Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Arctic Cat Inc. (NASDAQ:ACAT)

Q4 2014 Earnings Conference Call

May 15, 2014 11:00 a.m. ET

Executives

Shawn Brumbaugh – PadillaCRT

Claude Jordan – President and CEO

Tim Delmore – CFO and Secretary

Analysts

Scott Hamann - KeyBanc Capital Markets

Rommel Dionisio – Wedbush Securities

Mark Smith – Feltl and Company

Craig Kennison – Robert W. Baird

Joe Hovorka – Raymond James

James Hardiman – Longbow Research

Operator

Good morning ladies and gentlemen, and thank you for standing-by. Welcome to Arctic Cat’s Fiscal 2014 Fourth Quarter Conference Call. (Operator Instructions).

I will now 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 PadillaCRT. Before the market opened today Arctic Cat released results for its fiscal fourth quarter ended March 31, 2014.

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 fiscal year 2014 as we continue to advance our growth strategy through new product introductions and international expansion while enhancing our operating efficiencies. Following my comments Tim Delmore, our CFO will review our financial performance

Overall, we’re extremely pleased with 28% increase in sales during the fourth quarter and 9% increase for the full year, which included positive growth from all three businesses. During the year, we did experience a major challenge as Canadian currency weakened during the second half of the year that contributed to our sales being lower by roughly $10 million.

Excluding the impact of Canadian currency, the full year would have seen a double-digit sales increase. With that said, we did see a strong double digit growth from our ATV business for the year driven by the successful launch of the new Wildcat Trail model and continue to benefit from the Yamaha snowmobile and engine [ph] partnership.

In regard to individual businesses, during fiscal year 2014, snowmobile sales were up 7% driven primarily by new product launches during the year and the Yamaha partnership.

Regarding new product launches, we successfully launched 10 new snowmobile models and 2 new engines, including our first designed and built snowmobile engine. This engine called the 6000 C-TEC2 became the number one selling snowmobile in the United States’ 125 horsepower segment.

Snowmobile industry retail sales in North America had a great year driven by improved snow conditions throughout most of North America and as a result, were up 11% from the prior year. Artic Cat also had a strong year with retail sales increasing 19%. This increase in retail sales allowed us to gain the most market share in the North American industry.

And with our significant increase in retail sales and our continued focus on dealer inventory, we were successful in lowering the overall North American dealer inventory by 9%.

As we look forward to next year, we remain excited about our snowmobile business. At our February snowmobile dealer show, we launched 13 new snowmobile models, including the all-new Pantera 7000 targeted at the touring segment. The new models, combined with the continued benefits we are receiving from the Yamaha partnership will position our snowmobile business for another excellent year.

For fiscal year 2015, we are expecting North American snowmobile industry retail sales to continue the growth and expect the market will grow between 0% and 3%. With the expected increased industry retail sales and the launch of 13 new snowmobile models, our expectations are that we will see our retail sales exceed the market and we’re again expecting to take market share during the upcoming year.

On the ATV and side-by-side business, sales increased 21% for the quarter, driven by the launch of our new Wildcat Trail model. The Wildcat Trail offers a narrower 50-inch wide, trail-legal platform which allows riders access to authorized ATV trails. In addition to trail legal capabilities, the Wildcat Trail offers industry-leading horsepower and suspension, combined with the lowest price in the industry.

For the year, sales increased 11% with the sales increases coming from our ATV, prowler and Wildcat segments. In addition to all 3 product category strong growth, we also achieved growth in both the North American and international markets as we continued to focus on expanding our business outside North America.

Dealer inventory was again a key focus. For the year, dealer inventory for ATV and side-by-sides were up 5%, excluding Wildcat Trail and up 15%, including the Wildcat Trail. Also in Wildcat Trail, units were shipped in February-March and just now started to generate retail sales. With the strong retail sales we're seeing on the Wildcat Trail, we expect to see the overall dealer inventory increasing in a single digit range.

As we look forward to fiscal year 2015, dealer inventory will remain a focus, however as product development continues to be a major part of our growth strategy, we will continue to see modest growth in dealer inventory to ensure dealers have the right quantity and mix of products to meet the needs of their customers.

ATV industry retail sales for North America experienced its first year-over-year growth in over five years as retail sales increased by 3% during fiscal year 2014. Arctic Cat ATV retail sales outperformed the market, allowing us to gain share for the fiscal year.

Our side-by-side business, with the launch of the new Prowler HDX 500 and Wildcat Trail model, experienced solid retail sales growth of over 17% which allowed us to gain share in the North American market. For fiscal year 2015 we are expecting North American ATV industry retail sales to continue their growth and expect market will grow between 0% and 2%.

We also expect the side-by-side market to continue to grow in the 6% to 9% range. With the new models launched in fiscal year ‘14 plus the new models in our product pipeline, we are expecting to take share again in ATV and side by side segments for fiscal year 2015.

In addition to our ATV and snowmobile business showing year-over-year growth, we also saw an increase in our parts, garments and accessories business for the quarter with sales increasing 7%. The primary driver for the increase in fourth-quarter sales was the accessories business which increased sales by 20% and the garment business which increased sales by 18%. Both of these benefitted from strong snow conditions we experienced during the fourth quarter.

For the year, the parts, garments and accessories business was up 6% driven by a strong increase in our parts business. Looking forward to fiscal year 2015, dealer inventory is in excellent shape combined with the recently launched new snowmobiles and side-by-sides plus the strong pipeline of new products under development should allow us to see an increase in parts, garments, and accessories of over 10%.

In regard to operational performance, our focus has been on improving gross margin and controlling operating expenses. During the fourth quarter, gross margins improved by 178 basis points driven primarily by volume. For the year our gross margins decreased by 179 basis points with 110 basis points being attributed to the negative impact of Canadian currency. The remaining portion of gross margin decrease was primarily due to product mix.

As we look forward to fiscal year 2015, we will see a significant negative impact to gross margin due to a weaker Canadian dollar. As a reminder, about 30% of our sales are in Canada. With the weaker Canadian dollar impacting a large portion of our sales, we expect to see our gross margins decrease by 110 basis points with all of these coming from Canadian currency. Excluding the impact of Canadian currency, we would have seen our gross margin improved over 2014.

In regard to operating expenses, we stated at the beginning of the year our goal was to hold operating expenses flat as a percent of sales. By focusing on cost controls, we were successful in decreasing operating expenses as a percent of sales by 103 basis points. Although operating expenses as a percent of sales was slightly lower, we continued to invest in product development and for the full year saw our product development expenditures increased by 16% and fourth quarter product development increased by 7%.

As we head into fiscal year 2015, controlling operating expenses will remain a focus. However we will continue to invest in product development which will increase our operating expenses as a percent of sales but will position the business well for fiscal 2015 and beyond.

At this time, I would like to turn the call over to Tim who will review the fourth quarter and year end financials.

Tim Delmore

Thanks, Claude. Good morning everyone. I’d also like to welcome you to the conference call. Today I will focus on reviewing the highlights of our fourth-quarter and full-year financial performance and our outlook for fiscal 2015.

Net sales for the fourth quarter increased 28% to $145.4 million from $113.2 million. Snowmobile sales increased $6.4 million from a negative $5.3 million. ATV sales increased 21% to $105.9 million from $87.6 million driven by Wildcat Trail and Wildcat X side-by-side sales.

Parts, garments and accessories sales increased 7% to $33.1 million from $31 million for the same quarter last year, driven by snow related accessories and garments due to the favorable snowmobile riding conditions and Wildcat related accessories.

Our gross profits improved for the quarter to $20 million versus $13.6 million for the same quarter last year. Our gross profit percentage for the quarter improved to 13.8% compared to 12% primarily due to higher volumes.

Selling, general, administrative expenses were nearly flat at $22.7 million versus $22.4 million. Higher research and development expenses and higher sales and marketing expenses were offset by the positive effect of $1.6 million in Canadian hedge benefits. Selling, general, administrative expenses as a percent of sales declined to 15.6% from 19.8%.

The company continued its strategy to increase its investment in research and development to ensure a strong pipeline of new products. The net loss for the quarter improved to $1.5 million from $5.1 million and the diluted loss per share improved to $0.12 from $0.38.

Next, I would like to review our performance for the full year fiscal ’14. Our net sales increased 8.8% for the year to $730.5 million from $671.6 million a year ago. Year-to-date net earnings were nearly flat at $39.4 million versus $39.7 million while diluted earnings per share increased to $2.90 from $2.89.

On a year-to-date basis, snowmobile sales increased 7% to $282.4 million from $263.7 million. ATV sales increased 11% to $333.2 million from $299.8 million, and parts, garments and accessories sales increased 6% to $114.9 million from $108.1 million primarily driven by improved part sales.

Our year-to-date gross profits were $151.1 million versus $150.9 million. Our year-to-date gross profit percentage decreased as expected to 20.7% compared to 22.5% and was within our previously estimated range. Year-to-date selling, general, administrative expenses increased to $90.6 million from $90.2 million primarily due to higher R&D expense and compensation and benefit expenses and partially offset by $4.3 million of Canadian hedge benefits.

SG&A expenses as a percent of sales declined to $12.4 million compared to 3.4 -- to 12.4% compared to 13.4% the same period last year. The company’s tax expense was just under 35% compared to 34.5% for the prior year.

Looking at our balance sheet as of March 31. We ended the quarter with $82.5 million of cash versus $112.8 million. Our receivables increased to $42 million from $30.3 million due to U.S. floor plan receivables related to the timing of shipments during the quarter and increased international receivables.

Inventory increased to $141 million from $96 million chiefly due to the earlier starts of our snowmobile production schedule – we’re producing about a month earlier and a little bit earlier start on our side by side and oil production schedules.

Year-to-date – also very important [ph], and the year end, we ended with no short-term borrowings. Our year-to-date capital expenditures were $24.3 million, depreciation and amortization was $14.2 million.

Regarding our full-year fiscal 2015 sales and earnings guidance. We expect sales to be in the range of $775 million to $786 million with unfavorable Canadian currency exchange expected to reduce net sales by approximately $12 million or 1.5%. The company estimates the earnings-per-share range will be in the $2.33 to $2.43 per diluted share, which includes the favourable currency impact of $0.79 per diluted share.

For your financial modeling purposes, Q2 looks like the toughest comp for us as far as earnings-per-share goes as you do your modeling.

Our assumption includes the following – our financial model includes the following assumptions: for ATV industry retail sales to be flat to up 2%, side-by-side North American retail sales to be up 6% to 9%, snowmobile North American sales to be flat to up 3%. We expect to achieve slightly higher operating expenses levels as a percent of sales again due to the currency hedge benefit we booked in ’14. We expect our gross margins to be down approximately 110 basis points due to the Canadian currency and to a lesser extent product mix and tooling amortization.

Regarding our sales, we expect snowmobile sales to be up 5% to 6%, ATV and side-by-side sales to be up 6% to 7% and our parts, garments and accessories sales to be up 10% to 12%. We expect our tax rate to be 35.5%, our weighted average shares to be ground 13,150,000 mark and our expected capital expenditures for the year will be approximately $31 million and depreciation and amortization to be around $16 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Hamann of KeyBanc Capital Markets.

Scott Hamann - KeyBanc Capital Markets

Hey good morning. Just a couple questions on currency here, which I think is probably the biggest issue. Can you help us reconcile the $0.79 hit? Maybe what kind of hedges were favorable last year, how the impact flowed through this year, and then on a quarter-to-quarter basis, what the impact is. Just trying to understand how that flows through. And then just to follow up on that, as you think about ways to offset this impact going forward, are there things you can explore, like price increases or potentially operationally hedging some of this business by moving production to Canada, or how would you be thinking about that?

Claude Jordan

Hey, Scott, this is Claude. I will go ahead and start there and maybe Tim will go ahead and add in here a little bit of color. Couple of things, just in terms of background the currency, we do about $200 million in sales in Canada each year, we hedge about 80% of that in the March timeframe. And so last year as we looked at it, we had a plan of about 103, it actually came in about 104.5. If you look at currency itself, up until about September-October timeframe currency was trading in that 102-103 range and then in September-October started to take off and then by March hit – it actually hit up to about 112. And so currency is much like a parts discount and drops, it not only impacts your sales but it drops all the way through gross margin and operating profit as well.

In terms of the $0.79 for fiscal year ’15, it’s going to come in two buckets. First then is just off the top line, which will flow through gross margin, that 104.5 going to 112 and it’s going to impact us by about $11.8 million, and as I said, that comes right off of sales but also on gross margin. Last year since we were hedged, we had a good guy on the operating expense side of that $4 million. And so that will come back this year and also be a bad guy. So we’re looking at about a combined impact of currency moving plus the hedge we had in place last year of about $16.1 million. If you look at the business ‘14 the year we just completed, operating profit was about $60.5 million and so we’ve got to make up about $16.1 million just to go ahead and breakeven. So there is no doubt that the challenge that we faced last year of $0.30 EPS impact and then $0.79 that we’re expecting primarily, in fact, all of it due to Canadian currency has created the challenge for us.

Second part of your question, are there things that we can do? I would say a couple things. First of all, you mentioned price. We certainly are taking price, the fact that we took some price on the snowmobile side of our business, we took price on the parts, garments, and accessories side of our business. These were back at the February snowmobile show. It’s the first year, we took some price on some of our models on ATV side. The one thing I would say that when currency goes from 103-104 range to 112 it’s not possible, we are in a competitive environment, so it’s not possible to take all of that price at one time. But there is no doubt as we go forward, we’re going to continue to monitor the market and where it’s possible we will take price as we can.

Second part there, I would also say that as we shift to more of a side by side business, ATVs, today we do about 60:40 – 60% of our North American sales for ATVs are in the US and 40% are in Canada. On the side by side that makes us a lot different. Actually about 75% of our side by side business is down in the US and only 25% up in Canada. So we will get a natural hedge in there by the product mix shifting more to the US with side by sides. Longer term, I think that, there are more things you can do. I am not sure –currency has the tendency to move in both directions, it can go up, it can go down. We don’t want to be shortsighted in terms of currency might move in the future and start trying to move our plans. But there is no doubt that shifting more of the cost basis up to Canada could allow us go ahead and avoid or eliminate some of those worse [ph].

Scott Hamann - KeyBanc Capital Markets

Just a follow up on the sled segment, sales being up year-over-year not quite as much as maybe we thought inventories being down for fiscal ’15, can you kind of talk about maybe the international part of that and is Russia playing an impact in maybe some muted orders overseas?

Claude Jordan

I think the snowmobile actually did come in where we thought they were going to come in. We gave guidance at the beginning of the year, for last year we said it would be up, in fact, actually we said at the beginning of the year they’d be up – they’d be basically flat and we were actually up about 7%. As we look forward to ’15, the guidance that we gave on the snowmobile side of 5% to 6%, you are correct that inventory being 9% down, you would like to see increase in sales little bit more but we are seeing weakness on the international side. Russia is an area that is down on the snowmobile side for next year. Some of that I would say is their economy but the other side is the political risks that run there as well.

So if there is an opportunity, and let’s say the political risk side of things clears up, there's no doubt that as we see opportunities we could go ahead and move some more unit there. But as we sit here today we’re not expecting that, that portion of the business to grow.

Operator

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

Rommel Dionisio – Wedbush Securities

I wondered if you could just talk about the initial reception you guys are hearing from dealers with regards to the 2015 model lineup in snowmobile – actually it’s a good season and I think you mentioned, Claude, inventories are down about 9%, so if you could just talk about how the proceeding [ph] the initial plan for next year?

Claude Jordan

Yeah, I think we had our show back in February, any time you come out of a year like that we just had in terms of snow conditions themselves, dealers are happy, probably a little exhausted. Our retail sales were up 19%, we far exceeded everybody in the industry, but the industry was up 11% which is a great performance overall. So we introduced about 13 new models, we introduced the Pantera 7000, I think there is a lot of excitement. Dealers love new product and we can go ahead and continue to get them new product year after year. They like it. And so year before we launched 10 new models, two new engines, this year 13 new models. As we said before our growth strategy, one of the primary key areas is going to be product development, and as long as we’re doing that, customers are excited and the dealers are excited.

Rommel Dionisio – Wedbush Securities

Just to follow up to that, Claude, I think you mentioned – or Tim mentioned that 0% to 3% growth is the the industry outlook in snow for next season and that’s obviously comping a difficult – or you face a difficult year over year comparison because there was such a severe winter weather this year, are you seeing any sort of systemic participation trends that would sort of point to positive growth, I mean not every winter is going to be as good as the last one you had?

Claude Jordan

I think that on the snowmobile side we’ve said this before, as we look at our different businesses, within Arctic Cat, there is no doubt that we have high expectations on the side by side part of our business, snowmobile we certainly want to continue to grow that and then ATV, I think ATV has been somewhat flat over the last few years although we did see a little bit of a pick up last year of 2.6% growth there. So I think when you look at snow, there is an opportunity to continue to grow of those three businesses there. It is unit wise the smallest of the three businesses. Canada really wasn’t impacted that much during the recession, their overall unit sales remain somewhat flat, they are down a little bit but somewhat flat. And the biggest drop off was in the US. You were seeing it slowly climb back where it was and I think some of the 11% industry growth that you’re seeing this year, a lot of it was new snow but it's – I think the OEMs coming out with new product, generating the excitement, we’re all coming out with – last year we came out with our 6000 which is at 125 horsepower two-stroke and you’re seeing segments that we’re entering and customers like that and buying new. So I think that going forward snowmobile is a nice mid single-digit type of growth business and there will be some years where maybe it's flat and maybe we’re down 1 or 2 points but for the most part I think the planning wise over the next five years we think it’s going to grow in that mid single digit.

Operator

Your next question comes from Mark Smith of Feltl.

Mark Smith – Feltl and Company

First, just want to look at the dealers and primarily kind of multi-line dealers on off-road vehicles, do you feel like with the introduction of the 50th trail model, that you’re getting the floor space, that you want from dealers?

Claude Jordan

So I would say absolutely on the trail, we just started really shipping -- we shipped a few models in December, we shipped a lot of models in February, we’ve shipped a large portion in March. And feedback of ours has been very very positive. We’ve only got one other competitor out there and they have about 53 horsepower, we have about 63 horsepower, we beat them by about 10% on suspension. We put some nice features on it, such as doors versus our competition have nets, we’re going ahead and put Fox premium shocks on it versus our competition with the standard shocks. And then we top it off by beating the competition on price. So this has probably been one of our more exciting models that we launched in quite sometime.

So dealers are excited, as I mentioned during my earlier comments that we're seeing strong retails, and if you look at the fourth quarter retail sales for Wildcat, you got to remember we have been – it’s not a brand-new segment, we’ve been in there over two and half years now, but our fourth quarter retails, even though we started shipping Wildcat Trail late, we’re still up 77% from the prior year quarter. So i think the dealers are excited, it's a great product, it's got a great price and I think as we go forward it’s going to lead to great results for us.

Mark Smith – Feltl and Company

And then looking at, was there any impact from weather as we look at off-road vehicles, your side-by-sides and ATVs during the quarter that maybe slowed some shipments, it looks like those numbers were below expectations or guidance, anything that during Q4 on shipments of off-road vehicles?

Claude Jordan

I really can't say so much, last year – I have heard that from the few of the – from a few other spaces within the power sports and maybe even on the RAV side, on the motorcycle side, quite honestly if you recall even last year Q4 there was – we had a pretty tough Q4 last year in terms of weather. And so you might have seen a little bit of an impact, the industry on the ATV side, that late spring, the industry was down about 1%, we actually took share again on the ATV side, we were up a couple points there. So between that, I mentioned our Wildcat retails were up 77%. So our retails were fairly strong in the fourth quarter, could they have been stronger if we had perfect whether? Perhaps but then you started to trade-off because maybe your snowmobile sales are dropping.

Mark Smith – Feltl and Company

And then just looking at parts, garments, accessory business, how do you feel about your inventory levels at dealers today and it looks your guidance very stronger growth there, that either inventory being down from winter with garments and some parts, and snowmobile business, are there other drivers as it’s driving that very stronger?

Claude Jordan

I think you’re absolutely correct, we had a strong year in terms of the winter season, in terms of riding. The Wildcat Trail is driving lot of accessories, so as we go into next year we feel very good about our parts, garments, accessories business. Dealer inventory is fairly low, at February snowmobile dealer show the orders came in, in line with the expectation and the guidance we’re hitting now. So as we look forward we feel very good about that parts, garments, and accessory business and the fact it’s our highest margin business we feel really good about it.

Mark Smith – Feltl and Company

And then I think the last question for me, can you just give us an update on CFO role and where we are on transition?

Claude Jordan

Tim’s announcement of retirement handful of months ago and we are in a search. We have one of the leading search firms conducting that search and we still have not made any announcement, we’re still in the interviewing process and we hope to go ahead and bring that to a closure here in the near future.

Operator

Your next question comes from the line of Craig Kennison of Robert W. Baird.

Craig Kennison – Robert W. Baird

Just wanted to follow up on Scott’s question on currency, has there been any change in philosophy with respect to how you manage currency risk?

Claude Jordan

There is no doubt that Canadian currency – and it’s not the only currency we watch, we certainly watch the euro, we watch the yen, and so I would say that in terms of importance it remains an extremely important area primarily because basically 30% of our sales were up there in Canada. In terms of the way we approach it we've not changed it. As I mentioned during the comments to Scott, we have some natural hedges built in there and the fact that the side-by-side business is becoming a larger part of our business, it’s now over 50% of our dirt business. And that mix is probably 25% Canada, 75% US versus a 60:40 on the ATV side.

And the second thing is with currency and it does allow us to take price, we have already taken price in terms of some models and we expect to take some more parts as the market allows us. So I think the practice that we had in the past of hedging 80% or thereabouts remains a good practice. We certainly look at, could you go up beyond one year? The challenge you run into there is currency shifts on and moves the other way, it can create a negative in that regard to where you lock in at that higher currency. So it is something we will continue to look at. We’re going to continue to go ahead and work on different options as we go forward. But as it stands today we will continue to go and hedge about 80% of that business.

Craig Kennison – Robert W. Baird

And then with respect to the buyback it appears there's very little left on the share repurchase authorization the board has authorized stocks of 40%, I think year to date what’s the board’s view on authorizing additional repurchase activity?

Claude Jordan

I think last year we put in about $30 million share repurchase in place and we also put a dividend in place. We ended the year with about $82.5 million on our balance sheet in terms of cash and we feel very good. We continue to have no debt on our book. So from a fundamental business we feel very good about where we are today. We just increased our dividend from $0.40 a year to $0.50 or 25% increase, and we still have a little bit of money remaining on the share repurchases we put in place last year but the board looks at that continuously and I am sure something will address here in the future as we head into fiscal year ’15 in terms of whether we need to put additional money in place for it but the board does look at that and it’s constantly on the review.

Craig Kennison – Robert W. Baird

And following up on Mark’s question on sort dealer penetration, it sounds like you're having a lot of success with for example the Trail winning space on the dealer show room, are you winning incremental space on the dealer showroom or dealer sort of adding that and maybe subtracting something else?

Claude Jordan

I would say across-the-board I will make a statement, we told our employees this – during our fiscal year we are the only OEM that makes the statement that we took ATV share, side by side share and snowmobile share. And the only way you and take share is by retailing more units and the only way you retail more units is through the dealers to sell more, and put more floor space for Arctic Cat products. Retail wise we had a great year across all 3 businesses, so we feel very good about our dealer network and we feel very good about the floor space we are getting.

Craig Kennison – Robert W. Baird

And then just finally with respect to Yamaha that's been another of your I think very good strategic decisions and following on the Suzuki buyback and investment in product innovation, give us an update on that and can you give us any clues as to potential future path whether it's with respect to additional manufacturing synergies or maybe even distribution synergies?

Claude Jordan

Yamaha, first of all, that’s a relationship we just kicked off couple years ago, we used to buy their 120cc engines for the used models and then we expanded in, and they approached us and said, hey can you build up some used snowmobiles, we saw no impact on the marketplace from our dealers, or from a market share perspective, we expanded that, go ahead and start buying their 7,000 engine which is that 135 horsepower four stroke and that was a great model for us this year that we launched and then we took it a step further and said we start building performance snowmobiles for them – full sized performance snowmobiles for them with their engines and so overall we like the relationship, we’ve learned a lot from them, they learned a lot from us, it’s been a positive contributor to our EPS. As we look to next year it will continue to be a positive contributor to our EPS and so we like what it is today.

Going forward, I think it's vital and I think Yamaha and also have a a very good relationship and my guess is there is lot of engines on our side, there is probably an opportunity for us to look at their engine portfolio, to see what we can add ours and there may be an opportunity even to do some with full size products. So it’s still in infancy in the relationship, but the relationship is very solid, it’s very positive and as I said before it’s a positive contributor to or earnings per share.

Operator

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

Joe Hovorka – Raymond James

A couple of quick questions, going back to currency, I just want to understand a little bit better, so the $60.1 million impact, is one from lower revenues roughly $12 million and the lack of a benefit from 4.6 million –

Claude Jordan

Yes, it’s about – little bit over $4 million that the hedge that we got in ‘14 we will not get in ’15.

Joe Hovorka – Raymond James

Right, so it’s a negative in ’15, it's just a zero where it was a plus low point something last year.

Claude Jordan

Certainly your operating expenses last year would have been higher, without a good guide $4 million.

Joe Hovorka – Raymond James

Right, right, there is an additional 9, we’re not going from a plus 4 to a minus 4 – we’re going from flat to zero.

Claude Jordan

The net impact to pretax would be about $16.1 million.

Joe Hovorka – Raymond James

So you're taxing that at say 65%, 90.1 [ph] million shares that gets you 79 cent earnings?

Claude Jordan

Yes.

Joe Hovorka – Raymond James

What costs are associated – don’t you have flooring costs, promo cost, maybe some selling expense or Canadian dollar denominated or no

Claude Jordan

Yes we do. So kind of $200 million we kind around out, we have 200+ million exposure and that’s net of some offsets for Canadian costs.

Joe Hovorka – Raymond James

But I guess what I'm asking is there a benefit or a lower – if revenues are coming down by $12 million presumably there would be some reduction in selling expenses or anything else related to Canadian dollar further down the P&L?

Tim Delmore

There is but not -- it's not hugely material compared to that revenue effect.

Joe Hovorka – Raymond James

And then I think coming into the March quarter if we look at the revenue guidance that we were are expecting for ATVs and side-by-sides I think we are about 40 million or $50 million lower, what was the delta there between what you guys thought would be the March quarter and ultimately what was – and what changed during those 3 months?

Claude Jordan

I think overall for the quarter we were up 28%, certainly we weren’t expecting the snowmobile to -- I think the snowmobile we expect to be up certainly amount of 220% in the fourth quarter there. With that said snowmobile is a very very small part of the overall sales during the fourth quarter, as we ship both of that product in the second and third quarter. The biggest impacts are going to be a little bit on PG&A side, we were down little bit there and then on the ATV side, although was up 21%, that’s where we experienced most of the shortfall there. Certainly it would not have been on the Wildcat Trail side, Wildcat Trail we shipped every unit we had, the demand was much higher than what we actually shipped.

On that side, it would be dealers wanting the Wildcat Trail, Wildcat X and not as many on probably on the North American prowler side.

Joe Hovorka – Raymond James

So most of that delta in the ATV side by side would be on prowler?

Claude Jordan

Yes, certainly would not be on the Wildcat side. The Wildcat side quite honestly was up over 150%.

Joe Hovorka – Raymond James

Wildcat was up over 150?

Claude Jordan

Yes, it’s unit side, it’s not dollars. A little bit different mix was the trail in there too but a good quarter for the Wildcat.

Joe Hovorka – Raymond James

And what was Wildcat retail up in the quarter, I know you gave the overall side-by-side for the full-year?

Claude Jordan

Yes, really what I gave earlier for the quarter Wildcat retails – you got to remember the trail drove most of this and we didn’t start seeing Wildcat retail trails until the February timeframe when we started getting those units out but overall Wildcat segment was up about 77.4% for the quarter at retail.

Joe Hovorka – Raymond James

And then I think you said $31 million in CapEx fiscal 2015?

Tim Delmore

Yes.

Joe Hovorka – Raymond James

That’s significantly higher than kind of mid to high teens we have been running at with, what's the delta in ’15?

Tim Delmore

We have little higher based PP&E and then a big driver in our CapEx is our tooling, and you know what that's for new products.

Joe Hovorka – Raymond James

So the higher PP&E is what percent of that?

Tim Delmore

Small, I don't have that right numbers in front of me but –

Joe Hovorka – Raymond James

And the tooling increase would be for Trail or implying something else further?

Claude Jordan

A couple of things, Joe, across the board we are looking – and most of our capital today is on the tool side. When you look at that tooling budget, there is no doubt that Trail is one of them but we talked about 13 new snowmobile this year, we talked about 10 new snowmobile last year, two new engines, we talk about a very strong product pipeline on the dirt side of the business. We have continued to keep our [indiscernible] we mentioned our operating expenses this year on R&D were up 16% and the one thing we did not do as we head into ‘15 ad we face the challenge with currency, we did not take out foot off the pedal and say, let’s go and cut back on product development. We’ve continued to invest in that side of the business, we've not had an ATV show since 2008 and we are going to have one this year. So fundamentally speaking the business is sound, when you look at the long-term where we want to go, we talked about page 8 [ph] before in terms of making this a $1.2 billion our business by fiscal year ’19. We have every intention of delivering on that and the way we’re going to deliver that is through this the strategy of product development, international expansion, operational excellence.

Operator

The next question comes from the line of James Hardiman of Longbow Research.

James Hardiman – Longbow Research

Lot of my questions have been answered but I just want to follow up on a question Joe had there, I mean I guess if we take a step back for the year ATVs and side-by-sides up 11% as the category, it’s not just short of the goal from three months ago but it's well short of how you guys were thinking about it at the beginning of the year. I think the initial guidance was 25 to 29, is Prowler the entirety -- is Prowler even big enough to be the entirety of that gap or, was it that the existing ATV product which is – I mean it seems like that did fairly well, it sounds like you guys gained some share in a market that was up, just help me bridge that gap because it seems like a pretty big one and it seems like the new products and existing products are doing fairly well, how should I think about where we finished this year versus where we thought we were going to be when we started the year on the ATVs in particular – ATVs and side by sides?

Claude Jordan

If I look at it, James, in terms of the ATVs, you are correct, our retail sales were up on ATVs and we outperformed the market. But the ATV side is not a high growth base, as we said for this year, we said low single digits again for the industry and we expect outperformance. So certainly on the ATV side, I would not say that was a major contributor. On the prowler side, are absolutely correct that it is not a major part of our business but it is still a significant part in terms of the overall units that were shipped there. When I look at prowler, I think today it’s still about 17% of that dirt business. So when we see some softness there we do [indiscernible] rest of the business.

So prowler sales were actually up year-over-year, actually ATV sales were up as well. I would say the biggest shortfall would be on, probably on the Wildcat side and even with sales up 60% on the Wildcat for the full year, really what you saw there were the new models of Wildcat X, Wildcat 4X, the Wildcat Trail, really leading the way. And there is no doubt that we felt some competitive pressure, some of our competitors launched new some models in that space and I think some of the existing models really felt the impact of that. So I don’t want to say it’s a so trade-off but the dealer saying hey give me the high horsepower Wildcat X, or give me that Wildcat Trail, and maybe not buying as many of the base Wildcat models.

James Hardiman – Longbow Research

And so as I think about the guidance for this year it’s a lot more conservative in terms of that segment, I think you said up just 6% to 7% given that we falling short in each of the last two years versus that guidance how is that sort of informed, how you look at the guidance for this year and I guess the other piece here, this is the first time you haven't had a whole lot of visibility on the new products heading into a year, I am assuming it’s part of that 6% to 7% or are there any major sort of side-by-side product introductions that are factored into that that you haven’t announced yet or how should I think about that?

Claude Jordan

James, I mentioned that we have ATV show coming up and the later this year August, September timeframe, we’ve already announced that to our dealer network, we have not had shows since 2008. We are not going to get into specific product that we’re planning on launching but I would say that we continue to spend a significant amount of money on product development, we had made the statement that side by side is a critical part of our business going forward and we’re going to continue to invest in it. Technically when you have a show and you make those kind of statements about on product development you can probably go ahead and think there's always new products coming out this year.

James Hardiman – Longbow Research

But that is or it’s not currently factored in your 6% to 7% growth for that segment?

Claude Jordan

No, the guidance we are giving you right now I think are good guidance for ATV, the snow and PGA side. There is, as we launch products and they come out stronger, then there is a chance you could change the guidance but as we sit here today the guidance for the overall business we feel very good about.

James Hardiman – Longbow Research

And then lastly just so I can do a better job going forward on the currency front and then clearly I think most of us did in fourth quarter, so just so I understand how the hedges worked, you talked about being 80% hedged for this past year, I think you said it was a negative 10 to sales but you only got $4 million on OpEx, doesn’t seem like that's quite an 80% hedged, maybe I am thinking about that wrong. And then as we look to fiscal ‘15 the $4 million is going to zero, so what, is the hedge going away and if so why is that?

Claude Jordan

Couple of things, one, we hedge for one year at a time, so our hedging ran out again in March and so in March currency was anywhere between 110, 112, and so we would go ahead at that time and start locking in for the next 12 months.

Going back to your first question on currency, the 10 million but we got $4 million back, lot of it depends on – we have 20 million exposed and a lot of it depends on that 20% how much currency moves to impact that. So you can have a fairly significant hit to currency just on the 20% which is what we saw last year primarily on second half of the year where the Canadian dollar went from that 102, 103 range up to 112 within six months.

James Hardiman – Longbow Research

And as I think about the hedges that you are going to be layering on going forward to get any benefit on the OpEx side the Canadian dollar in particular would have to move even further unfavourably, is that why the 4 is going to zero, because presumably if you have had a hedge and were big negative to sales and gross margins you still get some benefit but is it just will have to get worse from here?

Claude Jordan

You’re absolutely correct. I mean we have to go ahead and – the currency goes up to 150,160, you will see a positive impact on our operating expenses but you will see further impact on gross margin for the 20% that’s unhedged.

We estimate that 112 and say that’s where it actually comes in.

Operator

Your next question is a follow up from Scott Hamann of KeyBanc Capital Markets.

Scott Hamann - KeyBanc Capital Markets

Claude, just in terms of the channel inventories in the dirt business, it sounds like up mid single digit at the core and then with the trail in there it was up in the midteens range. It sounded like you said that with the sell-throughs now that you are kind of back to and up mid-single digit, is that what you're alluding to as we sit here today?

Claude Jordan

Scott, what I said was with the initial retail that we’re seeing on the Wildcat Trail which has been fairly strong, we are guiding next year should be back in single digits. Lot of it will depend on product we launched this year, you got to remember, we have not launched on the ATV dirt side of our business. We have not EJB

of our business is not launched our product, new products model year ’15, that will be at the dealer show later this year.

Scott Hamann - KeyBanc Capital Markets

So is it safe to say that what you have seen in April and May has been pretty solid from a retail standpoint?

Claude Jordan

It’s safe to say that from the day we launched that Wildcat Trail we've been excited about our retail sales.

Scott Hamann - KeyBanc Capital Markets

Okay, channel inventories for core ATV versus side-by-side, are they similar, one up down or –

Claude Jordan

On the ATV side flat. Even though the industry was up 2.6 and we were up about 3.5 our inventory on ATV side is flat.

Scott Hamann - KeyBanc Capital Markets

And as we think about your wholesale inventory which was up considerably, a lot of that may be tied to snowmobile for the next model year, can you maybe help us kind of break that apart as to what increase was snow and what was kind of other stuff?

Claude Jordan

A large portion is on the sow side and so the big drivers there we had about $13 million of that $40 million increase, was attributed to other material and so when we started to – with the Yamaha product as well as our snowmobile business continues to grow we have had to move the start it back and so when we used to start building snowmobile in the middle of May we are now building in the first of April, which means you have to have inventory on hand at the end of March to go ahead and start that on the 1st of April. So other material was probably the biggest driver of $13 million, snow engines for both Yamaha as well as us for Arctic Cat products, snow engines were up about another $10 million. Wildcat in terms of units not just – not necessarily trail but the full sized Wildcat up about $7 million which we look at the price point of those is not very many Wildcats.

And then on PG&A, probably another $7 million as well, those are the four big buckets on the inventory side.

Scott Hamann - KeyBanc Capital Markets

And then just final question on cash flow, I think you guys operating cash flow being up year-over-year, can you kind of maybe give us some of the moving parts there and if that’s kind of how you are thinking about it for guidance?

Claude Jordan

I think that obviously as we look at next year operating cash flow is an area we continue to focus on within the business. I don’t have a specific number to give to you as I sit here today. There are things, obviously we are continually focused – obviously on the profitability side, but we are also focused on our balance sheet and how we generate additional cash there. I think inventory, if you look at turns at the end of this year were probably up in mid 4 range, we certainly likely – to go back up in the 5 range and I do think that as I talk to my team that that’s certainly a doable thing. So those would be the key areas of focus as we go forward.

Operator

And your next question is also a follow up from Joe Hovorka of Raymond James.

Joe Hovorka – Raymond James

A two quick follow-ups, one on the snowmobile units or rather revenue is usually a negative number in the March quarter and it goes from negative to positive which is great this year but remind us again what the negative is, is that a catchup of just a true-up of promo expenses netting against a little sales that are in the March quarter?

Tim Delmore

Joe, that’s really really no unit shipments and then we record sales incentive rebates and flooring.

Joe Hovorka – Raymond James

And then when we go to the positive is it because – I am assuming it’s a combination of both that is the flooring and retail incentives decline because retail is better but also you shipped more units?

Tim Delmore

Really the unit shipments drove that, with little change and Claude, do you want to get into that?

Claude Jordan

Yes, so hey Joe, what we did there was in past years we built model year ’15, we’ve gone out all these different snowmobile shows, the dealers will go ahead to 10 of those and help manage traffic and customers and answer questions. And what we did this year is that dealers have been asking us to go ahead and ship them model year 15, so that they could have them on their floor, as customers are coming in, they can go ahead and start showing them some of our new models for next year. So really when you see that increase in sales it’s s not a very big number, obviously when you are doing $6 million of snowmobile, we are talking about little bit over thousand units there. So but it does give our dealers an opportunity to have on their floor and they can go ahead and talk to them.

Joe Hovorka – Raymond James

If we were to break it out, you would still have a minus 5 million for the true-up that we typically have in March and then on top that you would have a plus 11 for the stuff that we shipped to the dealers and then we get a net plus 6, is that the way to think about it?

Claude Jordan

That’s the way to look at it.

Joe Hovorka – Raymond James

The second question was on your PG&A growth assumptions for 2015, I see you’re expected to grow faster than the unit sales numbers, sales numbers and with the lag that for the last few years, what's the delta or what's the change there in the thinking that will get PG&A growing faster than units?

Claude Jordan

I would say two things, first of all, on the snow business, we had a great snow year this year, we ran down the inventory fairly low, the dealer level. So that one we have a pretty good feel for, as we have already had the dealer show and we take pre season orders from dealer on snowmobile side. And those orders came in fairly strong. So we feel very good about snowmobile and then with the late shipments of the Wildcat Trail at February March we’re going to go ahead and see continued benefits from that as we head into ’15. So actually it’s a great thing, we are excited by the fact that PG&A business is going to be up double-digit.

The final thing I would say as much like on the unit side as we continue to invest in product development we continue to invest in the PG&A side of our business and especially on the accessories side, the coming out with new accessories for these new models. And so one thing that you make investment upfront and over a period of time starts to pay you back and we are starting to see that this year.

Operator

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

Claude Jordan

Well, I appreciate everyone joining us today. As a recap fiscal 2014 ended with all three businesses increasing in sales and the overall business increasing sales by 9%. Canadian currency was a challenge but we’ve continued to invest in product development with an increase of 16% for the year which will position the business well for fiscal year 2015 and beyond. As we look forward to fiscal year ‘15 our focus will continue to be on advancing our growth strategy through new product development and operational excellence. Canadian currency will present a challenge but our long-term growth strategy will remain in place. We appreciate your time today and look forward to updating you again in July. Thank you.

Operator

Thank you. Ladies and gentlemen today’s conference can be accessed through a replay after 2PM Central Time by calling 303-590-3030 or 800-406-7325 and entering passcode 4682438. That does conclude today’s conference call. Thank you for your participation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Arctic Cat's (ACAT) CEO Claude Jordan on Q4 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts