Arctic Cat F3Q08 (Qtr End 12/31/07) Earnings Call Transcript

Jan.25.08 | About: Arctic Cat (ACAT)

Arctic Cat, Inc. (NASDAQ:ACAT)

F3Q08 Earnings Call 

January 23, 2008 10:30 am ET

Executives

Christopher A. Twomey – Chairman of the Board, President & Chief Executive Officer

Timothy C. Delmore – Chief Financial Officer & Corporate Secretary

Shawn Brumbaugh – Investor Relations

Analysts

Paul Burton – RBC Capital Markets

Rommel Dionisio – Wedbush Morgan Securities

Joseph Hovorka – Raymond James & Associates

Mark Atlschwager – Robert W. Baird

Assia Georgeiva – Infinity Research

Operator

Ladies and gentleman thank you for standing by. Welcome to Arctic Cat third quarter 2008 conference call. During today’s presentation all parties will be in listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Wednesday, January 23, 2008. I would now like to turn the conference over to Shawn Brumbaugh at Padilla Speer Beardsley. Please go ahead.

Shawn Brumbaugh

Thank you for joining us this morning. I’m Shawn Brumbraugh with Padilla Speer Beardsley. Leading our call today will be Chris Twomey, Chairman and Chief Executive Office of Arctic Cat. Also with us this morning is Tim Delmore, Arctic Cat’s Chief Financial Officer.

Before the market opened this morning Arctic Cat released results for its fiscal 2008 third quarter ended December 31st, 2007. Chris will review the results of the quarter and then Tim will take you through the financials. After that we’ll have time for any questions. Some of the comments made today will be forward-looking 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 new release and in the company’s filings with the Securities and Exchange Commission including the company’s report on Form 10K. Now I’ll turn the call over to Arctic Cat’s CEO, Chris Twomey.

Christopher A. Twomey

Thanks everyone for joining us this morning. As I said on our January 4th call we are obviously disappointed with our third quarter and full year results. During the quarter we were unsuccessful in completing our FO8 ATV dealer orders in a declining industry wide ATV retail sales environment. At the same time we became concerned that the year long decline in ATV sales for the industry and Arctic Cat was worsening so we made the decision to cut our Q4 sales and production plan in order to keep our dealer inventories more in line with retail demand. For fiscal 2008 our ATV wholesale plan was back loaded to Q4 based on the availability of our new product. As a result even with these sales and production cuts we will still sell more ATV units in Q4 this year than last year. However, we expect our dealer inventories to be lower at year end this year compared to last year. We believe the availability of new models in the fourth quarter could spur our retail sales somewhat since these models are in segments where industry retail sales are increasing and where we have low or no inventories. Retail sales of our Prowler UTV’s continue to be strong and outpace last year’s sales. Both dealers and consumers are excited about our new 700 EFI Prowler XTX which we introduced in the third quarter. This exciting new model has more power, improved fuel efficiency resulting from the electronic fuel injecting system and better ergonomics including ingress and egress. This new model is best in class in almost every measurable criteria and should help our Prowler retail sales remain strong during the fourth quarter.

After a slow start through November industry wide retail sales of snowmobiles increased strongly in December as a result of the good snowfall we saw in the Midwest and East regions. With our planned 30% production cut in fiscal 08 and our strong December sales dealer inventories are well below last year’s levels and we expect they will continue to decline throughout the remainder of the fiscal year. As evidenced by increased snowmobiles parts, garments and accessory sales which we saw in the quarter. Snowmobilers are riding and this is the best predictor of increased future sales. Our model year 09 snowmobile dealer show begins in about a month and were excited to unveil our 09 model lineup which will continue the legacy of innovation in performance, ride, handling and features. With decreased dealer inventories and exciting new products we expect an increase in snowmobile sales for next year.

Sales of parts, garments and accessories for the quarter were down slightly. However, sales of snowmobile part, garments and accessories increased during the quarter as a result of the December snowfalls which offset a decline in ATV parts, garments and accessories which seemed to follow the decline in ATV retail sales. For the full year sales of parts, garments and accessories are up again driven by strong snowmobile parts, garments and accessories sales. At this time I will turn the call over to Tim to review the numbers and following that I will be happy to answer any questions. Tim.

Timothy C. Delmore

Good morning. I’d also like to welcome you to the conference call. Today I will focus on reviewing our third quarter financial performance as well as our outlook for the fourth quarter and full year. Net sales for the third quarter were $159.6 million compared to $228.1 million for the same quarter last year. Snowmobile sales were $60 million versus $106.4 million. The decrease was due to the previously announced reduction in 08 snowmobile production. ATV sales were $70.1 million compared to $91.8 million. This decrease was due to the quarterly shift in reduction in ATV shipments in order to better align dealer inventory with consumer demand. Parts, garments and accessory sales were essentially flat at $29.5 million versus $29.9 million for the same quarter last year. As Chris mentioned snow related PG&A sales increases as a result of the early season snow falls offsetting decreased ATV PG&A sales. Gross profits for the quarter were $18.2 million versus a $39.8 million. The gross profit percentage for the quarter was 11.4% versus 17.4% for the third quarter last year. A decrease in percentage was due to additional Canadian programs to help compensate for the stronger Canadian dollar as well as less rich snowmobile sales mix. Selling general administrative expenses were $32.7 million versus $28.9 million of the same quarter last year and increased due to Canadian hedge cost. Our interest income was $93,000 versus $289,000 for the same quarter a year ago and interest expense was $448,000 versus $0 for the same quarter. The net loss for the quarter was $10.5 million versus net income of $8.2 million and diluted EPS was $0.58 lost per share versus $0.48 earnings per share for the same period a year ago.

Next, I’d like to review Arctic Cat’s financial performance for the first nine months of 2008. Year-to-date net sales were $452.7 million versus $609.9 million. The year-to-date net loss was $3.7 million versus earnings of $23.6 million while the diluted loss per share was $0.20 loss versus earnings of $1.22. On a year-to-date basis ATV sales were $207.4 million versus $285.8 million. Snowmobile sales were $268.9 million versus $248.8 million. Parts, garments and accessories sales increased 1% to $76.4 million from $75.3 million for the same period last year primarily driven by the snow related PG&A. Our year-to-date gross profits were $85.2 million versus $115.7 million. Our year-to-date gross profit percentage was 18.8% nearly flat with last years 19%. Year-to-date selling and general administrative expenses were $89.6 million versus $81.5 million the increase there again was due to Canadian Hedge cost.

Looking at our balance sheet we ended the year with $1.1 million of cash, $10.8 million of short term borrowings. Our inventory increased to $162 million from $131million primarily due to ATV finished unit inventory available for shipment in Q4. Our year-to-date capital expenditures total $11.8 million depreciation was $24.6 million. We have repurchased 166,000 shares during the third quarter and on January 4, 2008 we announced a new share repurchase program of up to $10 million of common stock. Thank you for your attention and now operator we would now like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Rommel Dionisio with Wedbush Morgan Securities. Please go ahead.

Rommel Dionisio – Wedbush Morgan Securities

Good morning. I know you plan has always been to expand your dealer network especially in the South but given the challenging economic situation is that sort of been an issue or are you sort of on plan there in terms of adding additional dealers or has that been slowed down a little bit?

Christopher A. Twomey

You know as a result of the decline in retail sales industry wide, adding new dealers has defiantly slowed not to a halt, but it has defiantly slowed. But, having said that we have certain regions where we’ve seen as high as a 20% increase in dealers so there are certain districts where we’re underrepresented and we’re aggressively pursuing that. But, overall if you look at the big picture in the south you’d say with the industry retail decline in the sough and our mirroring the industry it has been more difficult to set up new dealers.

Rommel Dionisio – Wedbush Morgan Securities

Okay and just a follow up for Tim. Tim I think you mentioned in your prepared comments what the share repurchase in the quarter was. Is it possible to update us on whether you’ve been active since the January 4th increase on authorization?

Timothy C. Delmore

To this point we have not been active in that repurchase.

Operator

Our next question comes from the line of Paul Burton with RBC Capital Markets. Please go ahead.

Paul Burton – RBC Capital Markets

I was just wondering if you guys could give us a little information on ATV and sled inventories where you think on an order of magnitude where they are at the dealer level right now versus last year? And, maybe where you hope for them to be at the end of the year?

Christopher A. Twomey

Sure. Both ATV and snow inventories are down significantly at the end of December this year over last year. Of course that was our plan on snow when we took our production down 30%. So, I think that I would say that snow is right where we expected it to be on the year and we expect that to continue to decline as we go through the remaining three months of this fiscal year and really the remaining three months of the snow season. So, I think we’re going to start our, we’ll have a beginning inventory and ending inventory for the year maybe down as much as 30 to 50% over last year. It’s kind of a big range but you know a lot can happen in the last three months. I think that’s going exactly as we expected. Our ATV inventory at the end of December at the dealer level is down over last year and even with the increased units that we will ship in Q4 we expect by the end of the fiscal year that our dealer inventory will be less than it was last year at the same time.

Paul Burton – RBC Capital Markets

If I could ask another question, just sort of on the ATV mix that’s going in to Q4 wondering, I know you guys don’t like to give exact numbers but, sort of how that flushes out with percent of core ATVs versus the side-by-sides? And, maybe any thoughts of how you think that’s going be going forward maybe in 09? Not given guidance but how the industry is sort of flushing out, what your thoughts are on the growth.

Christopher A. Twomey

From the standpoint of Q4 08 shipment, I guess the comment that I would have would be the majority of those units will be core ATVs. However, the majority of the core ATVs will be new models that we don’t have at all in our inventory or ones that have very light inventory. So, I’m encouraged. There are a couple of segments in that ATV market that – we segment it as many different ways that we can to understand what’s going on in that market. There is a couple of different segments, one we’ve already talked about, the engine displacements over 700cc, that’s been a growing segment. We haven’t played in that segment and we won’t until the fourth quarter. So, that’s an example of a core ATV that we’re shipping into our dealers where we have no inventory. There are a couple of others that really put us in the same position where we have no inventory or low inventory so we’re excited about getting that new inventory into the dealers because we think that will improve our retail sales of current year models and also our overall retail sales.

In terms of the side-by-side units, the Prowler UTV which of course is in our ATV number, I think that our plan is to be up at bit over last year in Q4. I see that market, I believe that market at retail continues to increase although we have no good statistics on that. Our ATV statistics and snowmobile statistics are very reliable but, there’s no real reliable retail sales statistics on utility vehicles. So, our sense is that it’s up and our sense is that our sales in that category – we know that our retail sales in that category have increased more than 50% for the year and we expect that segment to grow again in F09.

Paul Burton – RBC Capital Markets

Just one more, just your thoughts on the strengthening of the Yen and your thoughts on maybe cost of goods going forward?

Christopher A. Twomey

I guess when I see the Yen strengthening I say, “We made an excellent decision in building our St. Cloud engine plant.” Because, those would be all ATV engines that we would have had to purchase from Japan and we would have been subject to the strengthening of the Yen. For 09, all of the engines that we put into our ATVs will be produced in the US and will not be subject to the strengthening of the Yen. On the snowmobile side of the business where we are still buying our engines from Suzuki, we have a Yen cost sharing which overtime has always tended to level out a bit. So, the strengthening of the Yen will have some impact on snow only but, a lesser impact since we have a cost sharing mechanism with Suzuki. ATVs engines we’ll be building in the US.

Operator

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

Joseph Hovorka – Raymond James & Associates

A couple of questions. One, going back to the SG&A increase, you talked about the Canadian dollar driving that. Was that the only thing? Is that all of the increase? Or, maybe you could quantify how much that was and if anything else is pushing that number up?

Timothy C. Delmore

That was the majority of the increase.

Joseph Hovorka – Raymond James & Associates

How does that look going into 2008? Do you have hedges in place for 08? If you do, where are they at? Do we expect another negative impact on margins in 08?

Timothy C. Delmore

Calendar 08 and fiscal 09 we don’t have any hedges in place and we’re just starting to look at our pricing strategies for Canada and our hedging strategies.

Christopher A. Twomey

As you can imagine Joe, there’s going to be a whole issue with everybody who is now facing a par dollar or maybe even a continued weakening dollar, strengthening Canadian dollar. But, that will really impact on our F09 pricing.

Joseph Hovorka – Raymond James & Associates

Sure. Then, the new products that you’re talking about that you’ll be seeing shipped here in the March quarter, overall are their margins higher or lower than what your corporate margins are?

Timothy C. Delmore

About the same.

Joseph Hovorka – Raymond James & Associates

So, not a significant mix shift from a margin standpoint for fiscal year 09?

Timothy C. Delmore

No.

Joseph Hovorka – Raymond James & Associates

Your cap ex through nine months and what you expect to spend for the full year?

Timothy C. Delmore

Full year cap ex will be around $24 million.

Joseph Hovorka – Raymond James & Associates

Okay. I think you said you had $10.8 million short term debt at the end of the quarter?

Timothy C. Delmore

Right.

Joseph Hovorka – Raymond James & Associates

Will you expect to be debt free again at the end of the year? Or, will you still be carrying some debt?

Timothy C. Delmore

We expect to be debt free at the end of the fiscal year.

Joseph Hovorka – Raymond James & Associates

Your repurchase authorization that you have, would you borrow to repurchase stock? Or, is this all just from cash from operations?

Timothy C. Delmore

That would be cash from operations.

Joseph Hovorka – Raymond James & Associates

So, no plans to borrow?

Joseph Hovorka – Raymond James & Associates

It’s an option but, we don’t anticipate the need too.

Operator

(Operator Instructions) Our next question comes from the line of Mark Atlschwager with Robert W. Baird. Please go ahead.

Mark Atlschwager – Robert W. Baird

Having the right level of dual inventories is always a function of the retail environment so could you discuss your expectation for retail demand that’s embedded in the view that dealer inventories are okay? In other words, do you have a sense for the days of dealer inventory now versus last year?

Timothy C. Delmore

There are less days of dealer inventory this year than last year at the end of December. We’re projecting a retail sales environment for Q1 of 08 or our Q4 to be similar to our Q3 or the Q4 of 07. The last three months of 07, we expect to see that kind of overall inventory retail sales to be similar in our Q3 and our Q4. As I said, we think that our retail sales may spike in Q4 because we will have more new product in that quarter which we know dealers are anticipating and we know customers are anticipating. I think we could see an increase but overall we’re projecting the industry retail sales to look the same in our Q4 as it did in Q3.

Mark Atlschwager – Robert W. Baird

With the aggressive FED rate cuts both yesterday and the last few months, are you seeing a similar decline in the borrowing rates for ATVs? Or, has that affect been more muted?

Timothy C. Delmore

It tends to be more muted. We expect that we will see that as we move into 09. I think you’re speaking of customer retail?

Mark Atlschwager – Robert W. Baird

Correct.

Timothy C. Delmore

You’ll see that maybe in February and March. If our consumer financing people are on the line I want to say that we expect to see it in January but, my belief is that maybe we’ll see that in March and certainly we’ll see those impacts going forward in April, May and June of our F09. I think it is interesting to note because we have looked at that and we see relatively similar approval levels of our consumer, as we look at the consumer loans being made by the people that we finance with. We see relatively similar approval levels this year compared to last year which tells us that our customers, the customers who are coming in and buying aren’t a lower credit quality than they were a year ago which I find kind of interesting.

Mark Atlschwager – Robert W. Baird

On the last call you mentioned that the board is considering some strategic options. You obviously have a valuable dealer network, a strong design and manufacturing expertise, Suzuki is [inaudible] shareholder and you also have a partnership with [Piashio]. Would you care to comment on any strategic options?

Timothy C. Delmore

Obviously, we wouldn’t comment on strategic options. But, the board all the time considers the variety of strategic options. That’s a very important part of the board’s responsibility and we do that constantly looking at all the options.

Operator

Our next question comes from the line Assia Georgeiva with Infinite Research. Please go ahead.

Assia Georgeiva – Infinity Research

A couple of quick questions and I apologize if one of them as been answered but, with the move of your corporate headquarters to you expect to see any savings in the SG&A line? I assume there will be slightly less travel, anything else that we can see from there? And secondly, sourcing all of your ATV engines domestically I know has a big impact on quality and the competitiveness of your product. Is there any possibility there for gross margin improvement?

Christopher A. Twomey

The movement our certain of the executive management team from Sioux River Falls to Minneapolis also included in that plan a plan to add some additional new people like general managers. So, overall with additional rent and additional new general managers of which we planned to add three, we’ve added one and we’re in the process of the second one now. We will expect a slight increase – and then the rental space, we’ll expect an increase in SG&A. My challenge to these general managers is, “Look, whatever increase we see we expect you to find that in the businesses.” Because, we now have more people focusing on those businesses. So, while we expect an increase we expect to find that within the businesses to pay for whatever increases we have.

Relative to the margin on our ATV engines that we’re sourcing. If the end continues to strengthen and we’re not buying these engines from Suzuki, we have an opportunity to see an improvement over what we would have paid or in fact, what we paid last year. So, there will be some improvement on that. We continue to look at the engine area as an area for focus for strategic sourcing because we think there are some opportunities to lower our costs with our strategic sourcing initiatives. And, those are in place, those are working and those will improve the gross margins on the engines that we have. So, two things will affect the engines: our strategic sourcing initiatives that we’ve got in place and secondly, the fact that the Yen has strengthened and we would have been paying more for these engines than we will have to pay since we are making them ourselves.

Assia Georgeiva – Infinity Research

As part of the strategic review of the company have you looked at your dealer network and possibly trying to focus efforts on the most productive dealers and thereby reducing costs and time and focus spent on some of the other dealers?

Christopher A. Twomey

That’s certainly nothing that we’re doing more of now then we have done in the past. The productivity of the dealers and the strategic placement of those dealers have always been important and those are things that we’ve always looked and we’ll continue to look at. We’re not doing anything different there than we have in the past. As you can imagine, with the snowmobile environment where sales have been declining, it’s been tougher and tougher to improve the overall productivity of the dealers. But, it’s something that we continue to focus on and it’s a part of our everyday analysis of the business.

Operator

The next question comes from the line of Joe Hovorka with Raymond James. Please go ahead.

Joseph Hovorka – Raymond James & Associates

Just a longer term question and kind of maybe piggybacking on what Assia was just asking about margins. Your gross margins now have kind of been downward trend for the last seven years and I know that a big part of that is the switch from, or the greater mix of ATVs versus snowmobiles because they carry lower margins. But, do we continue to see that kind of trend of lower gross margins year-after-year? Or, are we getting to a point where you’ll start to see maybe those level out a little bit and maybe start to increase again? Where are we in that from a longer term perspective?

Timothy C. Delmore

Our plan is to make sure those level out and increase. As you can imagine the impact on gross margins this year when you take 30% of your snowmobile production out and you have all those fixed costs to amortize over that. So, I mean that is kind of an unusual year and also on the ATVs as well. That’s impacted it. We have plans to increase those margins. Engines are a good example of that but, we’re also working on strategic sourcing initiatives in other areas that we expect to improve those margins as well.

Joseph Hovorka – Raymond James & Associates

Did snowmobile profitability come closer to ATV profitability because of the 30% production cut? I guess what I’m trying to get to – I understand that the big production cut does have negative margin implications for the snowmobiles themselves. But, are ATV margins still lower than the 17 or 18% you’re going to post for the full year 08?

Timothy C. Delmore

Snowmobile and ATV margins are going to be similar – both of them will be about the same this year. Maybe slightly lower on snow because of the cut but, generally, about the same.

Joseph Hovorka – Raymond James & Associates

So that would make sense that we’re getting somewhere near a bottoming margin assuming flat or growing sales.

Timothy C. Delmore

Right.

Operator

I’m showing there’s no further questions in the queue. I turn it back over to Chris Twomey for closing remarks.

Christopher A. Twomey

Thank you very much again everyone for joining us. We look forward to updating you on Q4 and also the outlook for F09 in May of 09. Thanks again.

Operator

Thank you. Ladies and gentlemen this concludes the Arctic Cat 2008 conference call. If you’d like to listen to a replay of today’s call please dial 303-590-3000 or 800-405-2236, enter the passcode 11107324. Once again that is 303-590-3000 or 800-405-2236 enter the passcode 11107324. Thank you for your participation. You may now disconnect.

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

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

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