Arctic Cat Inc's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Oct.24.13 | About: Arctic Cat (ACAT)

Arctic Cat, Inc. (NASDAQ:ACAT)

Q2 2014 Arctic Cat Inc. Earnings Conference Call

October 24, 2013 10:30 AM ET

Executives

Shawn Brumbaugh - IR, Padilla Speer Beardsley

Claude Jordan - President and CEO

Tim Delmore - CFO and Secretary

Analysts

Scott Hamann - KeyBanc Capital Markets

Garrett Johnson - BMO Capital Markets

Rommel Dionisio - Wedbush Morgan Securities

Joe Hovorka - Raymond James

Mark Smith - Feltl and Company

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Arctic Cat’s Fiscal 2014 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, October 24, 2013.

I will now turn the conference over to Ms. Shawn Brumbaugh. Please go ahead.

Shawn Brumbaugh

Thank you, and thank you for joining us this morning. I’m Shawn Brumbaugh with Padilla Speer Beardsley. Before the market opened today, Arctic Cat released results for the fiscal second quarter ended September 30, 2013.

Participating in our call today to discuss the Company’s performance and outlook, will be Chairman and Chief Executive Officer, Claude Jordan; and Chief Financial Officer, Tim Delmore. Following their remarks, we’ll have time for 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’s CEO, Claude Jordan. Claude?

Claude Jordan

Thanks, Shawn. Good morning everyone and thanks for joining us today. This morning I will review the individual performance of our three businesses during the second quarter of fiscal 2014, as well as the progress we’ve made in operations as we continue to focus on growth, profitability and operational excellence. Following my comments, Tim Delmore, our CFO will review our financial performance.

Overall, we’re pleased with the year-over-year increase in snowmobile and side-by-side sales. However, Europe continues to present a challenge, and North America ATV sales fell short of our expectations. With that said, year-to-date we’re seeing positive growth in all three business units and expect this growth to continue throughout the year.

Regarding profitability, we did see a decrease in gross margin, primarily due to product mix, Canadian currency, and increased sale incentives driven by double-digit retail sales increases. As I mentioned on our last call, our priorities this year are to continue to grow sales through new product introductions, increase earnings per share, generate additional cash and strengthen our balance sheet. As we look forward, we’re on-track to accomplish each of these.

Additionally, we’re excited about our strong new product pipeline and the products we plan to launch over the next 12 months. In regards to the individual businesses, snowmobile sales were up 5% for the quarter, primarily driven by volume, and to a lesser extent improved pricing. Additionally, we continued shipping limited quantities of Yamaha snowmobiles as part of the partnership we announced earlier this year.

We’ll continue to supply additional Yamaha snowmobiles throughout the year with a large portion being shipped in our fiscal third quarter. As we noted at the beginning of the year, the gross margin on Yamaha snowmobiles will be lower than our Arctic Cat branded snowmobiles and a significant portion of the gross margin impact will be experienced in the third quarter.

Regarding the snowmobile dealer inventory, we did see an increase over last year. This was primarily due to starting our production earlier to accommodate additional Yamaha snowmobiles and we expect the dealer inventory to decrease later this year as we enter the retail season.

On the snowmobile retail side, we have started the year off very strong. Although our second quarter is not a heavy retail month for snowmobiles, we did see our snowmobile retail sales increase over 70% from the same period last year. Based on the solid start to the retail season and the fact that we have many new products being launched including the new 600 two stroke snowmobile and the 135 horsepower four stroke snowmobile, we are once again targeting in the market share this fiscal year and continue to expect the overall industry to grow in the low single-digits.

For our ATV business, sales increased 4% for the quarter. Key drivers for the sales increase were the recently launched new side-by-side models, including the new Prowler HDX500 utility model, new Wildcat X High Horsepower Sports side-by-side and our new High Horsepower Wildcat four seat model. Both the HDX500 and Wildcat 4X started shipping in the fiscal second quarter. Although we did see strong growth in these models, we also experienced a decrease in North American ATV sales, as we experienced significant headwinds due to the European economy.

Overall, the increase in our sales for our ATV and side-by-side business fell short of our expectations. However, we remain excited about the growth prospects of this business based on new products we have under development that will be launched later this year.

Regarding dealer inventory, our objective for the year has been to increase overall inventory in the 0% to 10% range to allow for continued growth of the business. During the second quarter, excluding our recently launched Wildcat models, we have been successful in increasing our dealer inventory in the mid single-digits.

As we move forward, we will continue to focus on wholesale sales with retail sales and would expect to see increases in inventory, primarily driven by new product launches.

For the quarter, our North American ATV retail sales grew by 6% and our side-by-side retail sales increased by 23% driven by significant increases in our new Wildcat models, and our new Prowler HDX500 utility model.

Looking forward, product development will continue to be an area of focus for our ATV and side-by-side business. In addition to the recently launched models for 2014, our plan is to continue to launch multiple new models in the second half of this fiscal year, including the Wildcat 50 inch trail version that we will start taking orders for next month.

Although our ATV and snowmobile business are showing year-over-year growth, we did see a slight decline in our PGA business for the quarter, with sales declining 1%. The primary reason for the decrease in second quarter sales was the drop off in snowmobile garments. However, we expect the garment business to generate positive growth in the second half of the year. Year-to-date our PG&A business is up 2%, primarily driven our parts business, which is growing at 13%.

In regard to operational performance, our focus has been on improving gross margins excluding Yamaha snowmobiles, controlling our operating expenses, and strengthening our balance sheet. During the second quarter, gross margins decreased driven by product mix, Canadian currency, and increased sales incentives driven by double-digit retail sales in ATV and side-by-side business.

As we head into our third quarter, we will see improvements in gross margin for our Arctic Cat products and we will see pressure on our overall gross margins as we ramp-up shipments of our Yamaha snowmobiles.

For the full year, we’re expecting gross margins to be down approximately 80 basis points. In regard to operating expenses, our goal is to slightly decrease the operating expenses as a percent of sales. With this in mind, we continue 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.

In the first half of the year, we successfully decreased operating expenses as a percent of sales by 30 basis points. The one area that continues to grow is our investment in the new product development. During the quarter, R&D expenses increased 29% as we continue to focus on developing new products. This investment will not only provide a return in the current year, but also in the future as we launch additional new products in the new market segments.

The final area of focus has been working to strengthen our balance sheet. During the second quarter, our year-over-year inventory increased to support our sales growth and allow the business to start snowmobile production earlier than last year.

As we look forward, we will remain focused on having the right amount of inventory on-hand to support the growth into the business. In regard to cash, we ended the quarter with 40 million of cash in short-term investments and no debt. Our cash position is up from the prior year by $16 million. Going forward, we will continue to focus on increasing cash and expect to generate positive cash flow this fiscal year.

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

Tim Delmore

Thanks, Claude. Good morning everyone. I would also like to welcome you to the conference call. Today, I will focus on reviewing the highlights of our second quarter financial performance and our outlook for fiscal year 2014. Net sales for the second quarter increased 4% to 238.5 million from 229 million for the same quarter last year. Snowmobile sales increased 5% to 135.4 million. ATV sales increased 4% to 72.7 million driven by Wildcat and Prowler side-by-side sales.

Parts, garments and accessory sales decreased 1% to 30.4 million from 30.8 million. We’re still expecting a good second half for our PG&A business this year. Gross profits for the quarter decreased 4% to 61.7 million from 64 million. The gross profit percentage for the quarter decreased to 25.9% compared to 28% for the second quarter last year, primarily due to product mix, weaker Canadian dollar and increased sales incentives driven by higher retail sales.

Selling, general and administrative expenses increased to 25.4 million from 25.3 million, primarily due to higher research and development expenses and was partially offset by lower administrative expenses, which were aided by the Canadian hedge benefits. Selling, general and administrative expenses as a percent of sales declined to 10.7%, compared to 11%. The Company continued its strategy to increase in research and development to ensure a strong pipeline of new products.

Our interest income was 7,000 versus 4,000 last year, same quarter a year ago interest expense was 37,000 versus 62,000. Our net earnings decreased 6% to 23.4 million from 25 million and our diluted EPS decreased 6% to $1.70 from $1.80.

Next, I’d like to review our financial performance for the first six months of fiscal ’14. Our year-to-date net sales increased to 5.6% to 359.3 million from 340.3 million. Our net earnings increased 7% to 28.8 million from 27 million, while diluted EPS increased 8% to $2.10 from $1.95. On a year-to-date basis snowmobile sales increased 8% to 158 million. ATV sales increased 4% to 149 million. And parts, garments and accessory sales increased 2% to 52.3 million from 51.1 million.

Our year-to-date gross profits increased 5% to 98.8 million from 86.5 million. Our year-to-date gross profit percentage was 25.3% compared to 25.4%. Looking at SG&A expenses, they increased 3% to 46.1 million from 44.6 million again primarily due to higher R&D expenses which are partially offset by Canadian hedge benefits. SG&A as a percent of sales declined to 12.8%, compared to 13.1% last year.

Looking at our balance sheet as of September 30th, we ended the quarter with 40.1 million of cash. For the quarter, our receivables increased 19% to 105.1 million related to a higher U.S. and Canadian floor plan receivables, due to the timing of shipments during the quarter. We ended the quarter with no debt or short-term borrowings. Our inventories increased 19% to 171 million from 144 million and were chiefly driven by our ATV and snowmobile production schedules. Our year-to-date capital expenditures totaled 8.3 million and depreciation was 7 million.

For our fiscal year ending March 31, 2014, we are maintaining our sales and earnings guidance, but are targeting the lower-end of the guidance range. We continue to expect earnings in the range of $3.27 to $3.37 per diluted share, an increase of 13% to 17% over prior year earnings of $2.89 per share. We anticipate sales to be in the range of 754 million to 768 million, an increase of approximately 12% to 14% versus fiscal ’13.

For financial modeling purposes, while we aren’t giving quarterly guidance, we would like to remind you that during Q3 we are shipping the lower margin snowmobiles to Yamaha, which will impact our margins compared to Q3 last year. And we’d also like to remind you that Q4 will be a big shipping quarter for us on a comparative basis as we ship our new 50 inch Wildcat, as well as other new Wildcat models.

I’d like to thank you for your attention and Angel we would now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from the line of Scott Hamann from KeyBanc Capital Markets. Please go ahead.

Scott Hamann - KeyBanc Capital Markets

Just in terms of the shipments in AVT, can you kind of flush out the variants between that retail number of 17 and what you shipped into the channel. Is that more of a timing issue or how should we think about what’s going on there?

Claude Jordan

Hey Scott, I think timing would be the best way of saying it. If I look at retails for ATVs, in North America we’ve actually increased year-over-year 6%. In terms of shipments and either on unit side, in terms of shipments we are actually down about 15% in terms of shipments. And to me the dealers would to be a much better inventory position in fact if they are retailing so many more units and the fact that we are shipping so many fewer units.

And so, when you look at the overall business, retails are clearly strong across the board in fact in Prowler HDX, Wildcats, snowmobiles, ATVs we are all up very strong. We mentioned ATV up 6%, the rest in the models we are up 20 plus percent. So that’s a good start and obviously when you retail units you have the opportunity to go ahead and wholesale in future date.

Scott Hamann - KeyBanc Capital Markets

So in the wake of that dynamic, I mean is it safe to say that you’ve started to see some of these orders come in and you have some visibility into the second half of the year that makes you confident that you’re going to be able to get to the low-end of the guidance range?

Claude Jordan

I think the key thing there is not necessarily ATVs the thing that we’ve been counting on last couple of years and continue to count on as we go forward is the new products we’re shipping. Not necessarily a specific segment such as ATVs. And so Tim mentioned in his comments that in the second half of the year we’ve got three new Wildcats that we’ll be launching. None of the three have announced -- only one of the three have been announced, that’s the Wildcat 50 inch trail version. And that one, as well as the other two we will start taking orders for next month and I think we’ll have a better handle on it then.

Scott Hamann - KeyBanc Capital Markets

And then just a final question on dealer development, I see that you hired a new sales guy, I think it’s going to kind of play into that. But can you talk about some of the success that you might have had with the broader portfolio, the new Prowler so far and new Wildcats. Have you made any inroads in gaining that dealer here?

Claude Jordan

Yes, we continue to add net dealers, we track them, each week we track our net dealers year-over-year and if we look at the three individual businesses on ATV side, ATVs and Prowlers as well as Wildcats we have added net dealers, positive net dealers throughout the year. Obviously the biggest gain has been on the Wildcat side where we have seen a significant jump. I don’t have the specific increases by product category in front of me right now, all three are positive and as I said the Wildcat area is obviously biggest and a lot of that I think is on expectation of the 50 inch Wildcat model coming out here in the very near future.

Operator

And your next question comes from the line of Garrett Johnson from BMO Capital Markets. Please go ahead.

Garrett Johnson - BMO Capital Markets

When you guys talk about dealer inventories, is that including all segments the ATV and snow?

Claude Jordan

When we talk about dealer inventory, Garrett I do have across the board on the snow side we are up 15% year-over-year. If you recall last year we ended the year with about 16% as well, I’ll had to go back and double check that number, but it was fairly high. The one thing I would say is, obviously as both Tim and I mentioned, Q3 we’ll be a heavy shipment -- a heavy quarter for Yamaha snowmobiles.

And obviously they will not counter in our dealer inventories though, with a strong start on the snowmobile side, on retails plus the fact that we would ship a lot more of Arctic Cat snowmobile this year, I think you got to see that number come down. And actually I think year-over-year by the end of the year we expect to see a lower, even though we’re up 15% I think we expect to see a lower snowmobile inventory by the end of the year.

The second thing I would comment on the snowmobile side is, even though our retails, I know September is a very light month for retails, but we are up 70% and we have not started shipping any of our new 600 two stroke models or our 7000 models, the four stroke 135 horsepower engine models. So snowmobiles I think will do fairly well in terms of the dealer inventory.

On the other side of the business what we mentioned ATVs and Prowlers, we took our Wildcat down because we have so many different new models in there. But the ATV Prowler side is up mid single-digits. And one of the things we’ve stated at beginning of the year, we actually like to see that go up to about 10% to keep up with the growth projections that we have.

Garrett Johnson - BMO Capital Markets

Well, what I wanted to get out was what would channel inventories look like if you did include a new product because you have a lot of products you didn’t have last year, like the 4DX, the 4X, on-and-on.

Claude Jordan

Yes, if I included everything on the wheel side of the business, 10%.

Garrett Johnson - BMO Capital Markets

Okay, 10%. And the snowmobile, the mix between Arctic Cat models and models shipped to Yamaha in the quarter, what would that ratio look like and maybe if you could give us a guidance on what that ratio would look like in the next quarter? That would be helpful. Thanks.

Claude Jordan

I don’t have the specific numbers, for Q2 as I mentioned before it was a lot of Arctic Cat branded models going out and we shipped a limited number of Yamaha. In Q3 you’re going to see more of Yamaha models going out, I don’t have the specific number with me.

Garrett Johnson - BMO Capital Markets

Okay, and if I could get greedy here. Where are you seeing the increased sales allowances, what particular lines are seeing more sales allowances?

Claude Jordan

Yes, those are driven by volume and you’re seeing it across the board. As I mentioned if you look at snow, ATV and side-by-side, our retail sales are up 17% with that every model has some type of program on it, whether it’s retail financing or an extended warranty or something. And so when you retail a lot more units you are going to see increases, so I would say across the board.

Garrett Johnson - BMO Capital Markets

But if it’s having an impact on your gross margin the sales allowances must be increasing faster than sales somewhere in your product line, so that’s what I am trying to understand?

Claude Jordan

Yes, I think, the increases Garrett are magnified by the -- they are increasing perhaps faster than the wholesale sales growth, so they may impact our margins a little more.

Operator

Your next question comes from the line of Rommel Dionisio from Wedbush Securities. Please go ahead.

Rommel Dionisio - Wedbush Morgan Securities

In upcoming quarters as you guys launch several of these new Wildcat models, could you just talk about the commitment that your deals have given you in terms of maybe allocating shelf space to these new products. Just want to get the feel for the fact that they won’t cannibalize existing product lines and realize these are new products entirely. And do you get the sense that dealers will commit additional space to the Arctic Cat brand and side-by-sides?

Claude Jordan

Yes. Certainly one of the things that we work them and there is not a formal agreement that says we’re going to get a certain amount of shelf space from them. We continue to work with them, and let them know that we are coming out with new models, which is one of the reasons we announce these models such as the Wildcat trail so early. There is no doubt that certain models when you launch it, you see a small amount of cannibalization if there is an existing product that we have in that category.

And so for example when you come out with an HDX500 utility model and you have a 700 that’s out there, you may see a drop off on the 700s, but you’ll see a significant increase on the 500. So you do see that but on a net basis, it’s still up significantly. Really where we see the largest growth is when we come out with a new product that is brand new. And so for example the Wildcat trail, the 50 inch version, we have nothing in the marketplace today for that space. And so I don’t expect to see any kind of cannibalization on that product category. But there is no doubt that some of the models we come out with and it’s got a different sized engine, you may see a smaller amount.

In terms of commitments for the dealers, if you go out and take orders from them you really don’t -- you’re really going on the expectations in terms of what you’re hearing from the marketplace and what you’re doing in terms of your channel checks and checking with specific dealers.

Operator

Your next question comes from the line of Joe Hovorka from Raymond James. Please go ahead.

Joe Hovorka - Raymond James

You gave the shipped in for ATVs, I think you said retail is plus 6 and shipments are minus 15. Can you give the same number for side-by-side?

Claude Jordan

The only thing I would say Joe is these are on units and not dollars.

Joe Hovorka - Raymond James

Correct right yes.

Claude Jordan

Yes, and so on the Prowler HDX side and retails we are up about 4%, wholesale is up about 28.

Joe Hovorka - Raymond James

28?

Claude Jordan

28.

Joe Hovorka - Raymond James

Okay.

Claude Jordan

But I would caution you there because you have the HDX500, which is a brand new model. On the Wildcat side, wholesales are up 36% and retails are up 51%.

Joe Hovorka - Raymond James

Okay, so collectively if you do HDX and Wildcat together you’ll under-ship retail there as well?

Claude Jordan

Yes I had to go ahead and run the numbers.

Joe Hovorka - Raymond James

Your PG&A in the quarter, you guys had a tough year last year, then it looked like it was improving in the first quarter and now we’ve had a minus on the revenue side, but also margins are down again. Can you talk through that a little bit more? I know there was a comment on what hit revenues in the press release. But is -- I thought the margin issues may have been behind us by now?

Claude Jordan

Yes, little bit of a mixed issue on PG&A too. We had a tough comp for the quarter on garment sales, which have pretty nice margins. They are going to come in our second half of the year, but those sales or a lack of them were driven by the preseason sales, preseason orders from the dealers. And dealers apparently thought that they maybe had a little too much carryover and were a little modest in their orders of garments, but we expect that to pickup during the late fall and in the season.

Joe Hovorka - Raymond James

And that must be snow related?

Claude Jordan

Yes that is.

Joe Hovorka - Raymond James

So if I look at the vehicles, can you rank them on PGA content by vehicle, like is side-by-side the highest or is it below snowmobiles or how would you rank the three product categories?

Claude Jordan

On PG&A?

Joe Hovorka - Raymond James

Yes, content per vehicle, right not total dollars, but.

Tim Delmore

We're still, and Claude you can correct me if you wanted to, but we're still a snow related PG&A business. And the exciting growth opportunity for us as we're becoming a more of an ATV side-by-side Company, there is great growth opportunities in the parts and accessory business particularly for the side-by-side business and we intend to capitalize on that.

Claude Jordan

Hey Joe the other thing I would add there is, if you rank the side-by-side out a little bit there, it is no down path the Wildcat model lineup, you do see a great deal more in terms of accessories. Tim is absolutely right in terms of snow being number one because parts drives the higher performance unit, but you are also seeing a lot of parts on the Wildcat side as well. And then garments are primarily a snow related business as well. So snow does get a lot of garments, it does get the high performance parts and so forth, as well as the miscellaneous accessories windshields, things of that nature.

Joe Hovorka - Raymond James

And can you give an international number for the quarter, what was total international revenue, what was it, up or down versus last year?

Claude Jordan

Yeah, in terms of units we really struggled on the European side, but overall outside of Europe we did fairly well. In terms of unit shipped, we shipped about 20% more units primarily driven by some of our larger markets, Australia which is a fairly new one, but Australia, Mexico and some of the Middle East and Latin American countries.

Joe Hovorka - Raymond James

And do you have the dollar contribution in the quarter, what really is the percentage of revenues?

Claude Jordan

We typically don't roll it out on the separate line item by dollar.

Operator

Your next question will come from the line of Craig Kennison from Robert W. Baird. Please go ahead.

Craig Kennison - Robert W. Baird

Tim could you just clarify, did Yamaha have any impact on margins this quarter?

Tim Delmore

No. Just a little, we mostly this quarter was -- if we did any Yamaha business it was in the youth models which we had done in the prior you also. So Q3 is the big Yamaha quarter coming up.

Craig Kennison - Robert W. Baird

Q3, yes I was going ask from a seasonal perspective what percentage in general of the Yamaha contracts will be in the Q3 period?

Tim Delmore

Well, the vast majority, yes.

Craig Kennison - Robert W. Baird

And then Claude just on the price side of things competitive dynamics, you have got a lot of large competitors with some scale advantages, but you have been nimble and created some products people crave. Is there any concern that you are just not able to reach some of the competitive price points as competition heats up?

Claude Jordan

I think that we have been successful year-over-year in terms of taking small amounts of price. It is a very competitive industry, both on the snow, as well on ATV and side-by-side. But I’d say across the board we have been able to get anywhere from one to two. The one thing I will say is we do make decisions, competitive decisions now and then to do ahead in pricing model to allow us to take specific share in the specific marketplace.

And there is no doubt to that as we look at retail sales we have seen some positive traction because of that. And so, I am not going to give you in terms of you know what I like the – even do $4 billion a year and have that kind of scale going to the plant, I would. But we’re still able to take price and we’re still able to go ahead and come out with models that label us to drive retails and gain share.

Craig Kennison - Robert W. Baird

And then just with respect to your dealer network, in some cases you have got very strong relationships where you are one of the top two or three vendors to that dealer. In other cases you are fighting for share. Could you just talk about the differences in those markets and whether sort of the adoption of your product portfolio is just a lot easier with those big dealers?

Claude Jordan

Yes, I think that's true with anybody in this marketplace and whether it's Yamaha or Suzuki or BRT or players across the board we all have dealerships. If you look at the dealer network out there, I think the last study we did shows that the average dealer carries three OEM lines. And a lot of the dealers we are in, our competitive brands are in there as well. They are certainly a trend away from exclusivity there are very few dealers out there that carry one solo exclusive line of power sport product.

So the ones that we have had a long relationship with, we continue to do very well, obviously if you go to the northern market and Canada, Northern U.S., we do exceptionally well. And I think models such as the Wildcat and the soon to be released Wildcat trail will allow us to continue to take share in some of the southern markets which has been in our longer-term strategy.

Craig Kennison - Robert W. Baird

And as a follow-up you have got this new relationship with Yamaha on the manufacturing side. Are there any synergies you two could realize on the distribution side, as you sort of look at your dealer networks together?

Claude Jordan

No I think the Yamaha relationship is new, it's one of those things that to-date has proceeded very well. And I think as we go forward and that relationship gets stronger there's no doubt there will be opportunities for us to work beyond just engines, as well as us building snowmobiles for them. But I think we're in the early stages of that relationship, we'll see how it evolves.

Operator

And your next question will come from the line of Mark Smith from Feltl and Company. Please go ahead.

Mark Smith - Feltl and Company

In the segment guidance that you've given in the past on off-road vehicle, snowmobile and PG&A?

Claude Jordan

I'm sorry Mark, you cut out on the first part, I didn't hear it.

Mark Smith - Feltl and Company

Are you guys maintaining the guidance that you gave previously on off-road vehicles up 25%-29%, snow roughly flat and PG&A up 5%-8%?

Claude Jordan

We are maintaining that guidance, yes snow might have a little upside to that.

Tim Delmore

Obviously we've had a good start to our year in snow, but within that range, flaked up a little bit for snow.

Mark Smith - Feltl and Company

The 600, the introductions you did later this year that maybe help boost that a little bit?

Claude Jordan

Yes, I think it's a little bit across the board, there's no doubt that we launched a couple of models at 80s on the 600 side, which will certainly add some of the issuing meters there.

Mark Smith - Feltl and Company

And then second question, just as we look at the back half of the year, that sort of things don’t go to plan and you don't have quite the orders that you expect, are you able to manage some of your operating expense as we look at some of your selling, marketing and G&A to manage those lower if the top-line doesn't work out the way that we'd all hope?

Claude Jordan

Operating our expenses for the most part are things you do control and so we can manage some of those things. The one thing I would see is we made a decision I’ll go back a few years ago that we were going to invest in the product pipeline in this business and we were going to roll out products each and every year with a specific emphasis on the side-by-side part of our business.

You saw a 29% increase in the second quarter and year-to-date we spent 24% more. I just don't see us going backwards on that. That product pipeline is too important to us, I don't see us scaling that back, so if the orders were to come in, like I said there's three new models that we haven't started taking orders for. We don't know where those are going to come in, we have a pretty good idea, but if they came in, due to sensitivity if they came in later, I don’t think that we would carve out anything out of R&D or in our sales area, I think those are too important for not just this year but the following year and following year.

Mark Smith - Feltl and Company

And then last question just as we look at timing, I think you said November the two new Wildcats and then the 50 inch wouldn’t be shipped until Q4 of the fiscal year so that March quarter, is that correct?

Claude Jordan

Yes, we have, there's three additional Wildcat models one of which is the Wildcat 50 which we've already announced, we just haven't taken orders. And there's two other models that we haven't announced just yet that we haven't taken orders for either. And some of those will be shipping in Q3 and some of them will be shipping in Q4.

Mark Smith - Feltl and Company

Is it likely that we see some of the 50 inch model still shipments maybe dropping more so in the June quarter than March quarter or do you feel pretty confident you'll be able to get those out and if the dealer sense by the end of that March quarter?

Unidentified company representative

Now from a production side obviously our supply chain has known about this for some time, we feel fairly confident on the production side. And like I said we'll have a much better handle in the middle of November when we got out and start taking orders but based on, I put this in the similar launch of the Wildcat, I think what we’re hearing is a tremendous amount of excitement on the Wildcat trail side. And you have to remember, the Wildcat itself is a 64.5 inch width unit, you can only ride that in certain markets.

The Wildcat Trail the 50 inch can be ridden in every market, and it's almost a substitute for an ATV model. So that one there we're getting, it’s not a handful of dealers that are asking for it, that would be our entire dealer network that would want that one.

Operator

(Operator Instructions) And we have no further questions at this time. I would like to hand the conference back over to Mr. Claude Jordan.

Claude Jordan

I appreciate everyone joining us today. As a recap, we're excited about the progress we are making on our side-by-side business and across the board increasing the retail sales. As we look forward to the remainder of the year, our focus will continue to be on growth, both wholesale and retail, product development and operational excellence. We appreciate your time today and look forward to updating you again in January.

Operator

Ladies and gentlemen, this conference will be available for replay today at 11:30 Central Time, through to October 30, 2013 at Midnight. You may access the replay system at any time by dialing 1800-406-7325 and entering the access code 4646664, followed by the pound key, international participants may dial 1303-590-3030. Those numbers again are 1800-406-7325 and 1303-590-3030 and access code 4646664 followed by the pound key. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.

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