Arctic Cat's (ACAT) CEO Chris Metz on Q1 2017 Results - Earnings Call Transcript

| About: Arctic Cat (ACAT)

Arctic Cat Inc. (NASDAQ:ACAT)

Q1 2017 Earnings Conference Call

July 29, 2016 11:00 AM ET

Executives

Shawn Brumbaugh - PadillaCRT

Chris Metz - CEO

Chris Eperjesy - CFO

Analysts

Scott Hammond - KeyBanc

Tim Conder - Wells Fargo

Craig Kennison - Baird

Jaime Katz - Morningstar

Rommel Dionisio - Wunderlich Securities

Seth Woolf - Northcoast Research

Mark Smith - Feltl and Company

Gerrick Johnson - BMO Capital Markets

Operator

Good day, and welcome to the Arctic Cat’s Fiscal 2017 First Quarter Earnings Conference Call. Today’s call is being recorded.

At this time, I would like to turn it over to Shawn Brumbaugh. Please go ahead.

Shawn Brumbaugh

Thank you, Kayla. Thank you for joining us this morning. I’m Shawn Brumbaugh with PadillaCRT. Before the market opened this morning, Arctic Cat released results for its fiscal 2017 first quarter ended June 30, 2016. Participating in our call today to discuss the company’s performance and outlook will be President and Chief Executive Officer, Christopher Metz, and Chief Financial Officer, Christopher Eperjesy. 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 future performance. Such statements are subject to risks and uncertainties, and the 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, Chris Metz. Chris?

Chris Metz

Thank you, Shawn, and thank you all for joining us this morning. Today I will review the Company's performance in the fiscal 2017 first quarter, and provide an update on our strategic initiatives. As we discussed on last quarter’s conference call, we expected Arctic Cat’s first quarter sales to be lower compared to the prior year quarter. The company posted fiscal 2017 first quarter sales of $104.9 million. However, our first quarter loss of $0.81 was greater than anticipated. This was chiefly due to the timing of snowmobile shipments that shifted to the second quarter, as well as a more competitive retail environment that led to higher promotional spending than originally planned.

Importantly, in the fiscal 2017 first quarter, we reduced dealer inventory, and further strengthened and expanded our dealer base. We achieved this despite a weaker power sports market and continued foreign currency headwinds. I will say more about this in a moment. We remain focused on our strategies, and we are encouraged by the significant progress we’re making to reposition the company for long-term growth. We continue to anticipate reporting stronger financial results in the second half of this fiscal year, driven by planned new product launches, and contributions from our other key strategic initiatives.

Our fiscal 2017 is a year to rebuild and reposition the company. We expect to begin accelerating our sales and earnings power in late fiscal 2017 and fiscal 2018. We remain committed to our long-term goal to reach over $1 billion in net sales. As we stated, our strategic initiatives to reinvigorate growth include: dramatically improving our dealer network, ramping up end-user-focused new products, pursuing strategic partnerships, and creating a brand marketing powerhouse. As we invest for growth, we are mindful of the need to control costs and leverage the company’s operating efficiency.

Now I would like to briefly update you on our progress against our initiatives in the first quarter. First, as I noted, our efforts to strengthen our dealer network continue to gain traction. We are developing a top-quartile performing dealer network in terms of size, productivity, and capabilities in every region in North America. We see significant opportunity to expand our presence in geographic territories where we are either underrepresented or not represented at all. We are aggressively working to fill these territories with top-performing dealers that have the ability to increase Arctic Cat’s sales volume and market share.

In the first quarter of fiscal 2017, we added another 17 top-tier dealers to our existing base. This is on top of the 15 new dealers that we added in the 2016 fourth quarter. Our dealer expansion goal is to add 75 top-tier dealers by the end of fiscal 2017. To further enable our dealer expansion and capabilities, we’ve added resources that bring us terrific industry experience. We’ve also established a dealer advisory council with 15 or so of our best dealers to help guide our dealer-facing activities. We held our first meeting with this group in June, and we are thankful to have their support. As we've said, we remain committed to keeping our dealers in a healthy inventory position, which is why we were planning on lowering sales to dealers in the first half of this fiscal year. In our fiscal 2017 first quarter, our efforts to reduce shipments of ATVs and ROVs succeeded in decreasing dealer inventory by approximately 9%. We've also kicked off an internal initiative to introduce inventory replenishment to our dealer base. To support this effort, we established a cross-functional team, and the first step, as we announced earlier this month, involves forecasting, producing, and shipping product in waves during fiscal 2017. With this initiative and others we will continue to support our dealers through inventory management efforts and creative sell-through marketing programs.

Our second strategic initiative is to ramp up end-user-focused new products. We continue to make exciting progress here, although we are still in the early stages of delivering on our new product launches in our partnership with Robby Gordon. We are investing in research and development, and new product innovation, to support a dynamic multi-generational product and technology pipeline. In fact, we just finished our new state-of-the-art R&D facility expansion in St. Cloud, Minnesota, which will become home for all of our new wheeled product development. St. Cloud is a suburb of Minneapolis/St. Paul, and gives us a location where we can easily attract new R&D talent. During my tenure as CEO over the past 20 months, we are about halfway into the 2 to 3 year product development cycle necessary to launch innovative, industry-leading new products. We're doing everything possible to speed development. You will see the first products from our new roadmap begin to hit the market in the second half of this fiscal year. The rollout of our product vision is a multi-year endeavor, and will include multiple hero products introduced over the next several years. You'll be hearing a lot more about this in future quarters.

In our dirt business, sales of our side-by-side ROVs remained strong, including the Wildcat. Core ATV sales decreased as planned, as part of our ongoing effort to lower core ATV inventory at our North American dealers. Our aggressive new product development plans include the recent introduction of our first wave of 2017 model year ATVs and ROVs. We announced six all-new models, and a total of 27 class-leading machines for all categories of offroad work and play. These new 2017 models introduced over the past 90 to 120 days include the powerful six-passenger HDX Crew utility vehicle, which has a versatile cargo box that transforms into a flatbed with an industry-leading 1,000 pound cargo capacity. Our new Alterra TRV, two-rider vehicle, which allows a passenger to sit behind the driver; and our new entry-priced utility side-by-side, the Prowler 500. Consumer response to our newest offerings has been enthusiastic. These vehicles are innovative, full featured, and a terrific value. By that, I mean very competitively priced.

Turning briefly to our snow business, as I mentioned earlier, OEM snow shipments were pushed into the second quarter. At our dealer show last March, we unveiled one of the most exciting snowmobile lines in years, with many award-winning models such as the ZR Thundercat, which has the industry's most powerful turbo engine, and delivers an industry-leading 200 plus horsepower. This also will be the first year when our SVX 450 snow bike will be available. We expect the snow biking category to become a growing part of our snow business, and we believe that we are well positioned for retail growth in our snowmobile business this year, with good snow conditions. Overall, we remain pleased with our progress to date on implementing our product roadmap. We also expect to soon announce a new strategic partnership that will extend our product reach, stay tuned.

Taking a look at our initiative to create a brand marketing powerhouse, we continue to make strides to creatively introduce our great brand to new and old consumers alike. Our marketing efforts are focused on driving retail sell through to move our dealers' inventory and ensure their success. Our goal is to deliver passionate and exciting experiences at all customer touchpoints to fuel double-digit retail sales growth each and every year. To achieve this, we've enhanced our field marketing, advertising, race sponsorships, and team training.

Wherever possible, we are activating sales through experiential marketing and virtual reality demo rides, which is a novel approach that consumers love. We call this the Arctic Cat 360 experience. Virtual reality headsets allow consumers visiting Arctic Cat event displays and dealerships to feel the thrill of riding an Arctic Cat snowmobile or Wildcat side-by-side in an incredibly realistic 360-degree world. This is one more way we are living our brand to create the ultimate offroad riding experience. Experiencing virtual reality, together with our other event activation touchpoints, is driving consumer conversion to Arctic Cat products. In addition, fiscal 2017 is our first full year of sponsoring the Wildcat stadium side-by-side races, which are held in conjunction with Robby Gordon's popular Stadium Super Truck races.

The events attract large crowds and are televised on the CBS Sports network, which provides great exposure for Arctic Cat. The Wildcat stadium side-by-side race series came about as part of our partnership with Robby. In addition, Arctic Cat is the title sponsor of the All-Star circuit of champions Sprint car series. Again, this race series puts us in front of our target buyers. Beyond the actual races, our Wildcat side-by-sides will be showcased at these events in exhibitions and demo rides for race fans. We are excited to begin reaching new end users at these and many other events nationwide. Experience from marketing race sponsorships and event demos are pathways to building the Arctic Cat brand. We have passionate users, an iconic brand and really exciting products and we're focused on bringing all of these together in an engaging manner. The feedback from our dealers is that they are seeing the Arctic Cat brand and product show up in more places than ever before.

Looking ahead, we recognize the significant headwinds we face despite our continued progress in each of our stated key strategies. We continue to take appropriate actions to reduce costs and increase efficiencies wherever possible. At the same time, we will not stop investing in our key strategic initiatives, each of which is gaining traction and showing promise. We see tremendous growth opportunities through new product innovation and strategic partnerships and as the power sports market recovers, we will be positioned to capitalize. We are confident in our plans and we will continue to take actions that enable a return to profitable growth.

With that, I will turn it over to Chris to review the financials.

Chris Eperjesy

Thanks, Chris. Good morning, everyone. Please note that in my comments today, all references to earnings per share are on a fully diluted basis. Arctic Cat's fiscal 2017 first-quarter net sales of $104.9 million were down 22% compared to prior-year sales of $134.4 million. The Company had a net loss of $10.6 million or $0.81 per share versus a net loss of $1.1 million or $0.08 per share in the prior year quarter. The impact of unfavorable foreign currency exchange movements year-over-year reduced fiscal 2017 first-quarter net sales by approximately 1.6% or $0.20 per share.

Sales of ATVs and ROVs in the 2017 first quarter totaled $43.7 million, down 17.3% compared to prior-year sales of $52.9 million. We had strong sales of Arctic Cat side-by-side ROVs, including the Wildcat. Core ATVs decreased as planned, as we continued to lower inventory at our North American dealers.

Snowmobile sales in the fiscal 2017 first quarter were down 30.4% to $40.5 million versus $58.2 million in the prior year quarter, chiefly stemming from the timing of shipments. Sales of parts, garments, and accessories in the fiscal 2017 first quarter were down 11.5% to $20.6 million versus $23.3 million in the prior year quarter. The decline is primarily attributable to an overall weakening of the power sports market, as well as lower pre-season sales of snow-related items resulting from poor snowfall last winter in key geographies.

Our focus on strong inventory control enabled us to decrease Arctic Cat's ATV and ROV dealer inventory in the fiscal 2017 first quarter by 9%. We remain committed to further decreasing our dealers' inventory to ensure they are in a healthy inventory position, and our guidance for fiscal 2017 reflects that. Regarding our wholesale inventory, we ended the fiscal 2017 first quarter with a slightly elevated level of wholesale snow-related inventory due to the timing of shipments. We will ship these snow products in the second quarter.

Gross profit and gross profit margin in the 2017 first quarter were approximately $11.8 million and 11.2%, respectively, compared to $22.6 million and 16.8% in the prior-year quarter. Lower sales volume and unfavorable foreign currency exchange impact reduced gross profit by approximately $1.6 million or $0.08 per share. We remain focused on controlling costs and implementing efficiencies throughout the Organization, while maintaining investments in research and development to ensure a strong pipeline of new products and building our dealer development and marketing capabilities.

Operating expenses in the fiscal 2017 first quarter were approximately $29.1 million compared to $24.1 million in the year ago quarter. The year-over-year increase was chiefly attributable to unfavorable foreign currency exchange impact of $2.7 million with the remainder primarily due to research and development investments. Operating loss in the 2017 first quarter was $17.3 million versus an operating loss of $1.5 million in the same quarter last year. The Company's effective tax rate was 39.8% for the first quarter ended June 30, 2016, compared to 36.4% in the year ago period. The increase was due to the reenacted R&D tax credit. Excluding the R&D tax credit, our fiscal 2017 first quarter effective tax rate was 35.2%.

Looking at the balance sheet, Arctic Cat ended the fiscal 2017 first quarter with cash and cash equivalents of $13.5 million at June 30, 2016, compared to $20.3 million a year ago. Long-term debt was $50 million at the fiscal 2017 first quarter end, with $40 million of that related to inventory versus $30.9 million at the end of the fiscal 2017 first quarter. We expect to end fiscal 2017 with little to no long-term debt, while continuing to make investments in the Business to lay the foundation for future growth and improved efficiency.

Receivables increased to $45 million from $40.1 million at the end of the prior-year quarter, primarily due to new product pipeline fill. Inventory totaled $179.6 million versus $169.5 million at the end of the first quarter last year. Again, the increase was chiefly due to the timing of snow-related product shipments.

Capital expenditures in the 2017 first quarter were on plan and totaled $4.2 million, and depreciation and amortization was approximately $4.5 million as we invested in modernizing our manufacturing processes at our Thief River Falls and St. Cloud facilities, both in Minnesota, and increased our investment in tooling for key new product introductions.

Taking a look at our outlook, for the fiscal year ending March 31, 2017, Arctic Cat is maintaining its estimated full year net sales in the range of $635 million to $655 million, assuming a favorable foreign currency exchange impact on sales in the range of $2 million to $5 million. The company is lowering its anticipated fiscal 2017 full year net earnings to range from a loss of $0.70 to $1 per share due to weaker power sports market, increased promotional costs, and unfavorable product mix. Previously Arctic Cat estimated its fiscal 2017 full year net earnings to range from a loss of $0.39 per share to earnings of $0.08 per diluted share.

Continued foreign currency exchange headwinds in fiscal 2017, driven by the year-over-year impact of foreign currency exchange hedge losses, are estimated to reduce net earnings in the range of $0.42 to $0.53 per share compared to fiscal 2016. As I mentioned, we expect to end fiscal 2017 with little to no long-term debt. For the prior fiscal 2016 full year, the company’s loss per share totaled $0.71 per share on net sales of $632.9 million. In the first half of fiscal 2017, we expect net sales will be down 12% to 15% as we continue efforts to improve dealer inventory, and prepare to launch new products and other strategic initiatives.

We expect stronger financial results in the second half of the year to be driven by new product launches that will begin in the fiscal 2017 third quarter with the majority of new products to be launched in the fiscal 2017 fourth quarter. Our fiscal 2017 financial outlook includes the following assumptions: ATV/ROV wholesale sales flat to up low-single digits; snowmobile sales down low-single-digits; PG&A sales flat to up low-single digits. Positive foreign currency impact on sales for the full year in the range of $2 million to $5 million, assuming the Canadian dollar rate of $1.29 compared to an average rate in 2016 of $1.31.

Negative foreign currency hedge losses for the full year in the range of $4 million to $6 million versus foreign currency exchange hedge gains of $7.6 million in fiscal 2016 are expected to result in a net year-over-year increase in operating expenses of $12 million to $14 million. An estimated 70% to 80% of the net Canadian dollar exposure is hedged at an average rate of $1.34 in fiscal 2017.

Gross margin in the range of approximately 15.5% to 16.5%. R&D expense of approximately 4.5% of sales as we continue to ramp up investments in end user focused new products, and capital expenditures in the range of $30 million to $35 million. We continue to make progress against our strategic initiatives, we remain focused on investing for growth while improving the company’s efficiency and maintaining a disciplined approach to spending in order to enhance our financial performance over time.

Now we would like to open up the call for questions. Kayla?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We’ll take our first from Scott Hammond with KeyBanc.

Scott Hammond

Thanks. Good morning. Chris, can you give us the retail numbers for the quarter for ATV and side by side versus what you think the industry was?

Chris Metz

Sure Scott. Retail numbers for us were on the ATV side we were down low to mid-level digits. And ROV down high single digits. Now we think that's versus an industry where ATVs were down mid-single digits and we thought -- we think the ROV was up low single digits.

The only thing I was going to mention is that we need to take into account the fact that we are lapping no-brainer last year and so no-brainer last year the first quarter you recall we were up high teens almost 20% so lapping that and taking inventory down we looked at our retail numbers frankly they are where we expected them to be.

Scott Hammond

That's what I was going to ask was if you saw as the comps started to get easier lapping no-brainer did you see any improvement especially with new products out there later in the quarter and then into July?

Chris Metz

Good question Scott because April and May and frankly the -- to the middle part of June were tougher. We saw the end of June start to improve a little bit moving into July where it appears retails have improved slightly, for sure. And the contribution of our products, if you look at the six passenger crew and the Prowler 500 that I mentioned the TRV they are certainly contributing to the retail growth that we are seeing.

Scott Hammond

Then with respect to the guidance, the change in the first half of the year -- how much of that is a function of the industry versus maybe something else like a timing shift on a product launch?

Chris Metz

In fairness the majority of the sales versus our guidance -- the sales drop versus our credit guidance was simply timing, where we moved our snow shipments from Q1 to Q2. The other big portion of that that contributed not only to sales but also earnings is the rebate environment. I should probably take a step back here. We made a strategic decision to launch our first wave of 2017 model year products in June, versus the normal cadence of end of August which we've done in years past. We did this because we have seen that gradually over the last few years our competition has introduced their model year dirt products earlier.

Our team -- and this was a late call decision that we made after our analyst meeting in May where when Chris and I came back and sat down for a couple weeks with our team we made the decision that we needed to be out with wave one to be competitive in the marketplace by the end of June. Because we made that decision it had to impacts to our business. One, we slow down the production of snowmobiles so we could ramp up on our dirt product that we will be introducing in the second quarter. That was the predominant contribution to the shift in timing. Secondly we introduced a rebate program that went into effect from July through the end of September. Actually June tell the end of September.

By announcing the program in June, we had to recognize a full impact of that promotion which will carry into second quarter. So that was a big portion of the rebates or increased incentives versus what we had originally anticipated. So you could -- obviously timing.

Scott Hammond

And following up on that last point. Gross margin guidance is down 200 basis points from her where it was last quarter for the year. Can you reconcile what the big moving pieces are there? Because sales are the same.

Chris Eperjesy

Scott this is Chris Eperjesy. It's going to be well relatively parts, the increase promotional environment and there is a mix in our range of 635 to 655. There is a mix impact of seeing some of our lower margin products having higher order flow than we had expected in some of the higher-margin products having lower. And then the same is true both with the dirt and snow, so there is a mix impact there as well. I would say is equal parts of both.

Chris Metz

We see this not only in both our dirt and our snow business but it we also see with our OEM partners, where they are starting the big storage lower price point units in their forecast they're giving us.

Scott Hammond

Last question I have is can you provide us an update on the patent case. It seems like there was a modestly positive development here recently just timing around the next data points there. Thanks.

Chris Metz

Thank you Scott. I would characterize it as more than modestly favorable. We got a ruling and the verdict was a ruling of $46 million payment. Plus-plus because we, the way the verdict was ruled it was troubled damages. But it also includes things that are forward-looking. So this $46 million payment could easily end up being 30%, 40% bigger than that as we go forward. Now, BRP has appealed it. That will, that appeal will run its course. So, I can't comment on any further than that. But we were very, very pleased with the outcome of the trial.

Operator

We will take our next question from Tim Conder, Wells Fargo.

Tim Conder

Thank you and good morning gentlemen. Following on what Scott was talking about here, and then the feedback we are getting from clients that state the obvious here. The disconnect is your sales guidance was largely, it's intact. And yet we've seen a weakening, comments by another Minneapolis area competitor, comments by Harley-Davidson and the motorcycle market. So how is your sales outlook still intact? One. And then two, you gave some color there on margin guidance and the significant downgrade of the earnings. But did the, were there some other FX hedging incremental FX hedging losses in there also or some other factors? Again, predominantly the disconnect between no change in sales and what you are seen in earnings and what we are hearing in the industry environment? I guess is the main route of the question.

Chris Eperjesy

This is Chris Eperjesy. I will take the FX question first. When compared to last year, FX will continue to be a big portion of the explanation. Compared to our initial guidance the answer is no. There's not been a material movement as you know the average first quarter rate was what we were expecting it to be. So with respect to FX, FX other than versus last year will continue to be a big part of the story. Did not have a material impact on our revised guidance down on earnings.

Tim Conder

Okay.

Chris Metz

Tim, as it relates to the sales guidance. We are seeing the same thing that our competition is seeing. We certainly aren't anticipating a further deterioration in the marketplace. But what I can tell you is that we've got contributions of new products we expect to transpire here in the second half particularly in the fourth quarter that we have not had the contributions of in the past. So we remain committed to the sales guidance that we've given. Now the drop in earnings is as we talked about and alluded to before is predominantly the rebate or increased incentive environment but also the mix.

Let me put a little bit more color on the rebate, incentive environment. It's not that we see the retail incentive environment increasingly dramatic year-over-year or increasing sequentially. What is a bit different than what we had originally guided was -- or is that we expected to be able to pull our dealer based off of our interest protection flooring faster. As you know we offer extended interest flooring protection. And we've been very with their dealers and advised our dealer Council and had a lot of discussion with dealers that it's a win-win if we can get to the point where we don't have to predict -- protect old model year product. Our inventory is much healthier than it's been. We anticipated being able to get contributions from that. And we built that into our plan. Now given the retail environment, we think it's prudent to be able to continue that protection to help our dealers for a period longer than we anticipated even 60 days ago.

Chris Eperjesy

And Tim, I would add maybe one other piece of color. The fact that we didn't change our revenue guidance -- this is a good news bad news thing that Arctic Cat has the higher percentage of our sales that are snowmobile related. And going into this we have a pretty good idea of what that business is going to look like for the year. So when we put our initial guidance that's 50% of our business. We have very good idea what that's going to look like in terms of orders that we are have in hand. I think that's why it's less likely that we would make a change that you would have expected.

Tim Conder

Okay. Obviously that part is subject to we will see how strong or not when the materializes into.

Okay. Chris, just the mixture of understanding here, you wanted to pull the dealers off of the -- clearly the aging for yourself and the industry has gotten better. That's the good thing. But the consumer backdrop at best is held constant for ORVs so what you're saying is you want to extend that financing support or [indiscernible] financing support to get dealers a little extra help for through this period. That's basically what it boils down to?

Chris Metz

That's exactly right Tim. We've committed to our dealers that we will not leave them hanging or stranded. So we are going to pull back on that when our dealers are position to be able to absorb that. And we just feel like because of the state of that power sports market place right now we will not be able to pull that off as quickly.

Tim Conder

Great. Thank you gentlemen.

Chris Metz

Thanks Tim.

Operator

We will take our next question from Craig Kennison with Baird.

Craig Kennison

The first is on the dealer inventory question. What can you give us to quantify the improvement you've made in non-current inventory? I would just say that the dealer checks we've done indicate that there is still a fair amount of non-current inventory that could pose a challenge if you try to ship new current aggressive new products into the channel.

Chris Metz

Craig, I think the biggest and indication you can see of where we think the inventory sits at this point is where we are rebating, where we are incenting And most of our incentives are in our 2015 product right now because most of our product is much newer. That’s not to say we don’t have small pockets of older model year product. And I think it’s the squeaky wheel thing, where you’ve got those small pockets and you will hear the loudest chirps. But we are putting our money on the 2015 increasingly 2016 product because our product is at a much healthier position and that’s where most of our retailers need the competitive help.

Craig Kennison

Thank you. And with respect to the promotional environment, what prevents this from being a race to the bottom? I don’t think your cost structure right now is as competitive as maybe some of your larger competitors. And so the risk is, this becomes a rebate game that you just cannot win at this point given your cost structure.

Chris Metz

It’s certainly a fair question. I think the governing factor is that all of us are trying as hard as we can to increase earnings. And so there’s a limit to how much people want to discount. Clearly we are not a leader there. We are going to follow and we are going to hold our share. But increasingly we are going to get contributions from things that eliminate the competitiveness of rebates like new products and strategic initiatives that things that are going to take root that we haven’t frankly had the benefit of over the past year to two and we will start to see those things come on stream. Which I think are going buttress to the rebate environment we are in.

Craig Kennison

Thanks. Lastly you talked a little bit about some strategic partnerships in the pipeline. Any view on timing or impact or any color you can share it all on that particular catalyst? Thanks.

Chris Metz

Craig, we feel even more encouraged then we were 60 days ago or so when we were with you all in May. We made really good progress. We are very close to being able to share more detail on that. And that’s about all I can share. I wish I could share more at this point but all I can say is we are close. We are even more in encouraged by the contributions we are going to get. And it’s not just going to be one, we will have multiple strategic partnerships. And we hope to be back with you pretty soon on the first.

Craig Kennison

Is any of that in the revised guidance from today?

Chris Metz

We said consistent with what we communicated in May that there’s very little contributions this fiscal year. Most of the contributions you will see come on stream in our next fiscal year and beyond.

Craig Kennison

Okay. Thank you.

Chris Metz

Thank you.

Operator

We’ll go next to Jaime Katz with Morningstar.

Jamie Katz

Hi guys. Thanks for taking my questions. I’m going to piggyback on Craig’s question on inventory. I think the last time we spoke with you guys you said there was something like 3000 units of non-current inventory remaining in the channel. I may have that number wrong but could you let us know that’s actually higher or lower at this point?

Chris Metz

Jamie, I don’t recall us stating an exact non-current number. Because hat number changes so quickly.

Jamie Katz

Yes.

Chris Metz

As he flipped the model years, you quickly get into a non-current environment. I don’t know that we’ve ever stated that number. All I can tell you is that our inventory continues to get better-and-better. And purposely slow we will continue to reduce it so we can make way for the new products we will be introducing. So we feel a heck of a lot better than where we were 90 days ago and when year ago on a non-current situation, that is for certain.

Jamie Katz

And would you offer any color on the oil patch or ag demand that you guys are seeing and maybe how that has slowed down and whether it's finding a bottom.

Chris Metz

Yes, Jamie. This is a hard one. I think, frankly, it has caught the industry and our competitors a bit more off. I think it's surprised all of us a bit more. I knew that we had a very rural centric dealer base but I didn't realize the impact of oil and gas and ag as much. But it's substantial. A lot of those workers that count on those sectors to contribute to their income they are hurting right now. We saw some of the folks in -- not competitors but others an industry that have reduce their earnings guidance and what have you that are selling right into that sector, I mean that affects us. [Audio Gap] Was that still a net-negative on top line? I understand sort of the cost impact there but help me figure out the puts and takes of the situation?

Chris Metz

James, that was simply an announcement we made in June versus a typical announcement at the end of August. The actual flow of the product will still occur mostly during our second, third and fourth quarters as we introduce the subsequent waves. So the impact was on the timing of the announcement and the -- and then frankly some of the production too. We started to produce the product earlier so we can produce and ship it earlier in the quarters that followed.

James Hardiman

Just so I understand, it hurt your ability to ship snowmobiles because you shifted your production towards ATV, ROV but you didn't actually get sales from that earlier announcement in the first quarter.

Chris Metz

You stated it exactly right James.

James Hardiman

Okay. And then, secondly, just -- I think I understand the shift from 1Q to 2Q but maybe talk about some shifts from first half to second half. You left your full-year top line guidance unchanged but you brought the first half top line guidance down a little bit. Are there some incremental revenue drivers that you're now seeing essentially in the second half? Or how should I think about that?

Chris Metz

No, I would look at it more as us just tightening things up a bit in some of our dirt product that we've anticipated launching in the second quarter, has moved a little bit to the third quarter. But there's not big movements there, it's just a little bit of movement.

James Hardiman

Great. And I guess to the extent that the industry has taken a leg down here, can you speak to your -- the dealers appetite? If you go out and try to bring new dealers on, you have a goal for the end of the year. As you talk to those dealers - and sales seem to be getting worse, what's their appetite for bringing on a new brand? And what would come with it, new inventory? And maybe just the overall profitability of your existing dealers?

Chris Metz

I will take the new dealer first. Honestly, it's made bringing on new dealers harder. So us signing up 17 new dealers on top of 15 dealers, it certainly made that effort harder than we anticipated. Because we are asking a dealer to commit more of their working capital in a tougher environment. So what's going to really help us is when we get new products. We've heard that from new dealers that the closer we get to introducing some of our hero new products, the more inclined they are going to be to take it on. Because they don't want to be in a position where something new comes to market and they're not the destination for it.

Now the question on the existing dealers, it's a hard environment. We've seen a number of our dealers that are more credit hampered, more concerned about their liability. It's a tough, tough environment and that's the environment that's affecting us and our competitors that we are selling into an environment where dealers are much more cash strapped in a tough situation than they have been in a long time.

James Hardiman

That's helpful color. Maybe last question for me. I thought the commentary on mix was really interesting. I hadn't heard that before. Sort of the lower end outperforming the high-end or maybe it's within segments that you're seeing a negative mix. What do you thinks driving that? Do you think it goes back to the whole oil patch situation? Or is there something else that's driving that negative mix?

Chris Metz

Yes James, our thought on this is that and we've heard it from time to time again from dealers and from people that if I can't afford to buy the more expensive product, I'm still going to buy something. So we find folks are stepping down into something that fits their current financial situation better. And we don't expect this to be a long-term trend but we certainly expect it to affect us over the short to medium term here. And then we are reacting to it.

James Hardiman

That's really helpful. Thanks guys.

Chris Metz

Thank you, James.

Operator

We will go next to Rommel Dionisio with Wunderlich Securities.

Rommel Dionisio

Thanks and good morning. Just want to, regards to pricing and promotions and your strategy going forward for some of these new products. You've obviously made some efforts of these last several quarters to lower inventories and using pricing discount and promotions to do that. As you are launching a big slate of new products, could you talk about your confidence level and your ability to command list prices for new products? Or maybe is an aggressive pricing strategy, even at the list price level something you think about going forward for some of these new product launches?

Chris Metz

Rommel, we being pretty conservative. We wish we were in an environment with our new products that we can take more price. But we're factoring in the fact that we are going to have to be competitive where we don't have hero products. Now where we have hero products and we know that we've got a difference in the marketplace, we're going to ask for a premium. But for the most part, you see our pricing in wave one products for 2017 is an indication of this, where we are going to have to be really competitive in the marketplace. We can't be out of market on pricing. So we know it's been competitive and that's the way we are planning it.

Rommel Dionisio

Okay. Fair enough. Look forward to seeing the new products. Thanks.

Chris Metz

Thanks Rommel.

Operator

We will go next to Seth Woolf with the Northcoast Research.

Seth Woolf

Thanks guys. A couple questions here, really housekeeping. First, can you tell me what the ASPs were during the quarter? And then also as a point of clarification, Chris I think when you were talking about the retail sales for the dirt business you said low to mid double digits, did you mean mid-teens? If you could clarify that, ASPs it would be great.

Chris Metz

So low double-digit, low teens for ATVs is what I was referring to.

Seth Woolf

That's what I figured.

Chris Metz

What was the first part of your question? I'm sorry Seth, we didn't hear the first part.

Seth Woolf

Just hoping you can share the ASP change with us on the dirt side.

Chris Metz

When you say ASP you mean average sales price?

Seth Woolf

Yes. What was the -- how did that affect the overall dirt business.

Chris Eperjesy

The pricing again, we haven't seen big changes in pricing as much as we've just seen a mix shift down to lower price point products. And you see that in both ROVs and ATVs.

Seth Woolf

Okay, so no qualification there. Just thinking about the guidance and not to beat a dead horse, but totally understand what's going on with the snowmobile timing shift. But then we look at the dirt business and then the PG&A, so the top line -- the headline guide stays the same but you lower both expectations for the parts and dirt business from low -- from flat to mid-single digits, from flat to low double digits. Why don't we see a change with the headline and top line guide?

Chris Metz

Again, it's more of a trend that we're seeing right now. We still feel like growing those flat to low, versus flat to mid keeps us in the guidance range that we gave you previously. And some of that again, is us just shifting within those categories. But Seth, our guidance, we still -- again it's a tough environment but we still feel that we can hit the top line sales number that we've guided to. It will look a little different but we feel like we can get there.

Seth Woolf

Okay. Last question for me on the guidance. Is there anything besides the fact that it's going to be wholesale shipments of these snowmobiles which you already have planned and there's going to be some channel fill of new products? Is there anything else that you can tell us to kind of reinforce confidence in the back half guidance?

And then I guess, secondarily, when you look at the new hero products that are coming really late in the year. Can you give us any indication in terms of if they skewed to the lower price point vehicles that are resonating so well in the marketplace today?

Chris Metz

Yes, so in terms of the back half guidance, it's a little bit similar to last fourth quarter of this past fiscal year where we shipped quite a bit more than we had the previous year. It was the contributions of new products. You are going to see more of that. And I think it's an indication of us really trying to ramp up our new product development efforts. Typically we would -- I think historically introduce those more in the fall season in conjunction with our new model year launch. But in our efforts to accelerate as quickly as we possibly can we see more new products ship in the fourth quarter than we have in previous years. So you saw big growth this past fourth quarter year-over-year. I think you will see more that this fourth quarter. That’s really what’s driving the second half growth. And why you should find solace in the fact that our sales numbers are going to be up in the second half.

Seth Woolf

Okay. At what point would we have to reevaluate how we feel or how willing the dealers would be to take on more inventory if the retail environment continues to be as choppy as it has been?

Chris Metz

That’s a tough question to answer Seth. Because again, if the retail environment deteriorates further or if there’s no snow in the and La Nina doesn’t come obviously there are factors beyond our control that could affect retails. But the conversations we’ve had with our retailers, our dealers when we launch a new product year we sit down one-on-one and have a commitment discussion. Because all of their programs, rebates, their co-op, everything that we developed in partnership with them is tied to an annual forecast. And the forecast that we are being given and that we discussed with our dealers is that we can come in with the guidance of wholesale shipments that we’ve projected.

Seth Woolf

Perfect. Okay. Great. And on the hero question with the big hero products coming, based on what we saw the investor day. Those seem to look like they are going to be at the higher end of the pricing Spectrum. Is that fair? Or do have something that’s going to be in the sweet spot of the demand environment right now?

Chris Metz

From a hero product standpoint, we will be introducing a lot of new product over the course of the next 12 to 18 months. The first hero product you see will be a product that will be more at the higher end. But it won’t be at the highest end. The turbo pricing you are seeing, that kind of stuff, that’s not going to be the pricing. We are going to have pricing that’s going to hit a base, medium and a premium within that product launch. So we will be able to, I think, pick off some of that mid-price point type of buyer.

Seth Woolf

Excellent. Thank you guys. Good luck.

Chris Metz

Thanks Seth.

Operator

We’ll go next to Mark Smith with Feltl and Company.

Mark Smith

Hi. Good morning, guys. First off just a modeling question. Can you give us any insight into selling and marketing expense during the year? Do you expect to get any leverage on that line?

Chris Metz

No. I mean as we talked about Mark, our foreign currency hedge gains and losses flow through there and I think we’ve already said we’re going to see a year-over-year effect there of $12 million to $14 million. If you strip that out, we’ve also talked that we are investing in R&D and new product development and creating that brand marketing powerhouse. There could be some incremental spend.

Chris Eperjesy

I think there will be a different mix of it, Mark. What we’re forecasting right now is if you pull out the effects year-over-year of foreign currency in our expense line, you are going to see SG&A up slightly and consistent with what we said in the past. Although we are mixing it, we are saving costs in places on the SG&A line we are really taking a close look at how we do that. But we are trying to put more money into our key strategic initiatives like new product development and the marketing spend areas.

Mark Smith

And then just looking at, it seems like a lot of the guidance, the sales guidance based on snow bike sales?

Chris Metz

Small, Mark, very small. We will launch the snow bike this year and we have not baked in much in the way of contributions. And it's really going to affect our model year '18 in a big, big way. You will see major contributions. We are going to be out this year and really seeding the marketplace, really locking down with that interest and ultimately demand can be and where it's going to be and all of that kind of stuff. It's relatively new category. And we didn't want to overshoot the demand. I think it's going to be a sensational product. And frankly, we could produce a lot more we probably would this year but it's going to be a limited launch with a full on assault as we go into model year '18.

Mark Smith

As we look at what we assume is a big hero product that you're talking about and a new wildcat product. It certainly feels like maybe that comes during the snow show. I guess the question is, is if you're doing a product launch that late in the year, how much can you really wholesale in a 30 day time period to hit your numbers late in the year?

Chris Metz

The answer is we're not going to wholesale nearly as much as if we introduced in the fall timeframe. There's no question but we built that into are forecast. There's really two big riding seasons there's fall and there's spring. Fall is clearly bigger than spring and if we had our way, we would introduce it either during the fall timeframe. But all that is factored into it. I think as you look at the original question how to model this is you shouldn't count on significant contributions. But certainly it's what's driving our year, but as you move into 2018 quite a bit more. And that's why when we lay out the long-term path you start to shore up some of these timing things with these new product launches and they really start to contribute in model years 2018 and beyond.

Mark Smith

You talked a bit about that value entry point for side-by-side, primarily the Prowler 500. Can you speak to competitively -- we just came out of a dealer show for one of your competitors and they came out with a similar 500 product that is it looks like priced slightly below Prowler 500. Can you speak to the competitive environment and your ability to push some of the product that you just launched here recently?

Chris Metz

This is part of our strategic pillar of developing new products is continuing to go back and drive value engineering and continuing to take cost out where we can. When we will launch new products platforms and the Crew and the Prowler 500 are perfect examples. Well we are not going to standstill. We are going to continue to drive costs out where we can to remain competitive.

Mark Smith

Last question for me. Can you give us a rough -- quantify a number of dealers today as we look at, adding '17 this quarter a goal of 75 for the year? Kind of how that impacts of maybe the total sales as you wholesale to the new dealers and the total delta in the dealer movement?

Chris Metz

Mark, as you can imagine its additive to everything that we're doing. We haven't put out a public statement in terms of how much each of those dealers are going to represent. And that's something as we continue to work with these dealers that we were will develop a longer-range forecast. I can tell you this though, that we are tracking a key metric which is how much more productive our new dealers than older dealers. And our newer dealers are about 1.9 times more productive than the dealers that we parted ways with. So we said that part of our dealers expansion efforts are to right size that base. The new dealers we're bringing on are more productive than our typical dealer.

Mark Smith

If you can't quantify a number of dealers, do you expect to see a net gain in dealers in the number of dealers this year?

Chris Metz

We have not communicated that and given the environment that we're in right now, I wouldn't want to quantify that further at this point.

Chris Metz

Thanks Mark.

Operator

[Operator Instructions] We will go next to Gerrick Johnson with BMO Capital Markets.

Gerrick Johnson

Good morning. You mentioned dealer inventories down 9% in the first quarter. Was that year-over-year or sequential?

Chris Metz

Sequential.

Gerrick Johnson

Sequential. Do you know what it was year over year?

Chris Metz

No. Gerrick we don't have that number. But we know sequentially, I would have to, I don't know with that number is, to be honest. Sequentially it was down 9% and year-over-year I would have to guess that it was relatively flat.

Gerrick Johnson

Okay. Sequential doesn't really help us. It's supposed to be down sequentially you are getting towards the end of the model year. So year-over-year and if you don't know what it is what would be optimal year-over-year the dealer inventory optimal down 25%? Down 50%? 15%? Do you have a ball park range of what the optimal level of inventory at the dealer level would be?

Chris Eperjesy

Gerrick, we can follow back up with you on that. It's something that we clearly do look at. And it is something that we are monitoring. But given the timing of some of the new product launches that we've had, it certainly would not be down in that range of down significant as you may have, as you just pointed out. But sequentially for us is a very, very important measurement. And so, but we can get back to you and confirm what it is year-over-year.

Gerrick Johnson

Okay. If I heard you right, did you say you're shifting or you shifted a wave of new offer product from the second quarter into the first?

Chris Metz

No. No we didn't. We announced wave one and the introduction of model year 2017 products into June. So that was announced in June which is earlier than normal. But the actual shipment of the product will still occur in quarters two, three and four.

Gerrick Johnson

Okay. Great. Thanks for the clarification.

Operator

With no further questions I would like to turn it back to our presenters for any additional or closing remarks.

Chris Metz

Thank you for everyone's time today and we appreciate the questions and looking ahead we know that we face ongoing challenges in fiscal 2017 with a soft and increasingly competitive power sports marketplace and continued foreign currency headwinds. Again we also seek tremendous growth opportunities and we're highly encouraged by the progress we're making. We will continue to pursue our long-term strategies to improve and expand our dealer network, develop revenue and margin expansion from new products, secure partnerships that extend our distribution channels and product mix and create a brand marketing powerhouse.

As we invest to support those strategic initiative we remain intensely focused on controlling costs. We're confident in our plans to turn the business around and we remain excited about Arctic Cat's long-term future. We look forward to updating you in October on our fiscal 2017 second quarter results and again we thank you for your time today.

Operator

That concludes today's conference. The replay will be available starting today July 29th at 1 PM central and running through August 5th. Thank you for your participation. You may now disconnect.

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