Arctic Cat Inc. (NASDAQ:ACAT)
F2Q10 (Qtr End 10/03/09) Earnings Call Transcript
October 29, 2009 11:00 am ET
Shawn Brumbaugh – IR, Padilla Spear Beardsley Inc.
Chris Twomey – Chairman and CEO
Claude Jordan – President and COO
Tim Delmore – CFO and Secretary
Rommel Dionisio – Wedbush Morgan
Ladies and gentlemen, welcome to the Arctic Cat fiscal 2010 second quarter conference call on the 29th of October, 2009. Throughout today recorded presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions)
I will now hand the conference over to Ms. Shawn Brumbaugh. Please go ahead madam.
Thank you. And thank you for joining us this morning. I’m Shawn Brumbaugh with Padilla Spear Beardsley. Before the market opened this morning Arctic Cat released results for its fiscal second quarter ended September 30th, 2009.
Participating in our call today to review the company’s performance will be Chairman and Chief Executive Officer Chris Twomey; President and Chief Operating Officer Claude Jordan; and Chief Financial Officer Tim Delmore. Following their remarks we will 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 & Exchange Commission. We encourage you to review these documents for a description of risk factors that may affect results.
Now, I will turn the call over to Arctic Cat’s CEO Chris Twomey. Chris.
Thanks Shawn. Thanks everyone for joining us this morning. This morning I will cover the individual performance of our three businesses during the quarter, Claude Jordan, our President and COO will review the progress we have made in the operations as we focus on returning the company to profitability and at the same time investing in selected products to position Arctic Cat to be the stronger company as the economy recovers and Tim Delmore, our CFO will review the financial performance.
Before I begin the business review, let me first tell you the important economic assumptions we used as we made our business plans for the year. Number one, the US recession ends in the third quarter but overall growth remains very sluggish. Number two, the worldwide recession lags at least a quarter or two behind the US. Number three, consumer spending is anemic throughout 2009 and 2010, and spending on consumer recreational products trails consumer spending in general. And number five, unemployment stays above 9% well in to 2010. Nothing we have seen so far this year would lead us to change any of these assumptions.
With this in mind, let me talk about our businesses. Snowmobile sales for the quarter and year-to-date are down 13%, reflecting the lower planned sales for the year. Snowmobile sales are lower in both our North American and international markets as a result of the worldwide recession. While significant currency changes particularly in Russia also negatively impacted our international orders, the recent decline in the US dollar will not change our order situation since we are building to order and cannot adjust the (inaudible).
We are closely monitoring dealer snowmobile inventories as one important measure of the overall health of our dealer network. At quarter-end, dealer inventories were down 14% compared to last year. Even with lower dealer inventories, we are optimistic that retail sales could increase during the fiscal year and we will grow our share.
Retail selling season for snowmobiles begins in September and October. To date, we are encouraged by the early snows we have seen sporadically across much of North America, particularly today in Denver and the Rockies. While this early snow always melts except in the high elevations of the mountains, it always excites our customers and builds anticipation for the upcoming snowmobile riding season. We believe we have seen this positive effect on retail sales already this year. As I indicated in our last conference call, we expect snowmobile sales to dealers and distributors to be down for the year between 25% and 32%.
Sales of ATVs for the quarter were down 28% as we also shifted ATV dealers sales later in the year so that our dealer inventories would continue to decline and to better match the introduction of our 2010 models with the height of the retail selling season which occurs in September and October. Our intent is to also lower North American ATV dealer inventories in view of the continued difficult retail sales environment. At quarter-end, North American dealer inventories were down 22% compared to last year.
Calendar year-to-date North American industry-wide retail sales for ATVs are down about 30%. Arctic Cat retail sales have outperformed the industry and we have gained market share. Retail sales of Prowler UTVs are down for the year but not as much as our core ATVs. And we are seeing a number of week-over-week positive comps which we believe is a sign that this market has bottomed out and is heading back to a more normal sales pattern. Overall for the year, we expect ATV and Prowler sales to dealers and distributors to be down 18% to 24% for the fiscal year.
Sales of parts, garments and accessories are down 16% for the quarter and 9% for the first six months. For the full year, we also – or we still expect sales of PG&A to be down 4% to 11%.
At this point, I will turn the call over to Claude for a more in depth review of the operations. And after Claude and Tim, we will be happy to answer questions. Claude.
Thanks Chris. Good morning, everyone. As Chris mentioned, we are continuing to plan for a difficult year both the overall economy and power sports industry continue to struggle. During our last call we explained that during these difficult economic times we plan to focus on reducing expenses, controlling cash and positioning the business to be stronger as the economy recovers. As a result of these initiatives we have implemented, over the last nine months, we have started to see improvement in gross margin, lower operating expenses, lower inventory at both dealer and factory, and stronger cash.
In regard to operating expenses, we mentioned at the beginning of the year, our goal was to achieve a reduction of 12% to 17% compared to last year. This time we implemented numerous reductions that included a reduction of 12% of the workforce, a hiring freeze and various other cost reductions. We have continued to make progress on this objective and we were successful in lowering our operating expenses in Q2 by 12% and year-to-date by 17%.
Operating expense reduction will continue to be a major focus of the business and we will continue to identify new areas for further reductions without impacting our goal of becoming a stronger business as the economy recovers. We continue to believe we will achieve the 12% to 17% reduction for this year.
In addition to our focus on reducing operating expenses we continue to work on various initiatives aimed at improving our gross margin. The primary focus has been working with our vendors to lower our material and product costs as well as various engineering initiatives. In the area of material costs, we have been able to achieve reductions driven primarily by lower commodity prices. In addition to improved commodity prices, we are also seeing improvements to gross margins driven by product mix, lower transportation costs, and higher selling prices on select models.
These actions allowed us to improve our gross margin in Q2 by 410 basis points compared to the same quarter last quarter. And year-to-date we have seen our gross margin improve by 230 basis points. Based on the improvements we have made in the results of the second quarter, we continue to believe we will be successful in improving the overall gross margin this year less than 300 basis points.
Another area of focus has been working to improve our cash position. As we have previously stated, our single largest factoring at improving cash will be lowering our finished goods inventory by better aligning our production with the demands of the market. With the improved planning throughout the business, we have been successfully in lowering our overall factory inventory by 23% or from $172 million last year to $134 million this year. The biggest improvements to inventory came from reduced finished goods and engine inventory. Overall this improvement in inventory allowed the business to improve the year-over-year cash position and eliminate any short and long-term debt. Our goal is to continue the same focus throughout the year, while at the same time, ensuring we have the right amount and right mix of the inventory that meet the needs of our customers.
The final area that we have been working on is lowering dealer inventory. By lowering production and aligning the dealer inventory to the needs of the market we have been successful in reducing the amount of inventory at our dealers. During Q2 we successfully reduced dealer inventory by over 19% compared to the same period last year. We will continue the same focus on reducing which will allow the business to be well positioned for when the economy recovers.
At this time I would like to turn the call over to Tim, who will review the second quarter financials.
Good morning. I would also like to welcome you to the conference call. Today, I will focus on reviewing highlights of our second quarter and year-to-date financial performance.
Net sales for the second quarter were $166.3 million versus $204.3 million. Snowmobile sales were $85.7 million compared to $98.4 million. ATV sales were $51.7 million compared to $71.6 million.
Parts, garments and accessory sales increased were $28.8 million compared to $34.3 million for the same quarter last year. And due primarily to lowered pre-season sales of snow related parts and ATV accessories. And sales for all three product lines decreased due to the challenging economic conditions.
Gross profits for the quarter were $45.2 million versus $47.1 million. The gross profit percentage for the quarter improved to 27.2% from 23.1% for the second quarter last year, primarily due to higher margins for all product lines and lower snowmobile sales incentives.
Selling, general and administrative expenses decreased 12% to $23.3 million from $26.6 million for the same quarter last year, primarily due to lower R&D expenses, sales and marketing expenses, lower compensation costs and were partially offset by higher administration costs, increased hedge costs and higher expenses for our European subsidiary.
Our interest income was zero versus $27,000 for the same quarter a year ago and our interest expense was $175,000 versus $414,000. Interest income was primarily affected by lower cash levels at the beginning of our fiscal year compared to last year. Interest expense is lower due to lower borrowing levels driven primarily by reduced inventory levels and the company’s efforts to conserve cash.
While pretax earnings were up 8% to $21.7 million, net income for the quarter was down slightly $14.8 million compared to $16.8 million for the same quarter a year ago. And earnings per share was $0.81 versus $0.93 the same quarter a year ago. The prior year Q2 earnings were aided by a lower effective tax rate of 16% versus our current effective tax rate of 32% this year.
Next I would like to review our financial performance for the full first six months of fiscal ’10. Year-to-date net sales were $235.7 million versus $298.2 million a year ago. Net earnings were $8.8 million versus $10 million, while diluted earnings per share were $0.48 versus $0.55. On a year-to-date basis, ATV sales were $83.9 million compared to $125.4 million. Snowmobile sales were $103.7 million versus $119.8 million. And parts, garments and accessory sales were $48.1 million compared to $53 million over the same period last year.
Our year-to-date gross profits were $52.8 million versus $60 million. Our year-to-date gross profit percentage improved to 22.4% versus 20.1%, again primarily due to higher margins and lower snowmobile sales incentives. Year-to-date selling, general and administrative expenses decreased as Claude had mentioned to 17% to $39.5 million from $47.6 million, again primarily due to lower R&D expense, sales and marketing expenses, lower comp expenses, and partially offset by the increased Canadian hedge cost and other admin expenses.
Looking at our balance sheet as of September 30th, we ended the quarter with $11.2 million of cash and no short term borrowings compared to last year of $3.7 million of cash and $14.8 million short term borrowings. Accounts receivable decreased $10 million due to decreased sales and the decrease was to $68 million. Inventory decreased to $134 million from $172 million, primarily due to lower ATV unit inventory and lower ATV engine inventory.
Year-to-date capital expenditures totaled $2.1 million and depreciation was $11.3 million. Arctic Cat continues estimate sales for the fiscal year ending March 31st to be in the range of $425 million to $460 million based on achieving ATV sales of $188 million to $203 million, snowmobile sales in the range of $140 million to $152 million and parts, garments and accessory sales of $97 million to $105 million. We continue to expect improved per share results compared with fiscal 2009.
I would like to thank you for your attention. And operator, would you now open it up for questions.
Thank you, sir. (Operator instructions) The first question comes from Rommel Dionisio. Please go ahead.
Rommel Dionisio – Wedbush Morgan
Hi, good morning, thanks. I wonder if you can just talk a little bit about the competitive promotional environment, I think we have seen that moderating somewhat, and I am wondering if you could just talk about that for both snowmobiles and for ATVs please?
Yes, I would say that we have seen some moderation in that. We – we’re aggressively – we had a very aggressive finance program out for Q1. Actually for Q2, ended at the end of September and we have taken that down a bit. It still is equal to or better than anybody in the industry.
On the snow side of the business, our programs are above what they were last year, but are equal to or better than the other competitors. So in general, I would say, maybe there has been a little more aggressive ATV activity, but that seems to be slowing a bit and there is about the same level of snowmobile activity and doesn’t seems to be a lot of interest in raising that level of activity.
Yes. And one thing I would like to add is, on the ATV side is, on the first part of the year, first – quarter one and quarter two, we did go out with some aggressive retail financing with 1.9%, which basically when you consider sales were down, we’re able to go hit and drive some additional retail sales, we have actually taken care this year. So we felt pretty good about that.
In terms of the competitive environment, I am not saying where the competitors are much more aggressive than last year. They all are going in different directions. Some may go in the direction of higher dollar rebate, other ones are going with extended warranty. We’ve basically chosen the path of more on the retail financing side.
Rommel Dionisio – Wedbush Morgan
Okay. Thanks very much.
(Operator instructions) The next question comes from Steve Baughman. Please go ahead, sir.
Good morning, guys. Thanks for taking the question. Just real briefly wondered if you can just – the recall that the CPSC announced yesterday, does that going to have any material financial impact?
No, it’s not. It’s a relatively small number of units, about 3,000 units totally. And it’s a vendor related issue, so we will recover most of our – first of all it’s not a big dollar item anyway. It’s a very small part and a easy fix, so there is not a lot of money in it, and that’s vendor related, and we will recover most of that cost from the vendor.
Great. That’s good to hear. Thanks very much.
(Operator instructions) The next question comes from – I do apologize, the question has been withdrawn. There appear to be no further questions.
All right. Well, then, we would like to thank you all for joining us. We appreciate the – your time. It’s been a challenging first six months, but so far so good. We like what we see. And we have got plenty of work to do.
We like the snow that we see so far, so if that continues, we can see a way to a very positive snow year, much like we saw last year where snow outperformed the rest of RV industry. So, we look forward to updating everybody after the next quarter. Thank you very much.
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