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Arctic Cat, Inc. (NASDAQ:ACAT)

F4Q2011 (Qtr End 03/31/2011) Earnings Call

May 12, 2011 11:30 am ET

Executives

Shawn Brumbaugh - IR, Padilla Speer Beardsley

Claude Jordan - President and CEO

Tim Delmore - CFO

Analysts

Rommel Dionisio - Wedbush Securities

Craig Kennison - Robert W. Baird

Jimmy Baker - B. Riley Investment Bank Research

Steve Baughman - Divisar Capital Management

Joe Hovorka - Raymond James

Phil Anderson - Longbow Research

Operator

Welcome to the Arctic Cat's fiscal 2011 yearend earnings conference call. (Operator Instructions) This conference is being recorded today, Thursday, May 12, 2011.

I would now like to turn the conference over to Shawn Brumbaugh.

Shawn Brumbaugh

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 the fiscal year ended March 31, 2011.

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

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

Now I'll turn the call over to Arctic Cat's CEO, Claude Jordan.

Claude 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 fiscal 2011 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 financial performance for the full year. At the beginning of the year, we set out to grow sales, improve gross margins, increase operating expenses as a percent of sales, improve earnings per share, increase cash and reduce dealer inventory. All of these initiatives were accomplished.

In regard to the individual businesses, during the fiscal year, snowmobile sales were up 12%, driven by both the U.S. and international markets. Additionally, with sales up, we were successful in driving North American dealer inventory level by 22%, which should position the snowmobile business well as we head into fiscal year 2012.

Dealer inventory reduction has been an ongoing part of our strategy, and we've made significant strides in lowering the inventory over the last few years.

In addition, retail sales for the snowmobile industry in North America also rebounded this past year and showed strong growth throughout the year. Especially strong snow conditions in North American markets contributed to the industry gains.

Based on the industry growth this past year, we believe the industry retail sales would grow by 5% to 10% in the fiscal year 2012. With the expected increase in industry retail sales, our lower dealer inventory, combined with the recent launch of 23 all new snowmobiles, representing 75% of our 2012 model year lineup, we expect a great year for our snowmobile business.

On the ATV business, sales decreased 4% through the year, primarily due to North American sales as the business continued to focus on reducing North American dealer inventory in a continuing difficult market. With this focus on dealer inventory, we were successful in lowering dealer inventory by 21%.

We did see an increase in sales in our international ATV business as we continue to expand into new countries, in the Middle East, South America and Russia.

Industry retail ATV sales for North America had another difficult year as sales decreased by approximately 17%. Although North American industry retail sales were down, we were able to gain ATV share during fiscal year 2011.

Some of the highlights from the retail side were the introduction of the new heavy-duty utility, Side-By-Side HDX unit, which has performed well since being launched in July 2010 as well as the recently launched value-priced 350 4x4 automatic and 425 EFI 4x4 automatic, plus the new XC 450 for crossover model, combining 4x4 capabilities in a sport ATV. These last three models were all launched during the fourth quarter.

As we look forward by development, it will once again be an area of focus. As shown during our March dealer show, we were planning to launch a new sport 5x5 vehicle called the Wildcat, which will be a new segment for us. Based on the initial feedback we've received from our dealers, we expect this to be an exciting addition to our model year 2012 lineup.

Sales of our parts, garments and accessories business rebounded nicely and were up 2% for the year. Primary driver in the improved sales performance was our snowmobile parts, equipment business, both of which benefited from excellent snow conditions throughout North America and Europe.

Additionally, our recently launched Drift garment business continued to show strong year-over-year increases.

In regard to operational performance, as we stated at the beginning of the year, our goal would be to improve gross margins, control our operating expenses, reduce factory inventory and the end the year with more cash on our balance sheet.

In the area of gross margin, our initial goal was to increase gross margin by 100 basis points to 200 basis points, which was then revised upward to 200 basis points to 300 basis points. During fiscal year 2011, we had seen improvements to gross margin, primarily driven by a higher volume, currency, product mix, product cost reduction efforts and higher selling prices on select models. These actions have resulted in a gross margin improvement in fiscal year 2011 by 330 basis points.

As we head into fiscal year 2012, gross margin will continue to be a major focus, and we expect to see gross margins improve by 20 basis points to 60 basis points, although commodity costs will remain a challenge.

In regard to operating expenses, we stated at the beginning of the year that our goal was to hold our operating expenses flat as a percent of sales. With this in mind, we continue to focus throughout the business on all aspects of the expense control.

At the same time, we have continued to invest in product development, which has resulted in launch of various new models throughout the year. During the year, we were successful in decreasing operating expenses as a percent of sales.

As we head into fiscal year 2012, controlling operating expenses will be an area of focus we'll target flat operating expenses as a percent of sales for fiscal year 2012.

The final area of focus, as we are working to improve our cash position, is to improve factory inventory management. By aligning our production with the demand in the market, we've been successful in lowering our overall factory inventory by 24% from $81.4 million last year to $61.5 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 $71.1 million last year to $125.1 million this year. As we look forward to next year, our goal will be to end the year with more cash on the balance sheet.

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

Tim Delmore

Good morning, everyone. I would also like to welcome you to the conference call. Today I'll review our fourth quarter results, our yearend financial performance as well as our outlook for fiscal 2012.

As expected, net sales for the fourth quarter decreased and were $73.5 million versus $84 million in the same quarter last year. ATV sales were $48 million compared to $55.8 million. Snowmobile sales were a negative $4.5 million, primarily due to sales incentives versus sales of $597,000 in the prior-year quarter.

Parts, garments and accessories sales increased 9% to $29.9 million compared to $27.6 million, driven by stronger snowmobile related parts, garments and accessories sales.

Gross profits for the quarter were $6.8 million versus $7.9 million, in line with lower revenue. The gross profit percentage for the quarter was 9.2% versus 9.4% for the fourth quarter last year.

Operating expenses increased slightly to $21.3 million versus $20.4 million for the same quarter last year, primarily due to increased R&D and compensation expense. The net loss for the quarter was aided by a higher marginal tax rate and remained at $99.6 million, the same as of fourth quarter last year, and the diluted last for share was also the same, $0.52 per share, as a year ago.

Next I'd like to review Arctic Cat's financial performance for full year fiscal 2011. Year-to-date net sales increased 3% to $464.7 million versus $450.7 million a year ago. Arctic Cat significantly its profitability in fiscal '11 with net earnings of $13 million versus net earnings of $1.9 million for fiscal '10. The diluted earnings per share rose to $0.70 versus $0.10 a year ago.

On a year-to-date basis, ATV sales were $181.1 million compared to $188 million. Snowmobiles sales increased 12% to $182 million versus $162.9 million. And parts, garments and accessories sales increased 2% to $101.6 million versus $99.9 million for the same period last year.

On a year-to-date basis, gross profits increased 22% to $101.5 million versus $83.2 million. Our year-to-date gross profit percentage improved to 330 basis points to 21.8% versus 18.5% primarily due to higher margins from most product lines.

Year-to-date operating expenses increased 2% to $83.4 million versus $81.9 million, again primarily due to higher R&D and compensation expense, partially offset by decreased Canadian hedge costs.

Looking at our balance sheet as of March 31, we ended the year with $125.1 million of cash versus $71.1 million a year ago. We had no short or a long-term debt. Accounts receivable decreased $5 million to $23.7 million mainly due to the timing of Q4 ATV shipments in their selections.

Inventory decreased to $61.5 million from $81.4 million and was over lower for each of our product lines. Year-to-date capital expenditures totaled $12 million and depreciation was $15.8 million.

Regarding our outlook for fiscal 2012, we are estimating sales to increase 5% to 8% and be in the $488 million to $502 million range based on snowmobiles revenue increasing 11% to 16%, ATV sales being flat up 2% and PG&A sales moving up 3% to 5%. The company expects earnings per share to improve to $0.75 to $0.82 per share for fiscal '12.

Our 2012 outlook includes the following assumptions. Our gross margins to increase 20 basis points to 60 basis points, despite commodity cost pressure. Operating expenses to remain flat as a percent of sales. We expect our tax rate to increase to above 35%. And we expect to end the year with increased cash on the balance sheet from increased cash flow from operations.

Our 2012 capital expenditures will total approximately $18 million and depreciation will be $14 million. For the financial modeling purposes, while we aren't giving quarterly guidance, keep in mind that the majority of our revenue and most, but not all of our profits traditionally occur in our September and December quarters.

I'd like to thank you for your attention. And operator, we now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Rommel Dionisio with Wedbush Securities.

Rommel Dionisio - Wedbush Securities

I wonder Claude if you could just give us a little more color on the Wildcat launch. Maybe the timing as well as the price point of what the product might coming out at?

Claude Jordan

We obviously have been working on this for probably a couple of years now. We decided to go ahead and bring it out at the snowmobile show in March in front of our new dealers there and obviously generate a pretty amount of excitement.

One of the things we were trying to do at the time was obviously was get the board out there. Obviously create it little bit more exciting than we thought. But we really weren't planning on giving a lot of additional insight now. And with that said, we did tell everybody that we were to be launching that in fiscal year 2012 and certainly would be on the dealer's floor sometime within this fiscal year.

So in terms of physical specs, you can probably go online and take a look at this thing via the internet. You can see that this is sport side-by-side. The one thing we've commented on, the one thing that people have been looking for in a sports side-by-side is tremendous amount of suspension and that would be the industry leaders in the area of suspension.

So I would say, over the next few months we'll be coming out with additional information on the product. But as well as one thing we are saying is it will be on the dealers showroom floors this year.

Rommel Dionisio - Wedbush Securities

Just one other question, are you guys seeing any impact, just for last few weeks or months from rising gasoline prices on participation in ATVs?

Claude Jordan

We really haven't. We've done surveys before on both the snow side and on the ATV side in terms of whether this would impact people using their products. We refer back to the snow side more. If you look at the snow side you will get a gas tank that maybe takes 10, 11 gallon and not trying to downplay the price of gas, but even at $5 it's $50, $55 to fill out your tank and basically go out and have a good time.

So if you compare that to taking a family of four just going out to a ballgame and obviously again snowmobile riding or a day of ATV riding is certainly a lot cheaper. On the utility side, for the ATVs in terms of farmers and ranchers, modest, it's certainly something that people feel in terms of consumers. But it's not something that we've heard a lot of pushback just yet in terms of where the gas prices are today in terms of slowing down the retail.

Operator

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

Craig Kennison - Robert W. Baird

Could you talk about the restocking rate at the dealer level and how it may differ this year versus last year? In other words how close to wonder when are dealers replenishing inventory?

Claude Jordan

I think if you look at the snowmobile there you'll see, we take orders there in the March timeframe at the dealer show. And then we provide that product and we start shipping in as early as in June and we ship it all the way through to the first parties to assemble it there.

You noticed that dealer inventory was down for ATV and snow by over 20%. And we are continuing to go ahead and drive that inventory lower. And so at the end of the day you are seeing retail is much heavier than wholesale for both snow and ATV. And initially 22% down in terms of the overall business and pretty much snow and ATV are balance the same.

Snow's a little bit ahead of the ATV business of where we think it needs to be in terms of removing inventory. But it is something we're watching very closely to make sure that we want the dealers have the right amount of inventory and the right mix of inventory, so that we're not loosing shares in retail sales.

Craig Kennison - Robert W. Baird

So I'm trying to get at, whether you might enjoy somewhat of a bullwhip effect. Some companies in the broader recreation space have seen a bullwhip effect whereby dealers are ordering, they may be still destocking. But if they're destocking at a slower pace, the wholesale that you experienced could be a little bit stronger. And just wondering whether you expect to see any type of bullwhip effect in that way?

Claude Jordan

I think as I mentioned for snowmobile sales are a little bit better positioned in ATV side. And I'm not sure at all bullwhip, it's early to say, we expect snowmobile sales to certainly have a much more positive impact because of where the dealers set with inventory this year.

At ATV side, I think we have a little bit further to go. But as I mentioned before we are significantly more retail ATV sales than wholesale. And when we are retailing 30%, 40% during the wholesaling eventually I just saw it on the automotive side, the inventory levels are getting where they need to be and you will see, if you would, certainly that's one way of looking at it, but we'll start to see a pick up in wholesale.

Craig Kennison - Robert W. Baird

Secondly with regard to your cash position, what are your plans for cash be in maybe how would your privatized those?

Claude Jordan

On the cash position, obviously and we stated at the beginning of the year, we wanted to end the year with more cash in the balance sheet and we were successful this year in terms of driving that cash higher. We are certainly not at where we were a few year ago, so we're not at record levels of cash.

But it is an area that the board does discuss at the board meetings. It's something that we are looking at, we've drawn out as we go out to investor conferences or talk to our various shareholders. We do ask them in terms of whether they'd like to see more in term of reinstating the dividend, or weather we should look at possible buybacks or think that nature. And literally the shareholders are almost split to 50-50 in term of whether they like to just reinstate the dividend or they buyback stock.

We are aware that it is something we are talking to board about, obviously there are more usage than just dividend and buyback that we can do with that cash. And probably the one comment being that I think most of the shareholders have said, that is not only being (stupid) with it, but we're not looking to do that, but we will go ahead and continue to look at our cash position. And when we think the time is right and we can do something within best interest of our shareholders, we will.

Operator

(Operator Instructions) And our next question comes from the line of Jimmy Baker with B. Riley Investment Bank Research.

Unidentified Analyst

This is (Chris Armbruster) just sitting in for Jimmy Baker. I was wondering if you were able to exceed your sales guidance in the next fiscal year, if there is any operating leverage in the business. I know you guys guided to operating expenses flat as a percent of sales, but why wouldn't operating expenses decline as a percent of sales?

Claude Jordan

There is obviously a lot of onus in that question. The one thing that I would say as we look at next year is we have made a decision to go ahead and bring snowmobile manufacturing inside. And that's sort of a long-term project. We do have to go ahead and make some upfront investment. So we're basically carrying the developmental cost that our engines prior used to do, we're bringing it in-house now, and that certainly will impact our operating cost.

Other things as we look forward to next year and I think other firms are seeing this as value and certainly healthcare costs continue to go up, and certainly that's working against us on our operating expenses. And as I said during my comments, operating expense and gross margin is something we have focused on the last couple of years. And we will continue to focus on that through FY '12 and if there are opportunities to improve, we certainly will.

Unidentified Analyst

I have one more question. For the three new products that you've introduced in Q4, is there still dealer inventory building to do or are they pretty much full rolled out? And I guess the second part to that question would be, do you feel that there is any risk that the new lower price models will maybe cannibalize some of the sales of the ATVs. Are you sitting in dealer inventory?

Claude Jordan

There are different type of products. The 350 will basically replace it for 366. We took some features off of it and we certainly de-featured it. But if a customer goes in and wants to get a full featured 4 x 4 automatic 450, 550 those are brand new models for us or if you want to get power steering, you probably wouldn't be looking at those models.

Both of those units fit in a C-Body and you'll just buy real quickly here. C-Body's are a little bit smaller bike than a 450, 550, which are B-Body. So I think what you're seeing is a lot of first time buyers, a lot of entry people not look for the features, but just basics of 4 x 4. And that's really where we're really going after and certainly would not cannibalize the 557, 1,00 or 1,000, because that's a completely different buyer.

It will really give us a value offering. And so far we're just started really bring those out to the marketplace. Really larger shipments were in February. And we're seeing some pretty positive result there, which is really what we wanted to do, because the 350, 425 segment was one of our lower performing segments.

Operator

Our next question comes from the line of Steve Baughman with Divisar Capital Management.

Steve Baughman - Divisar Capital Management

I just wondered, I don't think you made any commentary on the situation in Japan. If you did and I missed it I apologize. Just wonder if you can give us an update on whether or not there are any supply-chain implications?

Claude Jordan

Well obviously, it's something that must like other firms we were certainly watching that situation very closely. Obviously our snowmobile engines come from Suzuki and certainly we want to make sure that we were able to do what we needed to do there.

We had with Suzuki a minor delay in couple of weeks. They've now given us the production schedule. Nearly the two-week delay that we're seeing from Suzuki will not have an impact on shipments this year. And they've been very flexible in terms working with us, if we do need more or certain models, they've been able to go ahead and put those into the build plan.

As we see here right now, we had already built into a production schedule going forward. We always continue to see we built into our schedule. So in the two weeks set back will not be an issue for us. We should be able to go ahead and get our snowmobiles out during the first, second and third quarter as we usually do.

Steve Baughman - Divisar Capital Management

And then on the issue of Suzuki, have you had any further discussions with them or further indications as to what they intend to do with their shareholdings?

Claude Jordan

We continue to talk to Suzuki. I mean they're obviously a strong partner of ours. They will supply our snowmobile engines through December of 2013. So still significant ways away. I think that Suzuki probably before the end of December 2013 will make a decision to go and do something with the shares. But we sit there right now. They've made a significant amount of money and since they became a shareholder, share price continues to do well for them. And it's not indicated to us that they plan to exit anytime soon.

Operator

(Operator Instructions) We do have a follow-up question from the line of Jimmy Baker with B. Riley Investment Bank Research.

Unidentified Analyst

Do you guys have a CapEx range for 2012?

Tim Delmore

Yes, we certainly we were going to have about $18 million of CapEx and $14 million of depreciation.

Operator

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

Joe Hovorka - Raymond James

A question on the snowmobile revenue number, was that $4 million negative number? Was that expected or was there a change in the last three months?

Claude Jordan

No, that number was expected. Again, we compared to the prior year we had no shipment. So then you're left with the announced programs for new approved basically rebate. So that's the kind of the sales we kind of accounting that we have to deal with these days.

Joe Hovorka - Raymond James

With the strength of snowmobile business, were incentives slightly better than you had thought going into the quarter or no or is it just?

Claude Jordan

I think it went right on plan.

Joe Hovorka - Raymond James

And I think you said you picked up some significant share in ATVs in 2011. Can you maybe put a finer point on that? Were you guys up at retail, were you down single digits?

Claude Jordan

What I said, during my comment, is that we gained share on ATV side. I did comment that the overall industry was down 17%. And obviously if you gain share you are down less than 17%.

Joe Hovorka - Raymond James

I was wondering if you could help me with that, may be you're down 15 or down 5?

Claude Jordan

We typically don't get into giving our share count something or, it is part of that data that provided us and to our competitors. And so we trying to go ahead and get to involved, but in fact that we either increasing or decreasing share.

Joe Hovorka - Raymond James

And any quantification on how you're doing in side-by-sides too? Are you also gaining share there? Are you maintaining share?

Claude Jordan

The side-by-side and I think you know this, but the side-by-side is not an industry track number today. ATVs if you say you have a certain share you definitely have that share side-by-sides. It's also speculating in terms of what everybody is doing. We have been doing fairly well on our Prowler business. There's a little doubt as we hit into '12 where we launch the Wildcat we expect to really start improving the side-by-side segment.

Joe Hovorka - Raymond James

I guess the way I understand is side-by-side I know it's harder to get numbers, but it seems like it was up or has been up at least year-to-date 2011. Would that characterize your retail up as well then?

Claude Jordan

I think if you look at the overall industry like I said, I don't have the specific data, because it's not provided. But you have certain players, Yamaha, that maybe they're moving up and you have all those like players. But recently it looks like they were up a little bit. So it is hard to extrapolate in terms of whether that's up the retail level, whether it's another segment by international or whether it's in government, I think to that nature. But it's hard to say. I guess I'd had to say, if I had to get maybe flat to up slightly.

Joe Hovorka - Raymond James

And then just a housekeeping question. I know you gave the CapEx and D&A for next year. Did you give it for 2011, full-year numbers?

Tim Delmore

2011 was $12 million of CapEx and $15.8 of D&A.

Operator

Our next question comes from line of Phil Anderson with Longbow Research.

Phil Anderson - Longbow Research

Yes, I just had a quick housekeeping question. I was wondering if you could repeat the segment guidance for snowmobiles, ATV and PG&A.

Claude Jordan

Snow we're expecting revenue to increase 11% to 16%, ATV flat-to-up 2% and PG&A sales up 3% to 5%.

Operator

I am showing no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Claude Jordan

We really appreciated for joining us today and as we mentioned throughout our comment, pretty excited about fiscal year '11. We sat out with a lot of different goals ranging from increasing sales to improving gross margin, to ending the year with more cash on the balance sheet and with all of those that we have achieved.

And as we look forward to 2012, as we've mentioned the think that sales will increase at 5% to 8%. We think our earnings per share will increase 7% to 17%. So if you look at our new products that are coming out in 23 brand new snowmobiles as well as the Wildcat. As we look forward to next 12 months, we feel very excited, we feel very good about the upcoming year. And surely in terms of the operational side we hope to do more in terms of the gross margins and operating expense.

So we appreciate your time today. And we'll look forward to updating you again in July.

Operator

Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4438591. We like to thank you for your participation. You may now disconnect.

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