Arctic Cat Inc. (NYSE:SAP)
F3Q10 (Qtr End 12/31/09) Earnings Call Transcript
January 27, 2010 11:30 am ET
Shawn Brumbaugh – IR, Padilla Spear Beardsley, Inc.
Chris Twomey – Chairman and CEO
Claude Jordan – President and COO
Tim Delmore – CFO and Secretary
Scott Hamann – Keybanc Capital Markets
Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Arctic Cat fiscal third quarter 2010 conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions).
I would now like to turn the conference over to Ms. Shawn Brumbaugh with Padilla Speer Beardsley. Please go ahead.
Thank you. 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 third quarter ended December 31, 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 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 will turn the call over to Arctic Cat’s CEO, Chris Twomey. Chris?
Thanks, Shawn. Thanks everybody for joining us today. This morning, I will review the performance of each of our three product lines during the quarter. Claude Jordan, our President and COO will review the progress we have made in operations as we’ve focused on returning the company to long-term profitability and at the same time investing in select products to position Arctic Cat to be a stronger company as the economy recovers. And Tim Delmore, our CFO, will review our financial performance for the quarter.
I believe the world-wide economy continues to improve albeit at a very slow pace and the consumer recreational products markets are lagging in the overall economic recovery. Consumer spending is improving slightly and will continue to improve, but it will be held back by the unemployment rate which will not change substantially in calendar-year 2010. With these overall economic views, let me talk about the individual product lines.
Snowmobiles sales for the quarter were down 35% and 23% year to date, reflecting our lower planned sales for the year. Snowmobiles sales are lower in both North America and international markets as a result of the world-wide recession. 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 16% compared to last year. North American total industry retail sales of snowmobiles are down about 20% compared to the same period last year.
Arctic Cat retail sales through December outperformed the industry and we have gained market share. Most of the snowfall so far this year came in late December. As a result, we have seen a strong pick up in retail sales in January. If this trend continues, we will close the retail sales gap with last year, but more importantly our dealers will have another good year of parts, garments and accessories as well as service sales, which will dramatically help their profitability.
ATV sales for the quarter were down 17% and 28% year to date as we have moved to adjust wholesale sales to better match retail sales activity and at the same time lower dealer inventories. At quarter end, the dealer inventories were down 23% compared to the same period last year. Arctic Cat North American total industry retail sales of ATVs through December were down less than the industry and Arctic Cat again gained share in this market as well.
Retail sales of Arctic Cat Prowler UTVs are down for the year, however significantly less than the core ATVs. We have also worked to better match wholesale and retail sales activities for Prowler UTVs, and at quarter-end dealer inventories are down at 11% compared to a year ago. Sales of parts, garments and accessories are down 7% for the quarter and 8% for the year to date. Again, we could see an improvement in this area if the snow stays and the dealers continue to service snowmobiles during Q4.
Now I would like to turn the call over to Claude Jordan for a review of the company’s operation. Claude?
Thanks, Chris. Good morning, everyone. As we have stated on our previous calls, our focus for fiscal-year 2010 will be 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 12 months, we have seen continued improvement in gross margins, lower operating expenses, lower inventory and stronger cash positioning.
In regard to operating expenses, we mentioned at the beginning of the year, our goal was to reduce expenses to over 17% compared to last year. With this in mind, we implemented numerous initiatives that have resulted in reduction during the third quarter of 9.3% and year to date of 14.4%.
Operating expense reduction will continue to be a major focus of the business. And we will continue to identify new areas for further reduction without impacting our goal of becoming a stronger business as the economy recovers. We continue to believe we will achieve the set 12% to 17% reduction for the year.
In addition to our focus on reducing operating expenses, we continue to work on various initiatives aimed at improving gross margins. Our primary focus has been working on our supply chain to lower – material and product costs as well as various engineering initiatives.
In the area of material cost, we have been able to achieve reductions driven primarily by lower commodity prices. In addition to improved commodity prices, we are also seeing improvement to gross margin driven by product mix, lower transportation costs and higher selling prices on select models. These are actions have allowed us to improve our gross margins in the third quarter by 550 basis points compared to the same quarter last year. And year to date, we have seen our gross margin improve by 350 basis points. Based on the improvements we have made in the results of the third quarter, we continue to believe we will be successful in improving the overall gross margin this year by up to 300 basis points.
Another area of focus has been working to improve our cash position. As we have previously stated, our single largest factor in improving cash will be in 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 successful in lowering our overall factory inventory by 29% or from a 150 million last year to a 106 million this year. The biggest improvements to inventory have come from reduced finished goods, engine inventory and salvage units.
Overall, this improvement in inventory has allowed the business to improve the year over year cash positions from $5 million last year to $50 million at the end of our third quarter, while at the same time eliminating all short and long term debts. Our goal is to continue to staying focused throughout the year, while at the same time ensuring we have the right amount and right mix of the inventory to meet the need of our customers.
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 our third quarter, we successfully reduced dealer inventory by over 19% compared to the same period last year. We will continue to staying focused on reducing dealer inventory which will allow the business to be well positioned when the economy recovers.
At this time, I would like to turn the call over to Tim who will review the third quarter financials.
Good morning. I would also like to welcome you to the conference call. Today, I will be focusing on reviewing highlights of our third quarter and year-to-date financial performance.
Net sales for the third quarter decreased as expected to a $131 million from a $174.7 million for the same quarter last year. Snowmobiles sales were $58.7 million compared to $90.9 million. ATV sales were $48.2 million compared to $57.8 million. Parts, garments and accessory sales were $24.2 million compared to $26.1 million for the same quarter last year. Sales for all three product lines decreased because of lower demand due to the changing economic conditions.
Gross profits for the quarter were $22.6 million versus $20.4 million. The gross profit percentage for the third quarter improved to 17.2% from 11.7% for the third quarter last year primarily due to higher margin percentages for all product lines resulting from the efforts we have undertaken to rescale our business, product cost reductions, price increases and a stronger Canadian dollar.
Selling and general administrative expenses decreased 9% to $22 million from $24.2 million for the same quarter last year primarily due to lower R&D, sales and marketing expenses and were partially offset by higher administration costs, including increased Canadian hedge costs.
Our interest income was zero versus $17,000 for the same quarter a year ago and our interest expense was $2,000 versus $323,000 of expense. Interest expense is lower due to lower borrowing levels primarily driven by reduced inventory levels and the company’s improved cash levels.
Net income for the quarter increased to $2.6 million versus a $2.7 million loss for the third quarter. And diluted earnings per share were $0.14 versus $0.15 loss per share a year ago. This quarter’s increase in the tax benefit was aided by discrete favorable tax items.
Next I would like to review our ACAT’s financial performance for the first nine months of fiscal ’10. Year-to-date net sales were $366.7 million versus $472.9 million a year ago. Net earnings were $11.4 million versus $7.2 million, while diluted earnings per share were $0.63 versus $0.40. On a year-to-date basis, snowmobile sales were $162.3 million versus $210.7 million. ATV sales were $132.1 million compared to $183.2 million. And parts, garments and accessories sales were $72.3 million compared to $79.1 million.
Our year-to-date gross profits were $75.3 million versus $80.4 million. Our year-to-date gross profit percentage improved to 20.5% versus 17.0%, again primarily due to higher margins for all product lines. Year-to-date selling, selling and general administrative expenses decreased 14% to $61.5 million from $71.9 million, again primarily due to lower R&D, sales and marketing expenses, and again partially offset by the increased Canadian hedge costs and other admin expenses.
Looking at our balance sheet as of December 31, we ended the quarter with $50.4 million of cash and no short term borrowings compared to $5.4 million of cash and $9 million of short-term borrowings at December 31 of last year. Our accounts receivables decreased to $43 million from $59.7 million due to decreased sales. Our inventories decreased to $106.3 million from $150.4 million mainly due to lower ATV units and lower ATV engine inventory as we are better matching production to retail demand.
Our year-to-date capital expenditures totaled $3.6 million and depreciation was $18.8 million. Arctic Cat continues to estimate sales for this fiscal year to be in the range of $425 million to $460 million, and we continue to expect improved per share results compared to year-end fiscal ‘09.
Also during the quarter, we were pleased to announce that we had signed two multi-year financing agreements. In October, we signed an exclusive US dealer floor plan agreement with GE, Commercial Distribution Finance to replace Textron Financial who announced it was exiting the business. In November, we signed a multi-year agreement with Bank of America to finance our ongoing working capital and general corporate needs.
Now I would like to thank you for your attention. And operator, we would now like to open it up for questions.
(Operator instructions) Our first question comes from the line of Scott Hamann with Keybanc Capital Markets. Please go ahead.
Scott Hamann – Keybanc Capital Markets
Yes, good morning. Just on the gross margin, Tim, could you kind of in order of magnitude on some of those major buckets, what were the big contributing factors to the year-over-year improvement? And then, maybe Claude, once you are done kind of flushing through some of these initiatives, where do you see potential for a normalized gross margin in future years?
While the improvements are like children, you don’t want to sink a lot of them. They all I think have nice weighting to them, so I think I would probably leave it at that. We just really like all of the improvements in all the areas I mentioned.
Hi Scott, I will go ahead and add a little bit to that. As we talked about it earlier this year we attack not only in the operating expense side but also in the gross margin side. Basically, every bucket that we possibly, at least we could think of. We benchmarked other firms and looked at what they were doing. And there is no doubt as Tim mentioned they’re all very important. Certainly, sourcing was very important to us. We took some select pricing increases, the engineering initiatives that we’ve been working on for last 18 months to 24 months. The list goes on and on in terms of where they came from and certainly some of them are certainly bigger than others, but all critical in terms of getting us to where we wanted to go. The third quarter was a big quarter for us. You saw an improvement there of 550 basis points. A large portion of that is, you got to remember where we came from. So we like where we are at now, 350 basis points up on the year, then we think we're done? The answer would be no. Haven't said – you know, have I sat down and figured out where we want this thing to be next year and the following year, I have not as yet. But we think there is still room to go further on that gross margin.
Scott Hamann – Keybanc Capital Markets
Okay, and then just a follow-up; you are up 350 for the year. Your guidance is up to 300. Is there an event next quarter that is going to bring that down for the year?
I don’t think it’s really one event. You have to look at the mix coming into play there and we are just about done for the year on snow and snow is a pretty good margin business for us. And we are a little bit more dependent on the ATV side. So I think mix comes into play. The volume running through the plan, I think it comes into play as well. So quarter by quarter basis we are not a linear business, all four quarters have a tendency to take a life of their own on. So we have historically seen different margins by quarter. So I think that’s probably have contributed to it more than anything else.
Scott Hamann – Keybanc Capital Markets
Okay then, Tim, just on a normalized tax rate going forward, what’s a good number to use?
I think year to date, we are about 16%. I think that would be a good number to use going forward.
Scott Hamann – Keybanc Capital Markets
Okay. Thank you.
Thank you. (Operator instructions) I show no further questions in queue. I’d like to turn the call back over to management for closing remarks.
All right. Thank you again all for joining us this morning. As I said, we are pleased that we’ve made the progress that we have. We continue to focus on bringing the year end at what we’ve said we will. We still see opportunities out there and I think as Claude mentioned we continue to work on those not only for Q4 but for next year as well. So we look forward to updating all of you at the end of the fiscal year. Thanks very much.
Thank you ladies and gentlemen. This concludes the Arctic Cat fiscal third-quarter 2010 conference call. If you would like to listen to a replay of today’s conference, please dial 1-303-590-3030 or 1-800-406-7325 and enter the access code 4205606 followed by the pound. Those numbers again are 1-303-590-3030 or 1-800-406-7325. The access code again is 4205606. ACAT would like to thank you for your participation and you may now disconnect.
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