael Malone

Right now, we have no hedges for 2009. If currency were to stay where they’re at right now we would feel pressure on top line sales as both the euro and the Canadian dollar are at more punitive rates for our top line sales then they were for the full year 2008.

We would also have pressure from the yen versus where we are and purchase our engines this year. So we expect to have headwinds from currencies in the fourth quarter which is baked into our guidance that we issued today and right now if currencies stay the way they are we would expect that to be a headwind as we go into 2009.

Operator

Your next question comes from the line of James Hardiman - FTN Midwest Securities

James Hardiman - FTN Midwest Securities

Can you give us the numbers, you gave us the year-to-date number in terms of heavyweight motorcycles, can you just give us the number for the quarter and how you compare to the industry number US?

Michael Malone

We’ll come back to that.

James Hardiman - FTN Midwest Securities

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

Bennett Morgan

The motorcycle data for the third quarter was essentially in the heavyweight cruiser and touring, they were down low single-digits and Polaris was up high single-digits. So we gained some share, the market didn’t actually deteriorate in the third quarter from a heavyweight standpoint in industry which was encouraging but we still would characterize it as relatively challenging still.

In regards to what we’ve seen in the last four weeks, I’m not sure this is going to be what you want to hear but frankly the trends that we’ve seen in the last four weeks are no different then what we’ve been reporting to you all year where we’ve seen strength in our businesses in places like snowmobiles, side-by-sides, PG&A and international.

Even as the world got crazy here over the last four weeks, our retail sales continued to be up over the last four weeks and month to date, we’re still seeing growth. In the areas where it had been pressured, we saw more pressure and it actually slowed a little bit more.

Talking qualitatively or anecdotally to our dealer network which is always dangerous, they’re telling us that they have seen a downturn in traffic. It has gotten a little bit worse here in these uncertain times here over the last few weeks but not way, way more awful then what we were seeing in say August and September. August and September were fairly challenging months I think from an industry traffic standpoint but again with our product and our product innovation, we continued to do I’d say remarkably well in this environment so we’re encouraged.

James Hardiman - FTN Midwest Securities

You sort of touched on this, international I think you said was up 31% for the quarter, so you’re not seeing any material slowdown if you sort of momentum through the quarter, is that a pretty consistent 31% number through the quarter and no real concerns heading into the fourth quarter?

Bennett Morgan

I would tell you that again, we’ve been pleasantly surprised because certainly at least what we read in the papers and seeing from an overall European economy, there’s been greater uncertainty and there’s more concerns over there.

It has not as of yet, certainly through the third quarter and early into the fourth quarter affected our retail sales. Our subsidiaries and our distributors had one of their strongest months ever in September. We’re going to continue to watch that very, very prudently as we go forward to see if we see signs of weakness but so far so good.

And I would tell you realistically even over the three, four, five months, we’ve seen Europe starting to slow but we have not seen signs of that yet in our business. We were just over at Intermot which is the International Motorcycle Show in Cologne, Germany and we had fantastic response to our Victory launch going into Germany next year and again there’s tremendous interest in Polaris products in general over there.

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

Tom Tiller

This isn’t completely unprecedented. For those of you that have followed the company for a long time, you’ll recall after September 11 when there was a tremendous concern around confidence and where the country was going and so forth, Polaris business was quite strong following that and I think that’s surprised an awful lot of people.

I think the guys have said many times we’re watching carefully what’s happening at the retail level but we haven’t seen any dramatic changes certainly over the last two weeks as the financial markets have been so volatile.

Operator

Your next question comes from the line of Gregory Badishkanian - Citigroup

Gregory Badishkanian – Citigroup

In terms of Europe, demand for the RANGER RZR products and what type of shipping volumes do you have in that market, because I think at your Analyst Day, Investor Day it was really well under penetrated and there was pent up demand, just wondering how that’s looking?

Bennett Morgan

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

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

Gregory Badishkanian – Citigroup

You had mentioned that the orders at the show exceeded expectations, that dealers had some, and consumers are starting to have some good reaction, can you give us a bit of color in terms of what dealers are telling you in terms of how the consumers are reacting particularly to the new RANGER innovations and is it a lot more excitement then say last year when you rolled out new products?

Bennett Morgan

We’re really encouraged. Obviously the side-by-side market is a much stronger, hotter market right now and the consumer reaction is already translating to significant retail on some of the new RANGER products and the new RZR S. Its way too early to declare in anything like a RZR phenomenon but the RZR S sell-through rate through the end of the third quarter far exceeded our expectations.

So we’re very, very encouraged about that new product and dealers are reporting that the new 2009 RANGER as they see the new products, are in hot demand. We have similar phenomenon on the ATV side with the Sportsman XPs. Those really did not hit the quarter until much later.

We had some shipments in the third quarter but really the last couple of weeks really of the quarter so they really have not hit the marketplace in significant quantities. I know when Scott was out last week, that’s one of the things that dealers were frustrated with. They wanted those XPs in their dealerships and so there is some pent up demand for those new innovative products.

I think it’s a formula that Polaris has proven itself in a tough environment over the last year or two. Innovation sells and it sells pretty well in generally any environment and that continues to be one of the playbooks that we’re running.

Operator

Your next question comes from the line of Hailey Wolf – Unspecified Company

Hailey Wolf – Unspecified Company

Can you give us a little color on how the Max velocity program is doing, what kind of early signs you’re seeing in terms of improved sell-through, improved matching of retail inventory and then can we get some details on the LIBOR reset and when in fact it does reset on your credit line?

Bennett Morgan

On MVP, as we’ve talked about in previous calls, what we’ve done is here over the last 60 days is gone to a regional test with a significant number of dealers, over 150 and frankly its just way too early to talk about any kind of metric success other then that the dealers are thrilled they’re on the program.

We have people raising their hands tremendously. They’re up and running, they’re starting to establish the retail processes. Our DSMs are in there a couple of times a month and the early returns after 30 days were encouraging but to talk about any kind of success or failure with that group of dealers is premature.

We have had a couple of other tests that we ran in another district that have been in place for the last year and another handful of dealers and in both of those cases we saw significant dealer inventory reductions. We saw share gain and we saw increased dealer and customer satisfaction as a result of that.

For those that have been up for more then a year, it’s pretty encouraging. Obviously we’re in a period right now where we’re testing and we’re trying to learn very quickly and then change and adapt as we go to more dealers.

Scott Wine

I had a chance to get out to Denver which is one of our test markets, and meet with six of our dealers and across the board they were elated with the MVP program. In fact it had been alluded to they spend as much time talking about their desire to have more XP ATVs and continue to praise the MVP program.

I asked every dealer what it was that the other OEMs do what we’re doing that we could learn from and despite my repeated requests, it all came back to they wished other dealers or other OEMs would pursue the MVP program. So getting high marks and specifically because Polaris has put some infrastructure behind it to make it easy for dealers to adapt the new processes.

So very strong reviews and we look forward to rolling it out further.

Michael Malone

Related to the LIBOR reset, our credit line allows either prime or LIBOR based borrowings. Currently we have $75 million of our outstandings on a swap so it’s actually fixed rates, they’re not variable rates for $75 million.

The balance is variable and as I said we can either choose prime or LIBOR. Generally you want to do LIBOR. Today and last week, prime has actually been lower then LIBOR so we’ve been actually borrowing at prime. But generally historically we do LIBOR locks for short periods of time, 30 days, 60 days, something like that.

So it’s kind of constantly resetting on a short-term basis, other then the $75 million which is fixed.

Hailey Wolf – Unspecified Company

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

Michael Malone

Well the current rate, prime is 450, so that’s what we’re borrowing at today because LIBOR is higher then that and our rate for the third quarter I would suspect that its closer to 3.25-ish, some place in that range.

Operator

Your final question comes from the line of Analyst

Analyst

Just a clarification, there were two comments regarding the heavyweight motorcycle market, the first one I think you said that year-to-date it was down high single-digits and then the comment later was that the third quarter actually showed no deterioration, was only down I believe you said mid single-digits?

Bennett Morgan

What we’ve been trying to report here recently is the segments directly we compete in which is generally is 1400 cc and up and cruisers and touring, so that was the data that we reported specifically in the remarks. When we asked for a clarification on where the third quarter was all we had was the 900 cc and up for cruisers and touring and so that may be why you see a little wobble in that number.

But in general the third quarter did not show deterioration from where we were in the first six months.

Analyst

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

Bennett Morgan

I think in general that has been true.

Richard Edwards

We want to thank everyone again for participating in the call this morning and we’ll look forward to talking to you next quarter.

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Source: Polaris Industries Inc. F3Q08 (Qtr End 09/30/08) Earnings Call Transcript
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