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Arctic Cat Inc. (NASDAQ:ACAT)

F3Q 2013 Earnings Conference Call

January 24, 2013 10:30 ET

Executives

Shawn Brumbaugh - Padilla Speer Beardsley

Claude Jordan - Chairman and Chief Executive Officer

Tim Delmore - Chief Financial Officer

Analysts

Scott Hamann - KeyBanc Capital Markets

Mark Smith - Feltl & Company

James Hardiman - Longbow Research

Craig Kennison - Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the Arctic Cat Fiscal 2013 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, the conference will be opened for questions. (Operator Instructions) As a reminder, this conference is being recorded today, January 24, 2013.

I would now like to turn the conference over to Shawn Brumbaugh with Padilla Spear Beardsley. Please go ahead ma’am.

Shawn Brumbaugh

Thank you and thank you for joining us this morning. I am Shawn Brumbaugh with Padilla Speer Beardsley. Before the market opened this mooring, Arctic Cat released results for fiscal 2013 third quarter ended December 31, 2012. Participating in our call today to discuss the company’s performance and outlook will be the Chairman and Chief Executive Officer, Claude Jordan, and Chief Financial Officer, Tim Delmore. Following their remarks, we’ll have time for any questions.

Before we begin, please note that some of the comments made today will be forward-looking statements regarding the company’s expectations of future performance. Such statements are subject to risks and uncertainties and actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and in the company’s filings with the Securities and Exchange Commission. We encourage you to review these documents for a description of risk factors that may affect results.

Now, I’ll turn the call over to Arctic Cat CEO, Claude Jordan. Claude?

Claude Jordan

Thanks, Shawn. Good morning everyone and thanks for joining us today. This morning I will cover the individual performance of our three businesses during the third quarter as well as the progress we have made in the area of sales, profitability, and operational excellence.

Following my comments, Tim Delmore, our CFO will review our financial performance. Overall, we are pleased with our performance for the third quarter. As we mentioned at the beginning of the year, we set out the gross sales in all product categories, improved gross margins, increased earnings per share, generate additional cash, and strengthen our balance sheet. Through the third quarter, we are on track to accomplish each of these.

In regard to the individual businesses, snowmobile sales were down 2% for the quarter, primarily driven by the decision to ship snowmobiles early in the year, so that all dealers and distributions added snowmobiles products to December, which is the largest retail month. For the year, snowmobiles sales were up 5% primarily driven by increased sales in our international business. The 5% year-over-year growth exceeded our earlier guidance of flat to up 2% growth. Snowmobile dealer inventory for North America was up 14% for December, primarily due to decreased snow conditions in various parts of the U.S. However, January retail has started off strong and we expect snowmobile dealer inventory to be reduced during the fourth quarter and in the year up slightly from last year.

On the retail sale side, the overall North American industry experienced some difficult snow conditions for the second year in a row, which has led to the industry being down slightly from last year. We also saw our retail sales decrease cover a large part of the decrease was due to the strong comps we had last year. We also saw our retail sales decrease cover a large part of the decrease was due to the strong comps we had last year following the launch of 23 new ProCross and ProClimb snowmobile models. With the soft snow conditions we are seeing, we are revising our lower end guidance for the industry down slightly from the flat to up 2% to a revised down 2% to up 2%.

On the ATV business, sales increased 28% for the quarter. Key drivers for the sales increase were North American and international sales of our Wildcat 1000 sports side-by-side and North American ATVs and the Prowlers. Dealer inventory was again a focus and we were successful in reducing our North American dealer inventory in ATVs and Prowlers by 8%, excluding the Wildcat. Including the Wildcat, overall dealer inventory was down 1% from the last year. As we move forward, we will continue to focus on matching wholesale sales with retail sales. With this in mind, we expect dealer inventory to start growing slightly keep up with the growth of the business and the launch of new products.

For the quarter, North American core ATV retail sales were down 2%, and for our fiscal year, industry retail sales are up 1%. Arctic Cat also saw a decline in third quarter retail sales. However, we have seen positive gains with our five new core ATV models that were launched in August. Our North American side-by-side retail sales experienced strong growth as sales increased over 35% for the quarter and year-to-date retail sales have increased over 50% driven by both our Wildcat Sports side-by-side and Prowler HDX utility vehicle.

Wildcat retail sales continued to be strong and match our expectations. In addition to our base Wildcat 1000 model and Wildcat 1000 Limited, we also recently announced a new 4-seat Wildcat 1000 model and a new high performance 90-plus horsepower Wildcat model. Both of these will begin shipping in our fiscal fourth quarter. With the lower dealer inventory, increased focus on product development and strong orders we are seeing for our ATV and side-by-side business, we are continuing to expect this business to grow sales 36% to 41% for the full year.

Although our ATV and snowmobiles business are showing year-over-year growth, we did see a slight decline in our PG&A business for the quarter, with sales declining 5% and year-to-date sales for PG&A are down 2% to last year. The primary reason for the decrease in sales was the drop off in the snowmobile environment due to the soft snow conditions in the select U.S. markets. On the positive side, we did see strong growth in Wildcat parts and accessories and expect this to continue throughout the year. With the continued strong performance of the Wildcat parts and accessories, we expect PG&A sales to rebound in the fourth quarter resulting in full year sales growing 1% to 3%.

In regard to operational performance, we stated in May that our focus would be on improving gross margin, controlling our operating expenses, and strengthening our balance sheet. In the area of gross margin, our goal was to increase gross margins by 20 to 60 basis points. During the third quarter, gross margins improved by 22 basis points driven by higher volume, product cost reduction efforts, and higher selling prices on select models. However, these positives were offset by the decrease in PG&A sales which is our highest margin business. We expect PG&A sales to increase in the fourth quarter driven by Wildcat parts and accessories, which will drive further improvement in overall gross margin. Gross margin will remain a major focus area and we continue to expect gross margins to improve by 20 to 60 basis points for the year.

In regard to operating expenses, our goal was to hold operating expenses flat as a percent of sales. With this in mind, we have continued to focus throughout the business on all aspects of expense control. At the same time, we have continued to invest in product development, which has resulted in launching various new models for both the snowmobile and ATV business. Year-to-date, we were successful in decreasing operating expenses as a percent of sales by 100 basis points while at the same time increasing our R&D spending by 15%. Based on our plan for the remainder of the year, we continue to believe that we will be successful in holding our operating expenses flat to down slightly as a percent of sales while continuing to invest in the product development.

Final area of focus has been working to strengthen our balance sheet. During the third quarter, our year-over-year inventory grew to support our sales growth. However, we were successful in improving our inventory turns. As we look forward, we will continue to remain focused on having the right amount of inventory on hand to support the growth phase of the business while at the same time continuing to focus on improving inventory turns.

In regard to cash, we ended the quarter with roughly $96 million of cash and short-term investments and no long-term debt. This amount is up from the prior year quarter by $20 million. Going forward, we will continue to focus on our cash position and expect to generate positive cash flow this fiscal year.

At this time, I would like to turn the call over to Tim to review the third quarter financials.

Tim Delmore

Thanks, Claude. Good morning everyone. I would also like to welcome you to our conference call. Today, I will focus on reviewing the highlights of our third quarter and year-to-date financial performance and our increased earnings guidance for full year fiscal 2013. We are very pleased with our third quarter and year-to-date results that are in line with our expectations. Net sales for the third quarter increased 5% to $218 million from $207 million for the same quarter last year.

ATV sales increased 28% to $69.6 million from $54.4 million driven by strong Wildcat side-by-side sales. Snowmobile sales decreased as planned 2% to $122.4 million from a $125.2 million. As a reminder, we had very strong Q3 sales last year with a sales increase of 61%. Parts, garments, and accessories sales decreased 5% to $26 million from $27.4 million for the same quarter last year. An increase in Wildcat parts and accessories sales was not quite enough to offset a decline in snowmobile garment sales due to lower than expected early season snowfall. However, we still expect to have a year-over-year increase in PG&A sales.

Gross profits for the quarter increased 6% to $50.8 million from $47.8 million. The gross profit percentage for the quarter increased 22 basis points to 23.3% from 23.1% primarily due to higher volumes. Selling, general, and administrative expenses increased 7% to $23.1 million from $21.6 million for the same quarter last year primarily due to higher research and development costs and Canadian translation and hedge costs.

Selling, general, and administrative expenses as a percent of sales increased slightly to 10.6% compared to 10.4% in the same quarter last year. Net earnings increased 5% to $17.9 million from $17 million. Third quarter diluted earnings per share increased 41% to a $1.30 from $0.92 due to increased earnings and a 26% reduction in diluted share count resulting from the repurchase of our shares from Suzuki late in December last year.

Next, I’d like to review Arctic Cat’s financial performance for the first nine months of fiscal ‘13. Year-to-date net sales increased 15% to $558.4 million from $486.8 million. Net earnings increased 24% to $44.8 million from $36.1 million while diluted earnings per share increased 68% to $3.25 from $1.94. On a year-to-date, snowmobile sales increased 5% to $269 million from $257.3 million. ATV sales increased 40% to $212.2 million from $151.1 million and parts, garments and accessory sales were $77.1 million versus $78.4 million.

Again, the overall sales increases were primarily due to strong sales of our Wildcat side-by sides and increased snowmobile sales. Our year-to-date gross profits increased 15% to $137.3 million from $119.2 million. Our year-to-date gross profit percentage improved to 24.6% compared to 24.5%. Year-to-date selling, general, and administrative expenses increased 6% to $67.8 million from $63.7 million, primarily again due to increased R&D expense for ATV side-by-side businesses and snowmobile businesses and higher Canadian translation and hedge cost comparisons. Selling, general, and administrative earnings as a percent of sales declined to 12.1% compared to 13.1%.

Looking at our balance sheet as of December 31, we ended the quarter with $96.6 million of cash, up from $76.3 million last year, an increase of nearly 27%. And as a reminder last December, we used $79 million of our cash to repurchase Suzuki stock. Receivables decreased 3% to $50.8 million due to lower PG&A sales. Our inventories increased 10% to $97 million from $88 million to support higher production in sales levels. We had zero short-term borrowings as of December 31 and have no long-term debt. Year-to-date, our capital expenditures totaled $10.4 million and depreciation and amortization was $9.9 million.

Regarding our updated outlook for full year fiscal ‘13, we continue to anticipate sales for the year ending March 31 in the range of $664 million to $684 million, an increase of 13% to 17% over last year and we now expect earnings per share in the range of $2.75 to $2.85 per diluted share, up 60% to 66% from last year. Previously, we estimated EPS in the range of $2.65 to $2.75 per diluted share. We continue to expect ATV and side-by-side sales to increase 36%, 41% for the full year driven by shipments of the Wildcat side-by-side models. We expect snowmobile sales to be up 3% to 5% and PG&A sales to end the year up 1% to 3%.

As Scott mentioned our outlook, it includes the assumptions that gross margins will increase 20 to 60 basis points and operating expenses to be slightly down as a percent of sales. I would like to thank you for your interest and attention. And now operator, we’d like to open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

Scott Hamann - KeyBanc Capital Markets

Hey, thanks and good morning guys. Just in terms of the two new Wildcat products that they are going to be launching here in the fourth quarter, what’s some of the feedback you have gotten from the dealers as you’ve shown this to them, and how are the order books developing for those products and how do you kind of foresee shipments in the fourth quarter and throughout 2014 fiscal year?

Claude Jordan

Hey Scott, this is Claude, couple of things here. First of all, the Wildcat 4 and the Wildcat X, obviously these are things that we have been working on for sometime now. So, they are not brand new products and they are certainly not incremental, it’s not like a surprise we didn’t know these were coming. The feedback that we have received we had a demo rides out west. We brought the Power Sports Media in. You got to remember that Wildcat X not only increases the horsepower up to that plus 90, which is about 15% increase, we also changed the entire clutching system. And so we have moved more closer to a flyway clutch now from the original clutching. So, great acceleration, handles a lot better in the snow. So feedback we have got has been extremely positive, because as you are out west it’s a little different if you are in a lot of dunes and so forth, it really does eat up horsepower, so getting that 15% bump on the X is the great thing.

Probably the one surprise we got is on the Wildcat 4-seater, which is our first 4-seater model. We extended the chassis by about 29 inches. So, it still got some great suspension 18 inches in the back and 17 in the front, but when you extend the chassis like that you are able to go through the bumps even better. And so that’s been some positive feedback. In fact they like that handling through the bumps with the change clutching on the Wildcat 4, they are extremely excited about that as well, so great acceleration on that. So, today it’s been very positive. We are just now starting to take orders on both of them and we’ll start shipping them later during the fourth quarter.

Scott Hamann - KeyBanc Capital Markets

Okay. And I know that you said you are going to have (4 skis of the) Wildcat out in fiscal ‘13 and you did accomplished that, now as we look into fiscal ’14, I mean is it safe to assume that there will be additional introductions into the side-by-side category?

Claude Jordan

I think it will be very safe to assume that. Going forward, we have talked about this product development. We continue to invest in that you saw during my comments we said year-to-date our R&D is up 15%, there is a lot of opportunities we are just scratching the surface in terms of different directions we can go. So, I think you are going to see across the board, where we are going to continue to go hit and rollout new products not just on the ATV and the side-by-side, but also on the snowmobile side as well. And we are extremely excited about bringing the engines in house and giving us a little bit more flexibility in terms of direction we are going to go on the snow side.

Scott Hamann - KeyBanc Capital Markets

Right, okay. And then finally just on the dealer side, can you kind of quantify where you are with dealer expansion on a net basis in North America? And then how you plan to attack some of the international markets with some of the new found strength in the side-by-side market?

Claude Jordan

Yeah, on the dealer side in North America, obviously we go direct in U.S. and Canada there. And we have three parts of the business on the ATV side. We have ATVs and then we have our Prowlers, and then we have our Wildcat. And then obviously on the snowmobile side, most of our dealers that carry snowmobiles will carry our ATV, Prowler and Wildcat products. Our snowmobile business in terms of dealers we are having goals in terms of adding net dealers each year and we have been successful in that. Really what that means is we may have lost the net and inactive dealers, someone that hasn’t bought anything for a couple of years, but state law doesn’t allow us to go ahead and remove them from our dealer file. So, you can probably go on our website and dealer locator and you would find those, but those really who aren’t active dealers. And so we are constantly as the laws allow us we are removing those. But we are on a net base as dealers that have actually ordered products from us we have been successful in terms of growing our dealer count for snowmobiles.

And actually even more so on ATV, Prowler and Wildcat side we have been successful in all three of those categories in North American in growing the net dealers year-over-year, and so the Wildcat obviously a little misleading there because we’ve tremendous growth there in terms of adding dealers. And as we continue to role out new products, we think that that will approach probably the same number of dealers we have on the Prowlers side.

Internationally, we continued to look at markets with the exception of six countries that we go direct in through our European headquarters. Today we go direct through UK, Germany, France, Austria, Spain and Italy and everywhere else we go through a distributor. We’ve been very successful in terms of signing up additional distributors and last quarter some of the larger markets out there are Australia and Mexico. We added distributors there which should help us as we go into fiscal year ’14. And then obviously as we continue to move forward there is no doubt that we are looking for opportunities and we continue to go direct if the market is a good fit for us. So, today we go direct in the six markets outside North America, that’s something as we go forward we wouldn’t mind adding to that in going direct to a few more.

Scott Hamann - KeyBanc Capital Markets

Great. Thanks a lot.

Claude Jordan

Thanks Scott.

Operator

Thank you. And our next question comes from the line of Mark Smith with Feltl & Company. Please go ahead.

Mark Smith - Feltl & Company

Hi guys. First, Claude can we just review some of your commentary in the quarter regarding kind of core ATV sales versus what Wildcat was up during the quarter, can you just talk about excluding Wildcat give us any insight into sales?

Claude Jordan

For the industry what I mentioned was if you look at the industry numbers, I think I have said for the ATV business I am just checking my notes here to make sure I am in line here. We said that core ATV which is your single seat and your two rider vehicles not the side-by-side, we said industry retails were down 2% for the quarter and for the year up about 1%. And what we said is on ATV side for the quarter we are basically trailing the industry a little bit there. But we also mentioned in August we launched five new ATVs that is the 400, 450, 500 and so forth and all five of them have been successful in gaining share.

Mark Smith - Feltl & Company

Yeah, so in that core business you said you are trailing the industry which was down about 2% during the quarter?

Claude Jordan

Yes.

Mark Smith - Feltl & Company

Okay. So given that with the growth in Wildcat is certainly still was certainly stronger during the quarter?

Claude Jordan

Yeah, when you factor in the Wildcat and the Wildcat’s brand new products that were comping over zero sales in the prior year, so if you recall the Wildcat our initial shipments were last December where we shipped a couple of 100 units and you are seeing some very, very strong comps in the Wildcat side which is pulling all the retail up for our business, which is not surprising when you launch a new product it creates that kind of excitement and you get a an initial bump, so we are still seeing very strong retails there.

Mark Smith - Feltl & Company

Okay. And that if we continue to look at that that core ATV business excluding Wildcat and other iterations of Wildcat, now can you keep that business even flat given cannibalization and as people transition from four wheelers into side-by-sides can you keep that business that are at a retail sales flat?

Claude Jordan

Yeah, I think you can. Obviously we have multiple players that are out there and some fairly strong players. And I think everybody is certainly targeting that and so we are not seeing as much product development on that space as we are in side-by-side. And then specifically on the side-by-side specific segments of that side we are seeing a lot more product development. But as long as the industry remains focused on launching new products I know we are working new products for that space. I think you will probably see flat, up 1% - up 2%. I don’t think you are going to see the same level of growth on the ATV side as you are going to see on the side-by-side. Side-by-side we said at the beginning of the year is up plus 10% and 20% for the industry and we are exceeding the industry.

Mark Smith - Feltl & Company

Okay. And then on that how do you feel about your ATV and Prowler inventories out at dealers today and are we close to a point now where we could see retail and wholesale kind of on a one-to-one basis, excluding Wildcat?

Claude Jordan

Yeah, I think we are moving towards that and that’s what’s I mentioned during my comments that ATV and Prowler, excluding the Wildcat, dealer inventory was down 8%. Mark, if you go back a couple of years ago, you can remember that the dealer inventories were down at 20%, 25%. So, we have slowly started to level off, where I think you will see as we retail a unit, we will start shipping one. So, that should actually start balancing out there in terms of leveling off. And then last year at our snowmobile show in February, we actually we obviously talked to dealers about specific goals and one of the things we have always talked about prior to that show was we want to bring dealer inventory down. Last year, we made a specific point to mention to our dealer network that hey, look we reached a point where we need to be. We don’t see a lot more of a decrease in dealer inventory. So, we are moving towards that and like I said I think the fact that we are only down 8% year-over-year is probably a positive thing.

Mark Smith - Feltl & Company

And then one more just on Wildcat and ATV, did we see the dealers during the December quarter that maybe delayed in ordering the Wildcats just in anticipation of new products coming of the four of the X that maybe said hey, I won’t fill up my inventory with Wildcats and I’ll wait and maybe leave a spot or two empty to fill in on 4X when it’s available?

Claude Jordan

We really didn’t. What we have done on our end, because even the base Wildcat is getting the new clutching starting in February. So, we made a decision not to ship any Wildcats in the month of January. And so that give the dealers a chance to run some of their inventory down somewhat. And then in February, we would start shipping. So, your January models you ordered we contacted the dealers and let them know that they will be getting those in February and those will be with the new clutch for the base Wildcat. They start getting the Wildcat 4 in February and then the Wildcat X they will get in March.

Mark Smith - Feltl & Company

Okay, perfect. That’s it from me. Thanks.

Claude Jordan

Alright, thanks Mark.

Operator

And our next question comes from the line of James Hardiman with Longbow Research. Please go ahead.

James Hardiman - Longbow Research

Hi, good morning. Thanks for taking my call. Just wanted to continue down this path with a couple of the new Wildcats that you guys have talked about, how should we think about the relative size of the opportunities of those two new Wildcats? I guess with the Wildcat 4, I realize it’s probably a small segment, but how is that from an industry standpoint compared to the broader high-end recreational side-by-side segment? And then with the Wildcat X, how should we think about how much of that opportunity is going to replace the base Wildcat, I don’t know if you have heard from your dealers or from customers, how much of that is going to be cannibalizing the base Wildcat and how much you actually think is going to be incremental?

Claude Jordan

Well, couple of things. The one thing I will emphasize since I think we got most of our analysts on the call here, all these products were built in the fourth quarter we knew they are coming. So, we have actually gone ahead and put an estimate in there. And so the guidance we have given we’d go ahead and already factor that in. In terms of the different size of the market, the Wildcat 4, that 4-seater, there are handful of firms out there. Some of our competitors already have a 4-seater and it’s a fairly significant market. So, I think that that’s going to be a brand new segment for us. And I think that those sales will truly be incremental. Now, it’s nowhere near as large as the 2-seater side-by-side Wildcats, but I think it’s a fairly active and fairly attractive market for us.

I think you are correct on the Wildcat X by increasing the horsepower putting the new clutching on there, you are going to see some of our base Wildcat customers who may have bought a Wildcat at first now stepping up and buying the Wildcat X, which for us is a little bit more price. So, sales will increase a little bit more and probably even a little bit slight increase on gross margins as well. So, but there is no doubt that you will see some customers that were originally planning to get the Wildcat, the Wildcat X in March, I would go ahead and buy a Wildcat X. Based on the feedback we have gotten, because we just now communicated it to the dealers and so forth, so not a lot of feedback from the dealers just yet. Obviously, they are always excited when they get new product. But the demo rides that we did with the customers and demo rides that we have done with the Power Sports Media last week out in California went extremely well and they went extremely well not only in the Wildcat X, but also on the Wildcat 4.

James Hardiman - Longbow Research

Got it. And then on the – that’s very helpful. On the snowmobile side, I just wanted to tie together, I think some of the things that you said it seems like the industry is a little bit worse than you expected, but your outlook for your business is a little bit better than expected, it sounds like international is outperforming, but I don’t know if you have gained or lost share within the North American market. How do I sort of tie all those pieces together?

Claude Jordan

Yeah, on snowmobiles, we said that on the wholesale side, we went into the year thinking we would be up 0% to 2%. You got to remember we shipped, I’m sorry we launched last year 23 new models, which was over 70% of our snowmobile lineup. And so, we knew going into this year, this was going to be top wholesale and retail comp, the comp against with all of those new models that are out there so.

On the North American side, I’m sorry, on the snowmobile side we shipped a few more units, but honestly those units went to – primarily went to international. And so on the international side we continue to do very well there, the largest markets Norway, Sweden, Finland and Russia. We continue to do very well and obviously Russia as it continues the transition from a utility type market to more of a performance market, we expect see that market continue to grow in line with the kind of retail sales we’re getting let’s say within Canada. And so that’s a great opportunity and it’s certainly been paying off for us.

On retail side, retail side for the snowmobile, I think that we are seeing good retails for the industry up in Canada, certain parts of the west. The east has been hit and miss we had good snow and then we have some warm weather and some rain come through. So, took the snow away and now we have had a little bit more snow and it’s been put in there so. Certain parts of the east are ridable. UP is good and we are still struggling in certain parts of Wisconsin, I know in Northern Minnesota we can ride but certain of Southern Minnesota. Out west Yellowstone has good snow, so it’s better than last year, but not great.

James Hardiman - Longbow Research

And so you talked about inventories being up in snowmobiles coming out of December, but then those should comedown maybe be up a little bit for the year. That – has that changed in terms of how you thought about it heading into the year, is that about where you thought inventories would be coming into the year.

Claude Jordan

I think that you never know how snow is going to be and the snowmobile industry goes with snow conditions. And so we have strong start to the year, you’re going have inventories come down lot faster than they would normally. So, the first couple of weeks here of January, the retails have been very strong on the snowmobile business. And so we think with what we’re seeing today the inventory will come down. The one – to where it’s up slightly for the year, but the one thing I would emphasize on inventory of the snowmobile, that’s the business that last year even though we were up 4% last year on snowmobile dealer inventory, the numbers were very, very small. So, we’ve done a very good job over last handful of years bringing that inventory down by the end of the year. So, the fact that we are up 4% or let’s say we were up small amount this year I’m not overly concerned, you don’t have the units there you have on an ATV or side-by-side.

James Hardiman - Longbow Research

Got it and then just last housekeeping question the share count for either the fourth quarter of the year, can you just share with us how should – we should be thinking about that. We’re originally assuming quite a bit of dilution from some options that actually came down a bit in this quarter. How should be expect that to trend in the fourth quarter?

Claude Jordan

Our guidance for the – previous guidance was up 14 million shares. We are trending little less than that. So, we will be in the 13 million to 14 million range obviously the lower end of that range.

James Hardiman - Longbow Research

Okay and it’s safe to say that the fourth quarter share count is going be pretty similar to 3Q?

Claude Jordan

Yeah.

James Hardiman - Longbow Research

Great, thanks guys.

Claude Jordan

Thanks James.

Operator

And our next question comes from the line Craig Kennison with Robert W. Baird.

Craig Kennison - Robert W. Baird

Good morning. Thanks for taking my questions as well. I wanted to start with a PG&A business. It’s my understanding the Wildcat product line has a fairly high attachment rate, what has been your experience in terms of the attachment rate of PG&A to Wildcat?

Claude Jordan

Yeah, I think you’re right and I think we’ve mentioned this on prior calls, prior to Wildcat and the Wildcat is a vehicle that people like to customize. And so when we launched the initial Wildcat and so then we have added the Wildcat limited as well as the Wildcat 4 and the Wildcat X. Several customers coming and maybe spending $300 or $400 on ATV or Prowler or an ATX, you’re seeing customers that will come in and spend over $1000 and $1500 putting on roof, windshield, things of that nature on a Wildcat. So, that’s been a very strong plus for our ATV business, I’m sorry for that PG&A business.

The challenge we’ve had as I mentioned in my comments on the PG&A side we’ve had a very strong performance with the Wildcat accessories and even Wildcat parts. On the other side of the equation, snowmobile garments and we mentioned this last year. I think everybody wanted to know whether we really felt the lack of snow last year on unit side and we said really where we’re going to feel it on is PG&A and that’s where we are feeling it this year, the garment business was down pretty substantially this year and a lot of that was due to dealers having garments from last year that they are still moving plus the slow start to this year in terms of garments as well.

Craig Kennison - Robert W. Baird

Thanks. And relative to your ATV business, to what extent are you able to measure the cannibalization you have experienced as you introduced the Wildcat in competition essentially in part with some of your ATV products? Are you seeing any degradation in the ATV demand related to cannibalization?

Claude Jordan

Not on the Wildcat. The Wildcat is such a unique different product for us it’s a completely different customer. We sell ATVs around the world in the U.S. south, north, Canada everywhere. The Wildcat is because of the width of it, there are certain markets, because it’s 64.5-inches, so there are certain markets that we are not able to go ahead and drive it on trails. So, the real markets are out west we have dunes and things of that nature. So, a completely different customer, different use, I mean it’s not a working vehicle it’s a pure fun vehicle, which is what we set out to build in the first place. So, we are not seeing a lot of cannibalization on our other product lines, not just the ATV, but even our Prowler side-by-side is really not cannibalizing that.

Craig Kennison - Robert W. Baird

And lastly how would you characterize your consumer today, we have had a change in payroll tax and a variety of other factors that may affect consumer behavior, what are you guys seeing?

Claude Jordan

Well, that just went into effect, so we really haven’t seen a lot of it just yet going forward. It’s certainly something that we will monitor. Our business, we sell a lot of discretionary items. We sell a lot of products for work purposes as well. Our ATVs are used for farming and ranching as well as our side-by-side. So, but it is an area that we closely follow. We certainly closely follow consumer confidence. We follow GDP growth. And there is no doubt that much like on the snowmobile side when we have great snow conditions, we see a lift. And when we have a great economy, we see a lift on our ATV side-by-side business as well. So, I think it’s a little early right now to get a feel for the payroll tax going up and whether that’s going to go ahead and further hit our customers. The one thing I would say is our customers are extremely passionate about riding snowmobiles, ATVs, and side-by-sides. It’s the one thing they do. So even with payroll tax going up a couple of points there, I don’t think it’s going to have a major implication, but there is no doubt that few less dollars that a customer will have at the end of the month.

Craig Kennison - Robert W. Baird

Great, thank you.

Operator

Mr. Jordan, there are no further questions at this time. Please continue.

Claude Jordan

Okay. We appreciate everybody joining us today. As a recap, we continue to be excited about this fiscal year, especially the launch of the five all new snowmobiles in the all new Wildcat Sport side-by-side models that we will start shipping this quarter. We believe these new products combined with the continued focus on product development and operational excellence will lead to another excellent year for Arctic Cat. We appreciate your time today and look forward to updating you on the full year in May. Thank you for your time today.

Operator

Ladies and gentlemen, this concludes the Arctic Cat fiscal 2013 third quarter conference call. You may now disconnect.

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