Arctic Cat CEO Discusses F3Q2011 Results - Earnings Call Transcript

Jan.27.11 | About: Arctic Cat (ACAT)

Arctic Cat, Inc. (NASDAQ:ACAT)

F3Q2011 (12/31/10) Earnings Conference Call

January 27, 2011 12:00 PM ET

Executives

Shawn Brumbaugh – Padilla Speer Beardsley

Claude Jordan – President and COO

Tim Delmore – CFO

Chris Twomey – Chairman and CEO

Analysts

Rommel Dionisio – Wedbush Morgan

Craig Kennison – Robert W. Baird

Bill Anderson – Montgo Research (ph)

Joe Hovorka – Raymond James

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Arctic Cat’s fiscal 2011 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) This conference is being recorded today Thursday, January 27, 2011.

I would now like to turn the conference over to Shawn Brumbaugh. Please go ahead ma’am.

Shawn Brumbaugh

Thank you. And thank you for joining us this morning. I’m Shawn Brumbaugh with Padilla Speer Beardsley. Before the market opened this morning, Arctic Cat released results for its fiscal third quarter ended September 31, 2010.

Participating in our call today to discuss the company’s performance will be, President and Chief executive Office Claude Jordan and Chief Financial Officer, Tim Delmore. Following their remarks, we will have time for any questions.

Before we begin, please note that some of the comments made today will be forward-looking statements regarding the company’s expectations to future performance. Such statements are subject to risks and uncertainties and actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and in the company’s filings with the Securities and Exchange Commission. We encourage you to review these documents for a description of risk factors that may affect results.

Now, I’ll turn the call over Arctic Cat’s CEO, Claude Jordan. Claude?

Claude Jordan

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

Overall, we are pleased with our performance for the quarter, especially our increased earnings. Year-to-date, we have continued to improve gross margins and are holding operating expense as flat as a percent of sales. Both of which have contributed to the improved profitability of the business. We are also seeing increases in the sales for our snowmobile and ATV businesses, while continuing to reduce dealer inventory for both of these businesses.

Snowmobile sales for the quarter were up 33%, primarily on increased international sales, but also in the North American markets due to timing of shipments.

We continue to focus on matching wholesale to retail to ensure that dealers have the right product during the high retail season and to drive dealer inventory lower.

For the quarter industry retail sales increased primarily due to excellent snow conditions throughout a large portion of North America. Based on what we have seen in retail sales through December, we are increased in our assumption on snowmobile retail sales and now belie that the industry retail sales will increase 5% to 10%.

In addition, to increase industry retail sales we continue to monitor North American and the dealer inventories as an important measure of our overall dealer help.

At quarter end, our dealer inventories were down 19%, compared to the same time last year, which will position our snowmobile business well as we look forward to next year.

Sales of our ATV business rose 1% in the quarter, driven by the sales of our new side-by-side vehicle, the Prowler HDX heavy duty utility vehicle which is designed more for the utility market than the recreation market.

Sales were also positively impacted by the international market which have seen large increases year-over-year. In addition, we also launched three new ATV models during the third quarter and expect to start shipping those during the fourth quarter.

The three new models includes a value price of 350, 4x4 automatic and value price 425 EFI 4x4 automatic and the new XC 450 crossover model combining 4x4 capabilities and a sport ATV.

As with the snowmobile business we continue to match retail and wholesale sales with the goal of reducing dealer inventory.

Year-to-date, ATV and Prowler dealer inventory is down 26% while at the same time we’ve been successful in increasing market share for the quarter in year.

Sales of our parts, garments and accessory business for the quarter rebounded nicely and were up 6%. Primary driver in the improved quarterly sales performance was our garment business which showed strong sales on our garment – our drift garment product line. Over the year, we expect our parts garment and accessory business sales to be flat.

In regard to operational performance we’ve stated at the beginning of the year, our goal would be on improving gross margin, controlling our operating expenses, reducing factory inventory and ending the year with more cash in our balance sheet.

In the area of gross margins, we revised our goal during the last call to improve gross margins during the year by 200 to 300 basis points.

During the third quarter, we have seen improvement in gross margin, primarily driven by higher volumes, product mix, product cost reduction efforts and higher selling prices on selected models. These actions have resulted in our gross margin improving in the third quarter by 430 basis points compared to the same quarter last year and year-to-date we have seen our gross margin improved by 370 basis points.

Based on the improvement we have seen year-to-date, we continue to believe that our overall gross margin will be 200 to 300 basis points.

In regard to operating expenses, we’ve stated at the beginning of the year our goal was the whole operating expenses flat as a percent of sales for fiscal year ‘11. With this in mind, we have continued to focus throughout the business on all aspects of expense control. At the same time, we have continued to invest in product development, which has resulted in launching various new models throughout the year.

During the third quarter, we were successful in decreasing operating expenses in terms of dollars and as a percent of sales.

Based on our performance year-to-date, we now believe that operating expenses as a percent of sales will be flat to slightly down.

Another area of focus has been working to improve our cash position through improved factory inventory management. By aligning our production with the demands of the market and with the improved planning throughout the business we have been successful in lowering our overall factory inventory by 27% or from 106.3 million last year to 77.2 million this year. These improvements to inventory came from every component of the business. Overall, this improvement in inventory has allowed the business to improve the year-over-year cash position from $50.4 million last year to 107 million this year.

We continue to believe, we will be successful in the intermediate year with more cash in the end of last year.

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

Tim Delmore

Thanks Claude. Hello everyone. I would also like to welcome you to the conference call. Today, I will focus on reviewing highlights of our third quarter and our year-to-date financial performance, as well as our outlook for the full year. Net sales for the third quarter increased 16% to 152.8 million from 131 million for the same quarter last year. Snowmobile sales increased 33% to 77.8 million from 58.7 million lead by increases in both the North American dealer sales and international sales to distributors.

ATV sales increased 1% to 48.6 million from 48.2 million, mainly driven by the sales of the company’s new Prowler HDX utility vehicle. Parts, garments, and accessory sales increased 6% to 25.6 million from 24.2 million for the same quarter last year, primarily driven by stronger garment sales including the new Drift garment line.

Gross profits for the quarter increased 45% to 32.7 million from $22.6 million. The gross profit percentage improved 430 basis points to 21.5% from 17.2% from the third quarter last year, primarily due to higher margins for all product lines resulting from increased volumes, mix, product cost reductions, price increases, and benefits of the stronger Canadian dollar.

Selling, general and administrative expenses decreased 7% to 20.5 million from 22 million for the same quarter last year, primarily due to decreased Canadian hedge costs, lower administrative costs of our European subsidiary and offset by higher R&D expenses, and compensation expenses.

Net earnings increased to 9.3 million from 2.6 million for the quarter. Third quarter diluted earnings per share increased to $0.50 from $0.14.

Next I would like to review the financial performance of the first nine months of 2011. Year-to-date net sales increased 7% to 391.2 million from 366.7 million a year ago. Net earnings increased 98% to 22.6 million from 11.4 million, while diluted earnings per share increased to $1.22 from $0.63.

On a year-to-date basis, Snowmobile sales increased 15% to 186.5 million from a 162.3 million lead by higher international sales to distributors. ATV sales increased 1% to 133 million from a 132 million. Parts, garments and accessory sales were 71.7 million, compared to 72.3 million for the same period last year.

Our year-to-date gross profits increased 26% to 94.7 million from 75.3 million. And our year-to-date gross profits percentage improved 370 basis points to 24.2% from 20.5%, for the same reasons our quarterly margins improved.

Year-to-date selling, general and administrative expenses increased slightly to 62.1 million from 61.5 million, primarily due to the higher R&D expense and higher compensation costs, partially offset by decreased Canadian hedge costs and lower admin costs of our European subsidiary.

Looking at our balance sheet, we ended the quarter with 107.1 million of cash in short-term investments compared to 50.4 million as at December 31st of last year.

Our accounts receivable increased 17% to 50.3 million in line with our sales increase.

Inventories decreased 27% to 77 million from 106 million and was lower for each of our product lines.

Year-to-date capital expenditures totaled 8.1 million and depreciation was 13 million.

Regarding our outlook for the year, based on our results year-to-date and expectations for Q4 we are raising our full-year 2011 earnings guidance and while we continue to estimate net sales in the range of 453 million to 463 million, we anticipate that earnings will be in the range of $0.57 to $0.65 per diluted share.

The company’s previous anticipated earnings guidance was 40 to $0.55 per share. I’d like to thank you for your attention and Jeremy, we would like to now open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Rommel Dionisio with Wedbush Securities, please go ahead.

Rommel Dionisio – Wedbush Morgan

Yeah. Good morning and thank you, and congrats on the quarter. According to you commentary talked about dealer inventory in the ATV business has been down 26% year-to-date, but in the fourth quarter given that you are shipping three new models, should we – maybe expect to see maybe not quite so much progress on a year-over-year basis in the Q4. I just want to be able to set a benchmark for – ?

Chris Twomey

Quite honestly, I mean we are continuing to monitor the North American dealer inventory. I think we are little bit behind where Snowmobiles, I mean, we thought that was in the business now being much better position for dealer inventory. So I think you’ll see the same level of focus even though we are shipping three brand new models, we will still going to be very conscious of wholesale and retail sales to make sure we’re not adding inventory.

Rommel Dionisio – Wedbush Morgan

And just one quick follow-up question. Could you just talk about the commodity price outlook and how that may impact you in the next couple of quarters?

Chris Twomey

So far, we’ve managed our commodity costs fairly well, there’s no doubt that it is something as we look into the next year and we’ve started doing our planning and what’s happen out there – certainly that’s – some risk we need to go ahead and to assess and take into consideration. In the last couple of years like I said, we have managed it fairly well, but it’s certainly something that could present additional challenge next year. We have not set any kind of target in terms of where we think commodity prices will come in the next year just yet, but it’s certainly something from our radar screen.

Rommel Dionisio – Wedbush Morgan

Okay. Great. Thanks a lot and congrats on the quarter.

Chris Twomey

Thank you.

Chris Twomey

Thank you.

Operator

Thank you. Our next question comes from the line of Craig Kennison with Robert W. Baird, please go ahead.

Craig Kennison – Robert W. Baird

(Inaudible) as well. I am just following up on that inventory question, I mean we’ve been in a period whereby dealers have been destocking for several years now. At what point or what would be the indicator to you that dealers maybe too lean and would need to start restocking inventory and maybe ordering more at wholesale than at retail?

Chris Twomey

We certainly we look at the overall picture in terms of how much inventory we have out, we track it by ATV, we track it by Prowlers, we track it by Snowmobiles. Yeah, we also work at the market share within each region. So, if we know how much they need to have on hint, so we’re very conscious of that.

I know where we are at today, as I mentioned we’re down 26%. I think we have a little bit further to go. But as we saw, even on the Snowmobile side it will be able to be there before us than ATV. But, as we saw even on the Snowmobile side it’ll be able to be there before us than ATV. But if I looked at the ATV side, we were still retailing North America a significant more number of units than we’re wholesaling today.

And I think that’s probably the strategy we’ll go into next year with but I could see this probably – I think we’re probably a year away from really trying to go ahead and start shipping to more product in there. The one thing we have to be careful about even on the – last questions in terms of the three new products, two of those were value priced products. One of them was a 350, 4x4 MSRP is about 54.99. That will be one – I think that’s probably the least expense of finance, I am not sure about that but it’s certainly one of the at least expense of 4x4 in the marketplace. And the 425 EFI 4x4 at 59.99 MSRP will be one least expense of EFI in the marketplace. We certainly expect those to retail fairly well and hopefully that will run through the inventory. So, we will watch and we will watch on a weekly basis how quickly we’re retailing those.

Craig Kennison – Robert W. Baird

That’s helpful. Then you mentioned the relationship between inventory and the pricing environment. Where would you say promotional activity is today relative to let’s say a year ago and does that play into your decision and fair level of inventory in the channel?

Chris Twomey

Hey Doug, as we look at our programs that we have out there we certainly look at what our competition is doing. We’ll look at US versus Canada and in certain areas we have to be a little bit more aggressive. But we’ll also go out with one month type programs to help if we see we’re starting to build inventory in any one area. What we think right now our programs are very competitive with one of the straight and probably more so and than other competitors. And like I said we continue to monitor that.

Craig Kennison – Robert W. Baird

And then lastly, could you maybe talk about the dynamic between some of your recreation based products versus your utility based products. I’m wondering for example if the steep price of corn has helped some farmers or some ranchers maybe have a few extra dollars to spend.

Claude Jordan

No, I think you’re absolutely correct. I think utility side is doing a little bit better than just a pure recreation side. But once again I think you have to break it down by category more than CC segment to really come up with an answer now. But there is no doubt that there is more disposable income on utility side today than the recreation side.

Craig Kennison – Robert W. Baird

Excellent. Well, thanks for your time.

Operator

Thank you. And our next question comes from the line of Bill Anderson with Montgo (ph) Research. Please go ahead.

Bill Anderson – Montgo Research

Yes. Hi, gentleman. Just curious looking at the guidance, it looks like that the things are expected to be down from last year in the fourth quarter overall, with an usually strong quarter, I guess the impressively strong quarter in Snowmobile segments, just wondering how much of that could be attributed to kind of timing shift between 3Q and 4Q, either Snowmobiles or the other segments?

Claude Jordan

Yeah, I guess for one thing we did shut the few couple of hundred Snowmobiles in Q4 last year, we don’t anticipate, we’re pretty well, with a good snow fall we’re pretty well shipped out.

Bill Anderson – Montgo Research

Okay.

Claude Jordan

And we’re also going to be, grab shipping a few last ATVs again as Claude said, we’re monitoring the inventory situation very closely. So, you would take that and our sales incentives are also going to be up because of increased flowing cost versus the prior year. So, that is also a negative comp for the quarter.

Bill Anderson – Montgo Research

Got you. But the international sales to distributors were a bigger piece of Delta and Snowmobiles then what timing would you use then?

Claude Jordan

Yeah for Q3, and year-to-date the international and of course we are all shipped out on international snow right now.

Bill Anderson – Montgo Research

Okay, very good. Thanks.

Operator

Thank you once again. (Operator Instructions) Our next question comes from the line of Joe Hovorka with Raymond James, please go ahead.

Joe Hovorka – Raymond James

Thanks guys, just two questions on your gross margins, this quarter and last quarter your cost of goods for PG&A or higher than you were a year ago, is that is a mixed issue or there is something else there. And then secondly on the, on the whole good cogs, nice improvement in the quarter but just had a big mixed ship towards snow if you were able to look at on a comparable basis that is ATVs versus ATVs, and Snowmobiles versus Snowmobiles, or the margin trend similar there? Or is just – is a big part of that mixed shift.

Claude Jordan

I’ll answer the last one first, I guess the margins rub nicely for the quarter, for all of the – which should help the product line. So, ATV is a little less than the PG&A side and –.

Claude Jordan

What was your first question again Joe?

Joe Hovorka – Raymond James

Well, it looks like your cost of goods went up on PG&A as percent it did at last quarter as well, just curious if that was a – if that just a mix of PG&A that’s been sold it’s changing that margin or if there is something else there?

Claude Jordan

Yeah, Joe one of the things I mentioned in my comment there that on the PG&A side a lot of the sales increase came at the garment side specifically the drift product line, drift product line is a fairly new garment we introduced last year, it’s a price point garment a little bit lower margins with lower pricing to allow us go after that lower end market. So, we do give up a little bit of margin when we pick it, so pick up that fails in that products category, so from the mixed perspective a little bit less margin now.

Joe Hovorka – Raymond James

Okay, that makes sense. That’s all I have. Thanks guys.

Operator

Thank you once again ladies and gentlemen. (Operator Instructions) Claude it show no further questions in queue.

Claude Jordan

Okay, really appreciated for joining us this morning, just to go ahead and recap here and you would feel really good about the quarter a very strong quarter, the things that we have been working on, we’re all say last probably two years and starting to pay off certainly in terms of gross margin, but for the quarter sales up 16%, gross margin up for 430 basis points, earnings per share of $0.14. And we thought moving up to 50 and certainly cash improved by $57 million, year-over-year. So all and all, we felt pretty good about the quarter and so certainly I think this will lead in the fourth quarter and I appreciate your time this morning and look forward to updating you in May, fourth quarter in the year results.

Operator

Ladies and gentlemen, this concludes the Arctic Cat fiscal 2011 third quarter earning conference call. If you would like to listen to a replay of today’s conference, please dial 1800-406-7325 and for international participants you can dial 1-303-590-3030 and enter the access code 4403970 followed by the # key. The replay will be available until February 3, 2011. Thank you for your participation. You may now disconnect.

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