Arctic Cat's CEO Discusses F3Q14 Results - Earnings Call Transcript

Jan.23.14 | About: Arctic Cat (ACAT)

Arctic Cat Inc. (NASDAQ:ACAT)

F3Q14 Earnings Call

January 23, 2014 11:00 AM ET

Executives

Shawn Brumbaugh – IR

Claude Jordan – President and CEO

Timothy Delmore – CFO and Secretary

Analysts

Craig Kennison – Robert W. Baird

Mark Smith – Feltl and Company

Joe Hovorka – Raymond James

James Hardiman – Longbow Research

Garrett Johnson – BMO Capital Markets

Rommel Dionisio – Wedbush Morgan Securities

Operator

Good day, ladies and gentlemen, thank you for standing-by. Welcome to the Arctic Cat’s Fiscal 2014 Third Quarter Earnings 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 Shawn Brumbaugh. Please go ahead.

Shawn Brumbaugh

Thank you, 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 its fiscal third quarter ended December 31, 2013.

Participating in our call 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.

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 third quarter of fiscal year 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 are pleased with the double-digit sales increases for our ATV and Parts, Garments and Accessories businesses, while our snowmobile business was negatively impacted as we shipped a large quantify of Yamaha snowmobile this quarter which as expected impacted both our sales and profitability. With that said year-to-date we are seeing positive growth in all three business units and expect this growth to continue throughout the fourth quarter, especially ATV business as we start to ship increased shipments on the new Wildcat Trail model. As I mentioned on our last earnings call our priorities this year are to continue to grow sales through new product introductions, increased earnings per share, generating additional cash and strengthen our balance sheet.

As we look forward we are on track to accomplish each of these. Additionally we remain excited about our strong new product pipeline and the products we plan to launch over the next 12 months.

In regard to individual businesses snowmobile sales were down 4% for the quarter, primarily driven by fewer Arctic Cat snowmobiles being shipped and a larger number of Yamaha snowmobiles which have a lower average order value than Arctic Cat branded snowmobiles. As we noted on our October call the gross margin on the Yamaha’s snowmobiles is lower than Arctic Cat branded snowmobiles and a significant portion of the gross margin impact was seen in our third quarter gross margin.

Regarding snowmobile dealer inventory this was an area that we targeted at the beginning of the year to decrease which was the primary reason for shipping fewer Arctic Cat branded snowmobiles. With the strong retail sales we have experienced combined with the fewer shipments we have seen the overall North American dealer inventory decrease 14% from last year and we should see further decreases in the fourth quarter.

On the snowmobile retail side we have continued to have a very strong year. During the third quarter our retail sales were up 16% and year-to-date our retail sales are up 27%. These increases in retail sales have allowed us to take the most market share in the industry. Based on the retail increases we are seeing driven by the multiple new products we launched this year including the new 600 two stroke snowmobiles and the 135 horse power four stroke snowmobiles we are once again targeting to gain market share this fiscal year. Additionally with the strong snow conditions we have seen in North America we are seeing double-digit increases to industry retail sales. Although we believe this will slow during the fourth quarter we are raising our snowmobile industry retail guidance from low single-digits to high single-digits.

For our ATV business sales increased 12% for the quarter. Key drivers for the sales increase were the recently launched new side-by-side models including the new Wildcat X Limited high horse power, sport side-by-side and our high horse power Wildcat X 4-seat model. Both of these new models started shipping over the last four months.

Looking forward we expect to see strong sales in the fourth quarter driven by the launch of the Wildcat Trail model as well as the continued success of the expanded Wildcat model line-up which now includes nine different models and ATE line up which continues to show strong retail sales growth.

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 third quarter dealer inventory has increased in the mid-single digit range. As we look forward we will continue to focus on matching wholesale sales with retail sales and we expect to see increases in the inventory primarily driven by new product launches.

On the retail side for the quarter our North American ATV retail sales grew by 15% which far exceeded all other competitors in the industry and allowed us to gain significant market share. The industry however continued to struggle and showed slightly negative retail comps for the quarter. Our side-by-side business also showed strong increases in retail sales driven by double-digit retail sales in our Wildcat line up. For the year our Wildcat line up is up 38% and we expect this to increase further as we start to ship the Wildcat Trail model during the fourth quarter.

Looking forward product development will continue to be area of focus for our ATV and side-by-side business. In addition to the recently launched model year 2014 models and the planned Wildcat Trail launch we expect to continue to launch additional new models over the next 12 months.

In addition to our ATV and snowmobile business showing year-over-year growth we also saw strong increases in our Parts, Garments and Accessories business for the quarter with sales increasing 13%. The primary driver for the increase in third quarter sales was the Accessory business which increased sales by 19% and the Parts business which also had double-digit sales increases. For the year the Parts, Garments and Accessory business is up 6% driven by double-digit increases to the Parts business.

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 third quarter gross margins decreased driven by the expanded launch of the Yamaha snowmobile which has a lower gross margin than the Arctic Cat range of snowmobile and to a lesser extent due the Canadian currency and overall product mix. As we head into the fourth quarter we’ll see improvement in our gross margin for the quarter. However the improvement will not make for the decreased gross margins to-date. For the full year we’re now expecting gross margins to be down approximately 190 basis points.

In regard to operating expenses our goal is to slightly decrease operating expenses as a percent of sales. With this in mind we have continued to focus throughout the business on 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.

For the quarter we were successful in decreasing operating expenses as a percent of sales by 90 basis points. And year-to-date we have successfully decreased operating expenses as a percent of sales by 50 basis points. While decreasing our operating expenses as a percent of sales we have been successful in increasing our investment in new product development which has increased 13% for the quarter and 20% for the year. Looking forward investment in new development will continue to be a focus and will result in numerous new models being launched over the next 12 months.

The final area of focus has been working to strengthen our balance sheet. During the third quarter our year-over-year inventory increased primarily to meet the growth needs of the business, support the numerous new models that have been launched over the last 12 months and to prepare for the launch of the Wildcat Trail. Based on planned shipments during the fourth quarter we should see inventory levels reduced by the end of the fiscal year.

In regard to cash we ended the quarter with $62 million of cash and short term investments and no debt. Our cash position is down slightly from the prior year by about $34 million primarily driven by increased inventory and receivables both of which are expected to decrease by the end of the fiscal year. Going forward we’ll continue to focus on increasing our 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 third quarter financials.

Timothy Delmore

Thanks, Claude. Good morning everyone. I would also like to welcome you to our call.

This morning I’ll focus on reviewing the highlights of our third quarter financial performance as well as our revised outlook for the rest of the year. Net sales for the third quarter increased 4% to $225.8 million from $218 million the same quarter last year. Snowmobile sales decreased as expected 4% to $118.1 million from $122.4 million.

ATV sales increased 12% to $78.2 million from $69.6 million driven by side-by-side sales. Our Parts, Garments and Accessories sales increased 13% to $29.5 million from $26 million driven by snow related PG&A as well as side-by-side related accessories. Our gross profits declined for the quarter and were $40.2 million versus $50.8 million for the same quarter last year. Our gross profit percentage for the quarter decreased to 17.8% compared to 23.3% primarily due to the impact of sales of lower margin Yamaha snowmobiles supplied in this quarter as well as the weaker Canadian dollar and product mix.

Selling, general, administrative expenses decreased to $21.8 million from $23 million for the same quarter last year. Higher research and development expenses were offset by lower sales and marketing expenses and a positive effect of $900,000 of Canadian hedge benefits. Selling, general and administrative expenses as a percent of sales declined to 9.7% compared to 10.6% for the same quarter last year.

The company continued its strategy to increase investment in research and development to ensure a strong pipeline of future new products. Net earnings for the quarter were $12.1 million versus $17.9 million, third quarter diluted EPS was $0.89 versus $1.30.

Next I would like to review Arctic Cat’s financial performance the first nine months of fiscal ‘14. Year-to-date net sales increased 4.8% to $585.1 million from $558.4 million a year ago. Year-to-date net earnings were $41 million versus $44.8 million while diluted EPS was $2.99 versus $3.25.

On a year-to-date basis snowmobile sales increased 3% to $276.1 million from $269 million. ATV and side-by-side sales increased 7% to $27.2 million from $212.2 million and Parts, Garments and Accessories sales increased 6% to $81.1 million from $77.1 million. Our year-to-date gross profits were $131 million versus $137.3 million, our year-to-date gross profit percentage was 22.4% compared to 24.6%. Year-to-date selling, general, administrative expenses increased slightly to $67.9 million from $67.8 million primarily due to higher R&D expenses which were offset to a larger extent by $2.6 million of Canadian hedge and translation benefits. Selling, general, administrative expenses as a percent of sales declined to 11.6% compared to 12.1% for the same period last year. The company reported a tax expense year-to-date of 35%.

Looking at our balance sheet, as of December 31st we ended the quarter with $62.5 million of cash versus $96.6 million for the same quarter last year. Receivables increased to $74.1 million from $50.8 million due to $14 million of receivables for Yamaha snowmobiles that were paid shortly after quarter-end as well as our U.S. floor plan and international receivables were up due to the timing of shipments.

We had zero short-term borrowings at quarter end. Our inventory was $137 million versus $97 million chiefly driven by ATV and side-by-side production schedules related to inventory as we prepared for Q4 shipments. Our year-to-date capital expenditures were $13.7 million and depreciation and amortization was $12.2 million.

We expect to end the year for capital expenditures at approximately $25 million and depreciation at $15 million. While we are revising our year-end guidance and we now expect fiscal ‘14 revenue to be up by 10% to 12% in the $740 million to $750 million range and EPS to be in the $2.90 to $3 per diluted share range.

The main change in that guidance we now expect ATV and the side-by-side sales to be up in that 14% to 17% range and gross margins to be down about 190 basis points year-over-year. Again the major issues there the snowmobiles built for Yamaha, the Canadian currency and product mix.

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

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from the line of Craig Kennison with Robert W. Baird. Please go ahead.

Craig Kennison – Robert W. Baird

Hey Tim, congratulations on your plans to retire and I want to thank you for all your support over the years.

Timothy Delmore

Thanks Craig.

Craig Kennison – Robert W. Baird

So in the dealer checks that we have done we hear a lot of enthusiasm about your new products, dealers seem excited to carry those new products. But maybe some reluctance to carry other products and my question is are you able to broaden the portfolio you are getting in the dealer ship to your satisfaction or that may be one area where you would like to do better?

Claude Jordan

Hey, Craig this is Claude. I would think across the board we would like to do better. I can’t think of an area where we wouldn’t. There is no doubt that over the last three, four years we’ve launched a lot of new products, the entire new Wildcat model line-up is brand new over the last two years and has nine different models and even on the HTX trailer side we’ve launched an additional side-by-side there. But our goal to in and continue to expand that line up and we’ve continued to educate the dealers and sign up dealers that really we want to grow with us.

But that’s an ongoing challenge and I think as we go forward we will sign up more and more dealer that want to grow well and expand the dealers even the ones we have today that want to grow as well. But it comes down to providing them with the products that are competitively priced and compete against the competition very strongly and are differentiated so that they want to carry them, and they can make good money on themselves.

I think we’ll continue to work on, on the dealer side of things. I think that we’ll continue to get better but that’s not a – type of solution. I think it’s an ongoing and you are constantly trying to get better and better dealers.

Craig Kennison – Robert W. Baird

Regarding your dealers could you give us an update on the number of active dealers and may what’s your target going forward?

Claude Jordan

We’re not going to get into specifics in terms of the number of dealers. I can say in terms of the active dealers we’ve added a small number of active dealers over the last 12 months in each of our product categories. Snow is probably flat but on the ATV, side-by-side Wildcat and trailers we’ve added a small number of active dealers.

I would say as we go forward, about two years ago we put together a dealer development team. We continue to go ahead and invest in that group. And we expect to we’re not going to get into metrics here but we expect to go ahead and expand our dealer network in North America as we continue to grow.

Craig Kennison – Robert W. Baird

Excellent. Final question just on margin the change in guidance from down 80% to down 190% is, I mean we were aware of the Yamaha relationship, the impact on gross margin what has changed that you are doing, are Yamaha selling more products or products just coming in at a lower margin?

Claude Jordan

I think a couple things here, one just to be clear here the Yamaha product we knew exactly how many units we were going to ship and what the margin was at the beginning of the year. And that’s why we said we would be down 80 basis points. The new information that said hey we’re going to reset this down to 190 is not Yamaha. What I would say is the combination of things, first and foremost if you remember at the beginning of the year we expected our ATV side-by-side business to grow 26% to 29% and we revised the guidance there down to 14% to 17%. So when you take that number of volume away from the business it certainly puts a challenge on in terms of holding those gross margins.

We mentioned earlier certainly Canadian currency has played a little bit of role and I would say even product mix in terms of some of the lower margin product going out to increased retails versus the high end not every product has the same margin. There is a pretty big spread depending on which model is going out the door.

Craig Kennison – Robert W. Baird

Great, thank you.

Operator

Our next question is from Mark Smith with Feltl and Company. Please go ahead.

Mark Smith – Feltl and Company

Hi, guys I think Craig hit on this a little bit and I jumped on later so sorry if I missed but can you give us the guidance for each category just ATV what are you looking at for the rest of the year on snow and PG&A?

Claude Jordan

Yeah snow we’re at plus 3 now so we’ll be at, at least that at year-end; PG&A will be in that previous guidance was 5% to 8% and we will be about 6% to 8% for PG&A.

Mark Smith – Feltl and Company

And to confirm ATV was 14 to 17 was that correct?

Claude Jordan

Correct.

Mark Smith – Feltl and Company

Perfect. And then any Wildcat Trail shipments during the December quarter?

Claude Jordan

Yeah we were able to get a few out say, below 100 units in the December quarter but very few obviously the most and that’s why we are saying obviously Q4 is going to be up fairly strong for us. A large portion of that is due to the Wildcat Trail most of that start going out in February-March timeframe.

Mark Smith – Feltl and Company

Okay. And then taxes, can you give us any guidance on taxes as we look out the next 12 months?

Timothy Delmore

In mid-May we’ll do our guidance for the next year but for the quarter for the year we expect to end at about 35% rate.

Mark Smith – Feltl and Company

Okay. And then Claude can you just talk a little bit, it sounds like Yamaha wasn’t really the change in the margin here but that was your, for the most part done with the first year with the Yamaha deal. Can you talk about how happy you are with this deal, things that you can change going forward, should we see the same kind of metrics next year?

Claude Jordan

I think first of all the number of Yamaha units that we shipped and we’re not going to get in specifics but certainly a fairly larger number of units went out the door this year and certainly next year. We’ll see a slight increase but certainly not the type of increase we saw this year. And so I think from that side I think that will help us in terms of absorbing things on the gross margin side.

In terms of the partnership I think the partnership is going great. There is opportunities for us and Yamaha to do things down the road we’ve learned a lot from them. They’ve learned a lot from us. So I think it’s been a win-win in terms of going forward. There is no down as we continue to run that volume through we will see increased benefits on the supply chain side and certainly in terms of the plan in terms of the volume going through the plant on absorption./

Mark Smith – Feltl and Company

Okay. And then last just on market share on snowmobile it sounds like you guys had a pretty good year early on at retail level and taking some share on snowmobile. I don’t know if you can give us any sneak peek into or talk more about dealer inventory where there are at, kind of their appetite for about for perhaps orders into this next year?

Claude Jordan

Well we got a show coming up in February so we’ll have a better feel for it then but as we look at dealer inventory on the snowmobile side it’s down 14% year-over-year. We’ve mentioned at the beginning of the year inventory last year was up and it was up double-digit and we’ve made a decision to ship fewer products and go ahead and bring inventory back down. The inventory is down 14% year-over-year and through the fourth quarter we think they are going to come down an additional amount. And so we feel very good and I would expect that as we go into the ordering period for model year ‘15 that we should see good reception from the dealers.

Mark Smith – Feltl and Company

Okay. Thanks guys.

Claude Jordan

Thanks, Mark.

Operator

Our next question is from Joe Hovorka with Raymond James. Please go head.

Joe Hovorka – Raymond James

Thanks, guys. Could you give the retail sales number in the quarter for side-by-side and then if you might be putting for Wildcat in each category like you did in the September quarter?

Claude Jordan

Well Joe I think obviously our competitors have all the market share data on ATVs and snowmobiles and so we’re not going to go ahead and give a lot more information than what we’ve already given on side-by-side.

Joe Hovorka – Raymond James

Okay.

Claude Jordan

Now I was going to say I mentioned in my script part there that Wildcat continues to do well, is up 38% this year. But I think we will leave it at that in terms of getting into it by model-by-model.

Joe Hovorka – Raymond James

Okay that’s fine. I know you did give a little bit more detail in September quarter I think side-by-side were up 23% in the September quarter, if I look at your overall North American was up I think it said 15% in the release and you said ATV was up 15% and snow was up 16% so that would imply that side-by-side would have been up less than 15%. So what’s the delta between what we’re seeing let’s say in the September quarter and what would appear to be may be 800 or 900 basis points slowdown in retail growth at side-by-side is that just a comp you give bigger numbers last year is it anything else?

Claude Jordan

Once again so I am not going to get into specifics and even in terms of giving you the delta because I am sure you can do the math there. Our side-by-side business retails were up double-digit. And I’ll leave with that. We feel very good about side-by-side business as I mentioned, I think Craig asked the question may be it was Mark have we shipped any Wildcat Trail, the numbers we’re talking about in Trails would have gone out at very end of December and at very few units. And so none of those in our numbers.

So as we go in Q4 we expect based on the orders that we’ve seen on the Wildcat Trail we expect to see a fairly good pick up on retails on our side-by-side business. And I’m sure we’ll comment on that again in the Q4.

Joe Hovorka – Raymond James

Right and then the margins in the quarter obviously Yamaha affected it, so what was the gross or op margin how we want to may be address if you could, would have looked like ex-Yamaha, that is what is the core business looking like year-over-year in the December quarter?

Timothy Delmore

I don’t know if we want to get into our specific margins there but again except for we’re real happy on how the Yamaha margins came out on the business. It is a bit of a tough story what this is the quarter, the big reset is occurring and there we do have a few headwinds in currency and product mix. So leading to the overall year-over-year guidance of 190 basis points down but we do want to emphasis it was not, the Yamaha we’ve got – guided and the additional things occurred to cause further decrease.

Joe Hovorka – Raymond James

Okay. And because you also alluded to I guess it’s a product mix in ATV that’s part of the reason for the lower gross margins?

Timothy Delmore

Correct.

Joe Hovorka – Raymond James

And is that I am assuming a shift toward ATV and away from side-by-side is that what you mean by product mix or is it something else in there?

Timothy Delmore

No, Joe first of all I would not try and categorize it. It wasn’t ATV business and within the side-by-side business you have a wide range depending on the product of margin. And so I don’t think you can sit there and say a shift from one to next. I would say within each of the categories some of the margins, some of the products that went out the door had lower margins than other products.

And just as an example when you have a brand new product coming out you have tooling expenses that are up against that versus the say a more mature product that’s been expensed in the tooling been written off. And so lot of times on your more mature products you do have a little bit better margin.

Joe Hovorka – Raymond James

Right, okay.

Claude Jordan

There is no doubt as I look at the business our strategy has been to invest in the R&D side, product development and there is no doubt when I look at the products that are going out the door, the brand new ones, there is lot of excitement on the dealer side and really that’s where lot of our growth is coming from. And so when you look at Q3 up 12% the majority of that’s new product.

Joe Hovorka – Raymond James

Okay. That’s all I have there. Thank you.

Claude Jordan

Thanks, Joe.

Operator

(Operator Instructions) And our next question is from James Hardiman with Longbow Research. Please go head.

James Hardiman – Longbow Research

Hi, good morning, thanks for taking my call. I’ll ask a question that may have been asked in a slightly different way. I mean I was impressed with the retail growth of your core ATV business in the quarter. Certainly the side-by-side seem like they are doing well but fundamentally 14% to 17% growth for the year versus the prior guidance is a pretty big departure and if I recall correctly last year it was a similar scenario where the ATV segment in particular may be more materially beneath where you originally thought it would be, is it more the newer Wildcat product while selling well obviously may you not have lived up to your expectations or is more that the existing product has been short of your expectation? How should we think about three months ago versus today, what’s really coming worse than how you previously thought about it?

Claude Jordan

I guess James I would ask that two parts to that, first of all on ATV side-by-side part of our business as we entered the year we did say guidance would be up 25 or 29 points, and the fact that we’ve revised that guidance down to 14 and 17 is certainly just – on our side. With that said we’re talking about the industry for example Q3 the ATV industry negative comp year-to-date it’s showing very low single-digit growth. So 14 to 17 growth says that we are disappointed that it’s not 25 to 29 but even 14 and 17 is pretty good growth rate for that business.

If I look at the reasons why it certainly would not be Wildcat and certainly would not be the new products. The new products as I mentioned earlier have been doing very well. If anything I would say it’s some of the other products that’s not new and that where we have seen the drop off where the dealers have been taking the new stuff and not necessarily the older stuff.

James Hardiman – Longbow Research

Okay, thanks. And then couple of quickies, the Canadian currency you called that out a couple of times is there any way to quantify the impact on that for the quarter or for the year?

Timothy Delmore

Well for the quarter it was at least $900,000, the benefit and year-to-date $2.6 million and it will continue to have an effect in the Q4 although we’re well hedged. So but there is no doubt it has been fairly dramatic change in that currency and again we’re pretty well hedged on it but it does have some impact.

James Hardiman – Longbow Research

And that was those two numbers you gave were top line impact or gross profit impact?

Timothy Delmore

Yeah in effect they are gross profit impact and we would call those as cash flow hedges through operating expenses. So negative gross margin impact, positive operation expense impact, operating expenses.

James Hardiman – Longbow Research

Great and then – I am sorry go ahead.

Timothy Delmore

No, that’s it.

James Hardiman – Longbow Research

Oh, that was it, okay. On the inventory side so pretty sizeable increase in inventory I am talking balance sheet inventory. You said that inventory levels would be reduced by the end of that the year, is that reduced versus current levels or reduced versus last year’s end of last year?

Claude Jordan

Reduced versus current levels. Obviously with the number of new products we’ve launched it is going to be up and we’ve said that as you continue to grow the business and launch new products you will have to invest on the inventory side of the business. What we are referring to is off the level is right now. It will be further reduced in Q4.

Timothy Delmore

Just keep in mind the side-by-side have a higher average costs than our core ATV business. So you may have even the same number of units around but they all have a higher average cost, that will result in higher inventory at dollar level.

James Hardiman – Longbow Research

So is it fair to assume that inventory level will be up comparable with that, I am sorry of what your total top line growth is but comparable with the sales growth or is it going to be materially more than that and why would that be the case?

Claude Jordan

I will be honest with you, I have not run the numbers I can’t, I haven’t run numbers so I want to go ahead and speculate.

James Hardiman – Longbow Research

Okay. That’s fair enough. And then just last question here on the dealer inventory side last two quarters really, wholesale numbers way short of retail numbers it sounds like you feel pretty comfortable with where dealer level inventories are but as I think about sort of the wholesale, the retail dynamic can we assume that they going to be roughly in line with one another as we move forward or is there going to be another quarter or two of right sizing that.

Claude Jordan

First of all in terms of right sizing I think the dealer inventory as we said at the beginning of the year we’d like to go ahead and actually get that increase now on the ATV side. On the snow side we’ve said it was too high and we wanted to bring it down. So I think the dealer inventory for snow is really where we wanted to be. I think as we go on in next year I think we’re well positioned. Inventory itself down 14% for snow so. I think we go in next week next month in the ordering period where we should see a solid reception.

On ATV side we wanted to be up 0% to 10% this year, we’re up in the mid-single digits. We would certainly like to see it a little bit more than that because when you are launching a number of new products we’ve been launching over the last 12 months and as we look forward the number that we will launch over the next 12 months, we are going to go ahead and invest more on the inventory side for our dealers.

James Hardiman – Longbow Research

Got it, thanks guys.

Claude Jordan

Thanks, James.

Operator

And our next question is from Garrett Johnson with BMO Capital Markets. Please go head.

Garrett Johnson – BMO Capital Markets

Our gross margin was impacted by year-over-year changes in promotions?

Claude Jordan

Garrett you were cutting out there, we didn’t hear the first part of that question. Could you repeat it please?

Garrett Johnson – BMO Capital Markets

Okay. I’ll try; on gross margin could you just discuss how much of the gross margin was impacted by year-over-year change in promotions?

Timothy Delmore

Really not a material amount. It wasn’t really an issue either positive or negative.

Garrett Johnson – BMO Capital Markets

Okay. And to clarify on your channel inventory comment up mid-single digit is that total or is that excluding new products?

Claude Jordan

Every product we have it’s on the direct side with wheels new product, old products, everything.

Garrett Johnson – BMO Capital Markets

Okay, great. And one last question on snowmobile. So your sales were up 2.6% for the year. If we excluded the Yamaha shipments what would the Arctic Cat branded performance look like? I just want to get a better handle on how your brand is performing and how that shipped during the year?

Timothy Delmore

Yeah we’re refraining from giving that details of information, it’s initial years and we are sensitive in our relationship with Yamaha and so we would like to keep it that way.

Garrett Johnson – BMO Capital Markets

Okay. Thank you very much.

Operator

Our next question is from Rommel Dionisio with Wedbush. Please go head.

Rommel Dionisio – Wedbush Morgan Securities

Yeah thanks good morning. Claude I think you referred to some deceleration in the core ATV industry and I wonder if you could provide just a little more color on that is that was that weather was it just you had a lot of innovation not just you but competitors as well in the side-by-side category, so maybe there has been more of a shift to that category from single seaters. If you could give a little more color as to some of the reasons for why I mean if the industry seen some deceleration there, retail sales trends?

Claude Jordan

Yeah I think a couple of things when I said the industry was – this is for Q3, for our Q3 the October-November-December quarter for core ATVs not side-by-side. I think weather was certainly one component I think the other side comps against pretty strong quarter last year as well. I think it’s important to remember that when I said it negative comp we’re talking about a very small negative comp.

As I mentioned on our side our ATV business some of our ‘14 model year ‘14 ATVs are retailing very well. And as I mentioned earlier in my comments that we’re up about 15% over the last three months and when I look at everybody else there we’ve taken more market share than anybody else in the industry over the last three months.

So I think it’s been good for us. I think the industry is still trying to find the bottom there. And it looks like sort of leveled off I mean like I said this quarter it was down slightly, the quarter before up slightly. So year-to-date you are seeing increases of low single digits for the industry.

Rommel Dionisio – Wedbush Morgan Securities

Thanks very much, Claude.

Operator

And there are no questions at this time. Mr. Claude Jordan please continue with any closing statements.

Claude Jordan

Appreciate everybody joining us today. As a recap we are excited about the progress we were making with our new product introductions and the across the board increases of retail sales. Additionally overall dealer inventory for snow mobile ATVs and side-by-side is down from last year and should position us well for next year. 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 May. Thank you.

Operator

Ladies and gentlemen, this does conclude Arctic Cat’s fiscal 2014 third quarter earnings conference call. This conference will be available for replay at 12:00 noon today through January 30th at midnight. You may access the replay system at any time by dialing 1800-406-7325 and entering the access code 4662831. Thank you again for your participation. And you may now disconnect.

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