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Arctic Cat Inc. (NASDAQ:ACAT)

Cash Buyback of 6.1 Million Class B Shares from Suzuki Motor Corporation Conference Call

December 28, 2011 11:00 am ET

Executives

Shawn Brumbaugh – Investor Relations, Padilla Speer Beardsley

Claude J. Jordan – President and Chief Executive Officer

Timothy C. Delmore – Chief Financial Officer and Secretary

Analysts

Craig Kennison – Robert W. Baird & Company, Inc.

Mark Smith – Feltl and Company

James Hardiman – Longbow Research

Doug Thomas – JET Investment Research

Joe Hovorka – Raymond James

Beth Lilly – Gabelli Investments

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Arctic Cat Investors Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, December 28, 2011.

I would now like to turn the conference over to Ms. 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.

Participating in our call today to discuss Arctic Cat’s announcement of the buyback of shares from Suzuki Motor Corporation will be Arctic Cat’s President and Chief Executive Officer, Claude Jordan, and Chief Financial Officer, Tim Delmore. Following their remarks, we will 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 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 will turn the call over to Arctic Cat's CEO, Claude Jordan. Claude?

Claude J. Jordan

Thanks, Shawn. Good morning everyone and thanks for joining us today. This morning, we are pleased to announce the purchase from Suzuki a 6.1 million Class B shares of Arctic Cat stock for $79.3 million. With this purchase, Arctic Cat will lower our outstanding shares from 18.4 million to 12.3 million and increase our non-Suzuki shareholders’ ownership of outstanding common shares by 33%.

On previous calls, we have stated that we were looking at various options for using our excess cash. These options included a possible dividend reinstatement, a possible share repurchase and also possible internal and external uses. Given the various uses, we felt at this time that the purchase of Arctic Cat’s shares from Suzuki would create great value to our remaining shareholders.

The fact that we were able to accomplish this purchase without impacting our public share float made this an even better choice for our existing shareholders. Following the share purchase from Suzuki, we will continue to maintain our strong balance sheet. Given our current cash position and projected cash generation, we expect to end the current 2012 fiscal year with more than $60 million in cash and no debt.

In addition to our strong cash position, we have an existing credit line with Bank of America for up to $60 million. And historically, have had little, if any, direct borrowings under this credit facility and would expect to continue to meet most if not all of the needs of the business with the existing cash on our balance sheet.

Suzuki has been our major shareholder since 1988 and a valued engine supplier of the Arctic Cat brand since 1976. We have benefited significantly from this relationship and look forward to maintaining a strong relationship with Suzuki going forward. Suzuki will continue to provide snowmobile engines to Arctic Cat through December 2013. They will also continue to supply us with snowmobile engine parts for many more years after that.

As we have previously announced, we will be moving to snowmobile engine manufacturing to our St. Cloud engine facility where we currently manufacture our ATV and Side by Sides engines.

At this time, we will open up the call to any questions you may have regarding today’s announcement.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) One moment please. And our first question comes from the line of Craig Kennison from Robert W. Baird. Please go ahead.

Craig Kennison – Robert W. Baird & Company, Inc.

Good morning. Thanks for taking my questions and congratulations on this transaction. The first question is, why there is significant discount, was this something that maybe had been negotiated over a period of time?

Claude J. Jordan

I think a couple of things. First of all, I think you are correct and this is something we’ve been negotiating over a period of time and obviously we’ve seen our stock price increase over the last handful of months. So there is no doubt that I think that played into it. The other thing I would say that played into it is the fact that Suzuki’s initial position was about $12.8 million.

Since then, they have received over $57 million in buybacks as well as dividends. So when you account the $57 million plus this $79.3 million today that they received for their shares, plus in the last 10 years alone we bought over $1 billion of engines and parts. So, I think when Suzuki looks at the total return to them over the initial investment, it’s has been a great run for them and certainly a great return.

Craig Kennison – Robert W. Baird & Company, Inc.

And with respect to the dividend, would you still be open to increasing the dividend at some point in the future?

Claude J. Jordan

I think, right now, as we mentioned, we expect to end the year with $60 million at least $60 million on our balance sheet and no debts. There is no doubt that as we proceed forward, we will look at the needs of the business and as we’ve always stated as we can return more to the shareholders, whether in terms of the reinstating the dividend or in terms of a possible additional buyback. Certainly we would look at those types of things. The one thing I would say about this that made it very attractive is the fact that we were able to go ahead and do a buyback without impacting float. And so going forward, that is certainly a major objective of ours is to not impact the float there. So, internal uses, possible strategic investments as well as dividend reinstatement, I think, are all possible candidates.

Craig Kennison – Robert W. Baird & Company, Inc.

Thanks. And Tim, for those of us adjusting our models, could you give us some help with respect to ending share count maybe the end of fiscal 2013 and how that might flow through the balance of the year.

Timothy C. Delmore

Sure. Looking at first of all full year fiscal ‘12 or March year end, we will end the year with approximately 17.3 million of weighted average diluted shares affecting the EPS calculation. The effect of the Suzuki transaction will be essentially impacting Q4 for the first time. Our Q4 basic shares are expected to be in the 12.4 million range.

And then, looking ahead to fiscal ’13, we are expecting weighted average shares to be approximately 14.2 million, weighted average diluted shares. The weighted average shares will decrease because of the full year affect of the 6.1 million share repurchase of the Suzuki shares. And then will be offset to certain extent by a dilution from stock options.

Craig Kennison – Robert W. Baird & Company, Inc.

And Tim, that 14.2 million, that’s a Q4 fiscal 2013 number? Not an average for the full year or?

Timothy C. Delmore

That’s an average for the full year of fiscal ‘13.

Craig Kennison – Robert W. Baird & Company, Inc.

Okay. Thanks for clarifying that. And then, maybe lastly while we had this opportunity, could you comment on the business trends in general? We haven’t seen as much snow where I live but maybe talk about the retail environment and what you’re seeing in the quarter.

Timothy C. Delmore

Yeah. We’re actually going to go ahead and we have a call scheduled for the end of January, so we’re going to go ahead and hold off until that time. The one thing I’d certainly would comment, we mentioned this at the end of Q2 that on the snowmobile side, we took a significant number of pre-season sales this year which basically means that from a retail environmental, lot of the units were sold before we even ship them. And so although we haven’t seen the snow that certainly we would like at least in I’ll say certain parts of the U.S. we do have fairly good retails and we knew we wouldn’t be having good retails at the end of Q2 as well.

The other thing I would comment from a global basis I’ll say the U.S. is a very important market but Canada is an important market and the certain parts of Canada has very good snow and then obviously the Scandinavian and the Russian market are also very good markets for us as well.

Craig Kennison – Robert W. Baird & Company, Inc.

Great. Thanks, Claude and Tim.

Claude J. Jordan

Thanks, Craig.

Operator

Thank you. Our next question comes from the line of Mark Smith with Feltl and Company. Please go ahead, sir.

Mark Smith – Feltl and Company

Hi, guys. First up, Tim, I apologize for making to repeat it, but can you walk through the fiscal ‘13 share count, just one more time. I missed.

Timothy C. Delmore

Yeah. In case the reception was bad, the fiscal '13 weighted average shares, we expect to be in approximate 14.2 million weighted average share range. Again, shares will decrease because of the 6.1 million share repurchase and then will be offset to a certain extent by dilution from stock options.

Mark Smith – Feltl and Company

Okay. Perfect. And then second, Claude, are you guys looking to fill that board seats with somebody else or will that just remain empty?

Claude J. Jordan

At this time, we are not looking to fill that board seat. That was a board seat that was put in place for Suzuki.

Mark Smith – Feltl and Company

Okay. And then lastly, can you guys give your current cash amount?

Timothy C. Delmore

Just our guidance on that is, we expect to end the year with over $60 million. This is near goals levels right now also.

Mark Smith – Feltl and Company

Perfect. Great. Thanks, guys.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of James Hardiman with Longbow Research. Please, go ahead sir.

James Hardiman – Longbow Research

Hi, guys. Thanks for taking my call and congratulations on a pretty impressive transaction here. Just real quick, I don’t know if we have all the puts and takes in terms of your cash flow here, but I guess two questions. You finished the third quarter with let’s see here, my apologizes $40 million in cash and another $55 million in short term investments. I’m assuming the $60 million number is cash only. So I guess, first question, are you going to be depleting those short term investments to any degree to finish the year? And then ultimately in terms of some of the other working capital adjustments, are you getting a cash benefit from inventory to accounts receivable anything like that or ultimately what are the puts and takes to get us to that $60 million cash number to finish the year?

Timothy C. Delmore

It’s kind of business as usual for us. Just to go back, generally, our guidance – we ended last year with $125 million of cash. We said we guided people that normally our net income adds to our cash level each year. So we are expecting – mostly we’re expecting us to have north of $140 million of cash and you take out the $79 million the math ends us at $60 million plus.

James Hardiman – Longbow Research

Okay. So just I’m sort of getting it now. I mean when you say cash, you’re including the short-term investments piece in there obviously?

Timothy C. Delmore

Correct, yeah.

James Hardiman – Longbow Research

Okay.

Timothy C. Delmore

The totality of our cash and short-term investments.

James Hardiman – Longbow Research

Okay, great. But ultimately from a working capital perspective, nothing meaningful happened here in the December quarter that that’s going to help that cash position at all, it’s ultimately the transaction in normal course of business?

Claude J. Jordan

Normal course of business that we’re tracking with our – right along as we plan with our cash projections.

James Hardiman – Longbow Research

Excellent. That’s all I had, great. Thanks guys.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Doug Thomas with JET Investment Research. Please go ahead

Doug Thomas – JET Investment Research

Good morning. Most of my questions have been answered. I just wanted to – I have one question, but I want to say congratulations on obviously what appears to be a very accretive deal and certainly Claude you are putting your money where your math is in terms of having talked about the commitment on the part of the management team to enhance shareholder value over time.

I’m just wondering, the only question I have is – does this change your view with respect to uses of cash. I know that someone asked the earlier question about dividend and so forth. But with this transaction having taken place at a much lower price than where the stock is trading at, does it change your view with regard to the valuation of the shares as it pertains to deciding whether to use cash to buyback stock or make acquisitions or pay a higher dividend or whatever?

Claude J. Jordan

Well, I think first of all, I think the price we paid $79.3 million was certainly a fair price. And as we said earlier, we think it does create great value for our shareholders. In terms of what we do going forward, certainly with the $60 million of cash that we expect to end the year with, we feel very comfortable. That will certainly meet the needs of the business. And once again, for direct borrowing purposes, we don’t see a major need for having to drawdown on the Bank of America credit facility.

With that said, I think we will continue to be aggressive out there. We see an opportunity to go ahead and reinstate the dividend. And certainly, I’m sure that’s the question that will come up at the board meetings. In terms of a buyback, we don’t want to impact the float much more. So I don’t know if we do a lot in that area, but certainly it’s something we can consider.

And then the final thing, there is no doubt that as we go forward an opportunity if we were to see something else attractive to us, I think we still have enough cash as well as the credit facilities go ahead and even look at some strategic investments as well.

Doug Thomas – JET Investment Research

Okay. And Claude, I guess again one more question, but you’d already announced some time ago that you intended to take the engine manufacturing in-house, and obviously Suzuki saw that and you’re going to continue to buy parts from them and so forth.

Does this change in any way your ability to either accelerate development of new technology or source part? Does this give you flexibility I guess is my question either in terms of manufacturing your own equipment or for others, or does it provide you with any additional opportunities out there whether it’s margin related or top line related, that we are not currently thinking about.

Claude J. Jordan

First of all, Suzuki has been a long and valued engine supplier for us for many years and we appreciate the relationship we’ve had with them. In terms of expediting the engine manufacturing, we stated that we would buy Suzuki engines through December of ‘13 and that will certainly meet our needs for the model year 14 product. And then after that, we will be bringing the engine manufacturing in-house.

I think for the most part, everybody has seen in prior calls what we have talked about, we’ve always stated that, with Suzuki, we may not be able to build engines as cheap as them, but we can certainly build them cheaper than you will sell those for. But I think at the end of the day that most people have recognized that and certainly not a major significant margin pickup, but there is no doubt that we will – probably the biggest advantage we think will benefit from with Suzuki is the fact that, we will be able to control our own destiny. So there are specific snowmobile engines certain directions we want to go, I think this gives us that flexibility to go ahead and produce and manufacture those engines in-house and allow us to go-ahead to let’s say new spaces.

Doug Thomas – JET Investment Research

Got you. Okay, thank you very much and again congratulations, it is a great deal.

Claude J. Jordan

All right, thanks.

Operator

Thank you. Our next question comes from the line of Joe Hovorka with Raymond James. Please go ahead sir.

Joe Hovorka – Raymond James

Thank you. Just a quick question about the share count for 2013. Can you just walk through the differences between the 12.4 and the 14.2 and it’s line item what adds like I’m assuming that the stock up significantly going to have more options that are now included in the diluted share base and then I’m assuming you also got some assumptions about future share issue, a future share issuances or future option issuances, but can you just give a line item by line item or roughly?.

Timothy C. Delmore

Yeah, let me do it this way. Some models I have seen out there have ascending the year at about just under 19 million weighted average shares before this transaction. Normally, our share count increases about 2% every year just normal dilution for option grounds and so forth and some exercises. From that number, we deduct the 6.1 million of Suzuki repurchases and then we would add a factor on before dilution from options to get to the 14 million. And some of the factors will be, where does the stock price go, what will be – we have more options coming into the money assuming a increase on our stock price and the weighted average share count inherently goes up with the stock price.

Joe Hovorka – Raymond James

I guess I have been looking at more as the units refers to percent, but it seems like you are adding a couple hundred thousands shares per year right 200,000 or 300,000 shares.

Timothy C. Delmore

Yeah, normally, just normal addition to share count.

Joe Hovorka – Raymond James

Okay. And the 12.4 million that you have given, is – is that as of the end of – that will be the December quarter end right where we would –

Timothy C. Delmore

Yeah, basic shares and we don’t see a lot of increase in that in Q4.

Joe Hovorka – Raymond James

Basic share, okay, right. And then on top of that, you would have whatever your diluted shares are to add to that 12.4 million. So if we didn’t have a loss in the March quarter, the number wouldn’t be 12.4, it would be what?

Timothy C. Delmore

It would be in that 17.3 million for the full year of fiscal ’12 because there will be a quarter worth of decrease from the Suzuki transaction awaited into the [calc].

Joe Hovorka – Raymond James

Okay. I guess I’d try to ask yourself, we are not adding the 1.8 million shares between now and the end of 2014 or 2013. There is something in that, that 12.4, there is another share number on top of that?

Timothy C. Delmore

No, there will be some dilution in the weighted average shares from the options. Will it be perhaps in excess of 1 million shares, the time will tell.

Joe Hovorka – Raymond James

Okay.

Timothy C. Delmore

And that’s just all the math works in that [calc] and weighted average share [calc].

Joe Hovorka – Raymond James

Okay. Okay, thanks guys.

Operator

Thank you. And our next question comes from the line of Beth Lilly with Gabelli Investments. Please go ahead.

Beth Lilly – Gabelli Investments

Claude and Tim, congratulations.

Claude J. Jordan

Thanks, Beth.

Timothy C. Delmore

Thanks, Beth.

Beth Lilly – Gabelli Investments

I wanted to just clarify the Suzuki relationship after you stopped buying engines from them. Will you continue to buy parts, is that correct?

Claude J. Jordan

That’s correct.

Beth Lilly – Gabelli Investments

Okay. So that is at a contractual relationship or how is that going to work? Is it just on an order-by-order basis?

Claude J. Jordan

No, we do have a contract with Suzuki to provide us engine parts after the termination here of (inaudible).

Beth Lilly – Gabelli Investments

After 2013?

Claude J. Jordan

That’s correct.

Beth Lilly – Gabelli Investments

Okay and (inaudible).

Claude J. Jordan

They will provide engines up to December 2013, of course that’s all of our model year 14 and then after that they will continue to provide engine parts.

Beth Lilly – Gabelli Investments

Okay, great. And then so that the Suzuki person steps off the board, correct, he is off the board as of today?

Claude J. Jordan

Effective immediately.

Beth Lilly – Gabelli Investments

Effective immediately. All right and just to clarify, you are not going to replace him any capacity so that board seat goes away?

Claude J. Jordan

That board seat, yes, that is correct. At this time, the board has not discussed or made a decision in terms of replacing that board member.

Beth Lilly – Gabelli Investments

Okay, great.

Claude J. Jordan

There was a board member that we had put in place specifically for the Suzuki transaction.

Beth Lilly – Gabelli Investments

Yeah, yeah. Okay, okay. Terrific. All right, well, what a great, great return to cash for shareholders. Well, thank you very much.

Claude J. Jordan

Thanks, Beth.

Timothy C. Delmore

Thanks, Beth.

Operator

Thank you. (Operator Instructions) There are no further questions in the queue.

I would like to turn the conference back over to Claude Jordan for any closing remarks. Please go ahead, sir.

Claude J. Jordan

Thank you for your time today especially who were in this busy holiday season. We are pleased to be in a strong financial position and able to enhance shareholder value through the purchase of Arctic Cat’s shares from Suzuki. We look forward to renewing the results of our third quarter and year end outlook with you later in January. Until then, we wish you a safe and Happy New Year. Thank you.

Operator

Ladies and gentlemen, if you would like to listen to a replay of today’s conference call, please dial 303-590-3030 or 1800-406-7325 with the access code of 450-1572. Thank you for your participation and you may now disconnect.

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