Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Shawn Brumbaugh – Padilla Speer Beardsley

Claude Jordan – President and Chief Executive Officer

Tim Delmore – Chief Financial Officer

Analysts

Scott Hamann – KeyBanc Capital Markets

Gerrick Johnson – BMO Capital Markets

Craig Kennison – Robert W. Baird

James Harden – Longbow Research

Beth Lilly – Gabelli Investors

Joe Hovorka – Raymond James

Arctic Cat Inc. (ACAT) F1Q 2013 Earnings Conference Call July 26, 2012 12:00 PM ET

Operator

Good morning, good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Arctic Cat Fiscal 2013 First Quarter Earnings 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, July 26, 2012.

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

Shawn Brumbaugh

Thank you and thank you for joining us this morning. I’m Shawn Brumbaugh with Padilla Speer Beardsley. Before the market opened this mooring, Arctic Cat released results for fiscal 2013 first quarter at June 30 2012. Participating in our call today to discuss the company’s performance and outlook will be President and Chief Executive Officer, Claude Jordan; and Chief Financial Officer, Tim Delmore. Following their remarks, we’ll have time for any questions.

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

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

Claude Jordan

Thanks, Shawn. Good morning everyone and thanks for joining us today. This morning I will cover the individual performance of our three businesses during the first quarter of fiscal 2013 as well as the progress we have made as we continue to focus on increasing sales, profitability and operational excellence.

Following my comments, Tim Delmore, our CFO will review our financial performance. Overall, we are pleased with our financial performance for the first quarter. As we mentioned in May, we set out the gross sales in all product categories, improved gross margins, increased earnings per share, generate additional cash flow, and strengthen our balance sheet. Through the first quarter, we are on track to accomplish each of these.

In regard to the individual businesses, snowmobile sales were up 4% for the quarter, primarily driven by increased mix in pricing. Additionally, snowmobile dealer inventory for North America was lowered by 10% at the end of the first quarter. With the lower dealer inventory, the increased orders we are seeing on the 23 ProCross and ProClimb snowmobile models. We launched last year in the five new models, we launched in March of this year. We are increasing our original guidance to a revised higher guidance is down 2% to up 1%. This increase will be seen in both the North American and the international markets.

On the retail side, we will not see any significant retails until September and October. However, we are once again targeting to gain market share this fiscal year and continue to expect the overall industry to grow in the low single-digits. On the ATV business, sales increased 93% for the quarter. Key drivers for the sales increase were increased North American sales of our Wildcat 1000 sports side-by-side, our HDX Heavy Duty Prowler and our core ATVs.

International sales were also higher due to increased Wildcat sales. Dealer inventory was again a key focus and we were successful in reducing our North American dealer inventory in 18 of ATVs and Prowlers by 16%, excluding the Wildcat. Including the Wildcat, overall dealer inventory was lower by 9%. As we move forward, we will continue to focus on matching wholesale sales with retail sales. We do not expect any further significant decreases in overall dealer inventory.

For the quarter, North American ATV industry retail sales grew by 5.5%, which was the second straight quarter of growth for the industry. Although, we were down versus our prior year quarter, this was primarily due to the strong quarter last year. Our North American ROV retail sales experienced strong growth and sales increased 84%, driven by both the Wildcat and Prowler HDX heavy duty utility vehicles.

Wildcat retail sales continue to be strong and match our expectations. In the latest issue of their tracks, one of the leading power sports magazine the Wildcat won the recent shootout as the top pure sport side-by-side vehicle in the industry. As we look forward, product development will continue to be an area of focus for our ATV business. We’ve launched our model year 2013 models and we’ll begin shipping them next month. In total we will launch five new core ATVs and one Wildcat. The new Wildcat will be Wildcat limited, which will provide our customers a Wildcat with upgraded features consistent of multi-colored seats, upgrade paint, expanded decal package, inflected accessories.

With the lower dealer inventory and the increased orders, we are seeing for our ATV business, we are increasing our original guidance to revised higher guidance of 36% to 41%. In addition to both of our ATV and snowmobile businesses being up, our parts garment and accessory business also showed a sales increase of 3% for the quarter. Increased sales were driven by accessories with the largest driver being Wildcat accessories.

In regard to operational performance, we stated back in May that our focus would be on improving gross margin, controlling our operating expenses and strengthening of our balance sheet. In the area of gross margin, our goal was to increase gross margins by 20 to 60 basis points. During the first quarter, we’ve seen improvements in gross margin driven by higher volume, product cost reduction efforts and higher selling prices on select models. These actions have resulted in our gross margin improving by 114 basis points during the quarter. Gross margins improvement will continue to be a major focus area and we continue to expect gross margins to improve by 20 to 60 basis points for the year.

In regard to operating expenses, we stated in May our goal was to hold operating expenses flat as a percent of sales. With this in mind, we’ve continued to focus throughout the business on all aspects of expense control. At the same time, we’ve continued to invest in product development, which has resulted in launching various new models for both the snowmobile and ATV business. During the first quarter, we were successful in decreasing operating expenses as a percent of sales by 650 basis points. Based on our plan for the remainder of the year, we now believe that we will be successful in holding our operating expenses flat to down slightly as a percent of sales.

Final area of focus has been working to strengthen our balance sheet. During the first quarter, our year-over-year inventory increased to support our sales growth and to allow the business to start snowmobile production earlier than last year. Over 70% of the increase in inventory was tied to the earlier start to producing snowmobiles. The shift in our snowmobile production will benefit our dealers and they will now have snowmobiles prior to December, which is the largest retail month for snowmobiles.

As we look forward, we remain focused on having the right amount of inventory on hand to support growth needs of the business. In regard to cash, we ended the quarter with $17 million of cash in short-term investments and no long-term debt. This amount is down from the prior year quarter by $82 million. However, the decrease was primarily due to the $79 million we spent to purchase Arctic Cat’s share from Suzuki this past December. Going forward, we will continue to focus on our cash position and expect to generate positive cash flow this fiscal year.

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

Tim Delmore

Thanks, Claude. Hello, everyone. I would also like to welcome you to the conference call. Today, I’ll review highlights of our first quarter results and our improved outlook for full year fiscal 2013. Net sales for the first quarter increased 49% to $111.3 million versus $74.9 million for the same quarter last year. ATV sales increased 93% to $73 million from $37.9 million, driven chiefly by our Wildcat sales. In addition Prowler side-by-side vehicles and core ATVs contributed to the strong increase in sales of our ATV business.

Snowmobile sales increased 4% to $18 million, versus $17.4 million and parts, garments and accessory sales increased 3% to $20.4 million from $19.7 million, primarily due to increased Wildcat accessory shipments. Gross profits for the quarter increased 57% to $22.5 million from $14.3 million. The gross profit percentage improved to 20.2%, versus 19.1% last year. The improvement was due primarily due to higher volumes.

Currencies including the euro did not significantly affect this quarter. The vast majority of our sales outside of North America are made to distributors and denominated in U.S. dollars. So we believe we have relatively small exposure to the euro compared to our competitors.

Regarding the Canadian dollar, we sell to our Canadian dealers and Canadian dollars and we have had the majority of this exposure. Selling, general, and administrative expenses increased 8.4% to $19.4 million versus $17.9 million primarily due to increases in research and development expenses for both ATVs, ROVs and snowmobiles and higher selling and marketing expenses related to increased sales levels. Operating expenses as a percent of sales declined to 17.4% compared to 23.9% in the prior year quarter due to the higher sales levels.

Our interest income was 13,000 for the quarter versus 25,000 in the same quarter last year and interest expense was 20,000 versus 2,000. We are pleased to report our net earnings for the first quarter improved to $2 million versus a loss of $2.3 million last year and diluted earnings per share improved to $0.14, versus a loss of $0.13 for last year’s Q1. Looking at our balance sheet as of June 30th, we ended the quarter with over $17.4 million of cash, down from the $99 million for the same quarter last year.

As a reminder, Claude mentioned, we used over $79 million of our cash in December of last year to repurchase Suzuki’s Arctic Cat stock. Looking at accounts receivable, they were up $7.3 million to $39.9 million due to increased international shipments, which updating terms. We had short-term borrowings of $4.2 million and as of June 30th, we had no long-term debt. Inventory increased to $141 million from $87 million chiefly driven by snowmobile – our snowmobile production schedule and related inventory. Our year-to-date capital expenditures totaled $2.1 million and depreciation and amortization was $3.2 million.

Regarding our updated outlook for full-year fiscal 2013, we now anticipate sales for this fiscal year ended March 31st to be in the range of $662 million to $682 million and earnings per share in the range of $2.55 to $2.65 per diluted share. This is up from previous guidance of sales of $631 million to $650 million and earnings per share of $2.40 to $2.50.

We now expect ATV and ROV sales to increase 36% to 41% for the full year driven by – primarily by shipments of our new Wildcat sport side-by-side as well as increased shipments of our Prowler and core ATVs, we expect snowmobile sales to be down 2%, up 1%, and PG&A sales to be up 1% to 3%. Our 2013 outlook includes the following assumptions, our gross margins to increase 20 to 60 basis points, operating expenses to be flat to slightly down as a percent of sales, our tax rate to be 35.5%, and our weighted average diluted share count to be 14 million shares. Fiscal 2013 capital expenditures will total approximately $19 million and depreciation will be approximately $13 million.

Thank you for your attention and now, operator, we’d 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) And our first question comes from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

Scott Hamann – KeyBanc Capital Markets

Hey, good afternoon, guys, just a couple questions on the Wildcat. Do you feel like you have your initial allocation out there to the dealers and now we are looking at the balance of the year kind of being in line with the retail trends that you are seeing?

Claude Jordan

I think, Scott, we – go back to Q4. We certainly started to ship in larger quantities our initial Wildcat in Q1 this quarter here. We shipped some additional ones to meet demand, so now we are just based on demand, so as we sell retail of 100 units, we are going ahead and shipping the 100 units.

Scott Hamann – KeyBanc Capital Markets

Okay. And then with respect to the new skews that are coming out the limited addition what – what’s the price point in that limited addition going to be?

Tim Delmore

That’s going to be slightly higher. Obviously, we took some additional price this year will Base Wildcat as well as the Wildcat Limited. There is no doubt when you start to put some additional accessories on it you’re going to go ahead and generate some additional margin. So I don’t have the specific NSRP with me, but it’s, I’d stay close to a $1000 higher.

Scott Hamann – KeyBanc Capital Markets

Okay. And then you still have a few more skews that you plan to get out during fiscal year ‘13, is that correct?

Tim Delmore

You are talking about the overall business or are you talking about Wildcat?

Scott Hamann – KeyBanc Capital Markets

Wildcat.

Claude Jordan

Yeah, we’re continuing to work on additional products as we go forward and when products are ready, we go ahead and launch them. So because we have launched our model year 13, which will start shipping the first of August, I would not assume that that’s all we’re launch in terms of new models for this year.

Scott Hamann – KeyBanc Capital Markets

Okay. And then just in terms of PG&A business, yeah it seems like you have some carryover inventory coming out at the end of last year, is that what was kind of hitting the margins a little bit this quarter in that business and what’s the expectations as we kind of (indiscernible)?

Claude Jordan

Yeah, Scott, yeah we had margins in the PG&A business were a bit down compared to last year. There were some mix issues going there a less percentage of the higher margin some of the deal related PG&A and -- but our margins, we believe we’ll be catching up here as we go along each quarter throughout the year.

Scott Hamann – KeyBanc Capital Markets

And that’s just related to the expectation that the Wildcat stuff is a bigger kind of percentage of that there?

Claude Jordan

That answer is also some other mix issues in even the snow related to PG&A like plugs and belts and so forth so.

Scott Hamann – KeyBanc Capital Markets

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Gerrick Johnson – BMO Capital Markets

Hey good morning, guys. I was going to ask you a couple of questions about your core business excluding Wildcat. First of all, on the PG&A, I’m sure there are some incremental PG&A sales there for the support of Wildcat launch, what would that (indiscernible) business, have looked in terms of sales, if you exclude the incremental shipments for a Wildcat?

Claude Jordan

Hang on a second - let me just – give me a second.

Gerrick Johnson – BMO Capital Markets

And part B which is going to be a off-road vehicles or ATV sales, how they would have looked without the Wildcat?

Claude Jordan

Yeah, I’m going to go a little bit out on the limb here in terms of foreign currency accessory business, if we were to take the Wildcat out, I think you would have seen PG&A sales down slightly up, but we are just talking about the accessory stuff.

Tim Delmore

Yeah, flat to down slightly, yeah.

Claude Jordan

Yeah. And there is no doubt that we benefited from the Wildcat accessories there. On the long cap side, on the unit side, if we were to go ahead and eliminate the Wildcat, it still would have seen sales up by a fair amount in our Power ATX as well as our progress at a very good first quarter. As we were down significantly on ATV inventory, we’ve got to start shipping a little bit more there. So you still would have seen an increase even without Wildcat in the unit side.

Gerrick Johnson – BMO Capital Markets

Okay. And kind of related to what Scott was asking earlier. There were minimum order quantities for the Wildcat. So what would you say the percentage of dealers. How many of those dealers have worked through those initial quantities that they’ve ordered and taken and now in for the reorder phase?

Claude Jordan

Well, there is a minimum in terms of what they can order now. A lot of order significant amount more than that. I would read what Scott said, you were sort of past that initial wave of orders that we started shipping those back in the February. And as we sit here today in late July, now it’s a matter of when they’re retailing and we’re shipping out. And so the earlier ones that are - on the initial orders is, as we continue to sign up the Wildcat dealers which we’ve been doing. And a fairly steady flip. I feel those guys are putting their initial orders now.

Gerrick Johnson – BMO Capital Markets

Right. I was kind of wondering how many guys may have got their initial orders and they are sitting on a few units that they probably would order later on the season. So would we assume sort of a pull forward of demand from retailers for that?

Claude Jordan

I don’t think so. Like I said, you’re going back now to February when we started the initial shipment here, we spread the shipments around. That was a latter – when you look at the Wildcat sales are targeted towards that spring and towards the fall part of year in winter. And so, retails were very, very strong as we came out of the loss. We’ve been on this path before in terms of increasing inventory to dealer level. We monitor it. As we said, during my earlier portion ATV and Prowler dealer inventory is down and even when you factor in Wildcat, it’s still down pretty significantly.

Gerrick Johnson – BMO Capital Markets

Yeah. Okay, great. Thank you, guys.

Claude Jordan

Thank you.

Operator

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

Craig Kennison – Robert W. Baird

Good morning. Thanks for taking my question as well. Just regarding your dealer network, I’m sure they’re thrilled with the Wildcat. Have you been able to leverage that stronger product portfolio to move up a notch in existing dealers or even add new ones?

Claude Jordan

Yeah. We don’t really give out the number of dealers that we have. I can’t go ahead and say that we have added a significant number of dealers over the last 12 months, a lot of those, driven by the fact that they didn’t want to carry the Wildcat. And so the Wildcat although its been great in terms of units and great in terms of parts and accessories, also has been very beneficial to us in terms of adding additional dealers as well.

Craig Kennison – Robert W. Baird

And when they do are you also able to bring on board your full product portfolio, whether it’s snowmobiles in the north or ATVs etcetera?

Claude Jordan

That’s correct.

Craig Kennison – Robert W. Baird

That’s great. And then on financing, can you just comment on current credit availability and whether you’re seeing any changes as the economy turns a little bit?

Claude Jordan

That we really haven’t but also go so far as we say that we didn’t really experience any type of challenges even or in parts of the recession and so as we look at it today, we’re running about 60% approval rate and you know I think for the folks that want to get it through, Sheffield in the US, and I think for most far people has been successful taking it through there. On the other hand, I think a lot of times we offer a program where it’s a certain type of retail financing or an extended warranty and yeah, I think what, individuals or customers may do is to, didn’t take our extended warranty and then get the retail financing set up through the local credit unions.

Craig Kennison – Robert W. Baird

Great, thank you.

Operator

Thank you. Our next question comes from the line of James Harden with Longbow Research. Please go ahead.

James Harden – Longbow Research

Hi, thanks for taking my call here in and congratulates another great quarter. What is to tease out some of the comments that you made. I think you said, with the core ATVs that at retail they were down but from a wholesale perspective they are up. And I guess I’m wondering is that just a function of sort of getting inventory back to where they need to be good. I guess more generally in terms of inventories you talked about this idea of a wanting to get inventory to a point where you can do sort of a one-to-one wholesale retail. If you’re there now that would seem to suggest maybe a little bit of a wholesale benefit over the course of the next year. If so, how should I think about quantifying that and is that built into your guidance?

Claude Jordan

So first is building that into our guidance. It’s all over and take that table, real quick on the other side of equation. In terms of ATV or core ATV. Dealer inventory today we are about 15% lower than this time last year and as we’ve mentioned on prior calls, our goal is to starts transition into a wholesale-retail and county where if our dealers were to go in retail unit, we were going to chip him. Take a little the time to go ahead and get there where you’re leveling off, but if you’re going to look at last year’s Q1, you see that we were down over 20%. Now we’re down 15% so we are starting to level off.

In terms of the other questions you’d mentioned in terms of being down a little bit on core ATV, if you go back to Q1 of last year that election. That was actually the highest of market share we would add for achieved as a business that we were coping against the very strong number. So yeah we were happy with our core ATV retails, definitely happy in May and June when they came on very strong. But as I said before in terms of dealer inventory we’re still down 15%. And I still think we have some room to go ahead and continue to shift some new products that bring it up to and more level in terms of dealer inventory.

James Harden – Longbow Research

Okay. And then second question here. I was hoping you could just help me throughout maybe the model year 13 products that we’ve already heard about with the fiscal year '13 guidance, you made a comment that just as we’ve seen this limited edition Wildcat doesn’t mean that’s the only thing for model year 13 and that we’re going to see on that front. I guess my question is that the only thing that I should expect to really benefit fiscal 13 and if not I mean is that as an incremental wild cat built into guidance or is that more of a fiscal 2014 of that?

Claude Jordan

No I’ll go back to what we’ve said early on in terms of the guidance you were through first, the first quarter. We’ve increased our guidance as we sit here right now, the guidance that we’ve given is what we feel comfortable with for fiscal year 13. I also implied that we may have some additional models that would come out. And so that would be built into the guidance. And that’s something that could come out later this year but as that continue to say product development is the major focus of the business, we’re going to continue to roll products out. And we have not ready and available to roll out. So these are things that takes anywhere from 2 to 3 years to develop, where we have a pretty good handle. In terms of what’s going to happen over the next 4 or 5 years in terms of when products are going to hit marketplace. So easily when we get guidance, we’ve a pretty good handle on work and words going to going to impact this year.

James Harden – Longbow Research

Great. And then last question and I’m sure this is, one of your favorite I’m going to ask about weather but obviously last winter was record season and record low snowfall and in the summer has been record heat. I guess as we look forward to this upcoming snowmobile season. What if any assumption that you make about whether and have you done any sort of sensitivity from an industry perspective or from a company perspective to try to get comfortable that you can still meet your goals even if we have a winter kind of like last year?

Claude Jordan

Yes I’d say couple of things. One, obviously, we do monitor weather but I think we we’re all aware of the fact that weather is very unpredictable and so you try and build it in your guidance, you try and do some sensitivities in terms of what if scenarios if were to be like last year or to go ahead and you can be better than last year. Yeah, last year was a difficult part in various parts of North America. We did have good snow in Russia, certain parts of northern Europe. So that’s actually benefited us.

Going forward, we’ve taken the orders. We’ve increased our guidance now on snowmobile shipments because of the increasing orders we’re seeing from our dealers. And so it will be done shipping in November and most of our customers, when they talk about buying early, most of them buy with the anticipation of snow coming. So, a lot the sales will start taking place as early as September and October and then the biggest month of retails will be in December. And so we sort of, we plan for that. Our dealers certainly look at it as well. And as we sit here right now, the guidance that we’ve given is minus two to plus one seems to be a pretty good number in term of our snowmobile business.

James Harden – Longbow Research

That just to understand, that guidance is based on weather patterns, sort of similar to last year or more normalized weather patterns for the snow season?

Claude Jordan

I’d say it’s really irrelevant of that because those are orders that we’ve already taken from the dealer. Those are ones that we’re building and going to ship. That’s not retail, that’s wholesale.

James Harden – Longbow Research

Got it. Thanks guys.

Operator

And our next question comes from the line of Mark Smith with (indiscernible). Please go ahead.

Unidentified Analyst

Hi, guys. Just wanted to follow up on the snowmobile, you guys said that inventory was down 10% year-over-year. Is that correct?

Claude Jordan

That is correct, Mark.

Unidentified Analyst

Okay. And then I guess, I’m impressed with your snowmobile guidance of just being kind of down two to positive one. I guess looking at peers and looking at kind of the industry, is there something that you guys have maybe done to help boost that? You have people that may be weighted on all the new models last year and so they’ll pick up a new sled and your two or trying to get a point two for, maybe that strength that we call it, that in snow?

Claude Jordan

Well, I think last year, we launched 23 brand new snowmobiles. That was a little over 70% of our lineup. And you’re right. We do have some customers that say, hey, I’m not going to buy the first year. I’d like to go ahead and buy the second year. We had two snowmobiles in the year, last year, so very well received by the trade magazines and so forth. So I think as we go forward, I think there is still a lot of pent-up demand for the Arctic Cat Snowmobile.

Unidentified Analyst

Okay. And just to confirm, Claude, I think on your guidance on PG&A, did you say positive 1% to positive 3%?

Claude Jordan

That’s correct.

Unidentified Analyst

Okay. Perfect. And then looking at the inventories, started building snowmobiles a little earlier this year, if we look at your other kind of model, year 2013 products that are ready for August, was there a build up there as well, that may be bumpy inventory, a little bit higher this year compared to last year?

Tim Delmore

It was fairly sales being up 49% that would require you to go ahead and invest a little bit more in the business. In addition to the 70% -- 70% of the growth was tied to snowmobiles and about 19% was tied to PG&A. Actually we did a very good job on the ATV side of the business sale – I’m sorry inventory increase was probably about 4% for that. And so even though we shipped a lot of products there and a lot more to Wildcats we were able to manage that fairly well.

Unidentified Analyst

Okay. And then last question. Just for Tim, just tax rate should we be looking still that kind of a 35%-35.5%?

Tim Delmore

Yeah, 35.5% for fiscal ‘13.

Unidentified Analyst

Perfect, great. Thanks guys.

Claude Jordan

Thank you, Mark.

Operator

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

Beth Lilly – Gabelli Investors

Good afternoon Tm and Claude.

Claude Jordan

Hi, Beth, how are you doing?

Beth Lilly – Gabelli Investors

Good. How are you doing?

Claude Jordan

Excellent.

Beth Lilly – Gabelli Investors

So, Claude I wanted to follow-up on something that you said which is, in terms of – you’ve done a phenomenal job really cleaning up the channel with the inventory levels and everything. And you mentioned that you wanted to move the business on the HTV site because it’s less seasonal than some of to more of you get the order and then you ship it. And so can you talk about what it all takes for Arctic Cat to get to that type of system?

Claude Jordan

Yeah, I think in terms of system we are gaining they are basically today and one thing I would say is last October we introduced a new ordering system call RPM, which is basically allowing our dealers to order every month now. And so the way this is set up if you go back prior to October, your dealers would have ordered three times a year on ATV side of the business and would have ordered in June, August and December and then we went month-to-month order in process. And basically what we’re asking for the dealers is to we’re looking for three months commitment in terms of what they want by models and then three months of our forecast, so we always have a loft in 13 week window. And this has been well received by the dealers, the dealers are allowed to go ahead and change that mix during that forecast period. And once again within the three months if there are small things such as colors and things like that they want to change we work with them and see if we can do it. But there is no doubt that the month-to-month ordering has helped a great deal. And we saw that in Q1 as well because dealers needed to and we were able to go ahead and supply that more ATVs during the months of April and a little bit in May that we might not have ordered previously have done.

Beth Lilly – Gabelli Investors

So would you say that as you look at – so the systems called RPM? Okay and are you now happy with it or you think you can get to higher variances so that they got order month-to-month is phenomenal, but from the order, I mean is your goal to get it to a week-to-week. Can you just talk about where you want the system to get through?

Claude Jordan

Yeah, I think here we just launched this, the month-to-month back in October. We’re still working through that it’s been it management’s benefit so far. But we still have a little ways to go. Once we get the month-to-month. Now, we’ll look at it this year if there is a benefit we’ll talk to our dealers and see whether there is a benefit to them. But as we sit here right now, I do think that we’ve been very flexible and even when our dealer places an order as beginning of a month. If they want some slight changes, we can go head and work with them in terms of those changes. As long as when I found that shifting from 425 to 550 PRA or something.

Beth Lilly – Gabelli Investors

Okay. So there’s room for growth.

Claude Jordan

There is room for improvement on everything we do.

Beth Lilly – Gabelli Investors

Yes. Okay. And my other question is, since it is just been in the last several years, you’ve done a phenomenal job in serving the margins of this company and congratulations on that. As you look to where you think Arctic Cat can get over the next a few years. Is it unrealistic to model out that you can get to double-digit operating margins.

Claude Jordan

I do not think that it’s unrealistic to think that we – if you go back 3 or 4 years ago some of my initial guidance was that we needed to get the business to a 25% in terms of gross margin. And we needed to get our operating expenses at 15 or below. And so we’ve moved a little bit quicker. On the operating expenses line due to increased sales. And now we’re tracking this slightly below 15. At least our guidance as per this year. The gross margin here last year, we finished about 22.3. So we’ve got another 270 basis points to get it up to 25. But I do not think that’s on unrealistic. And it’s definitely one of the top goals in the back of our mind.

Beth Lilly – Gabelli Investors

So, how do you get your gross margin up? Is it about operating material cost down, I mean, how do you get that 270 basis point improvement?

Claude Jordan

It’s across the board. So when you talk about material cost. We just hired a new supply chain director. Obviously one of the biggest expenses we have in business with our supply chain and so when we can go ahead and say 10 to 50 basis points in that area is the significant improvement to the overall business. When we look at opportunities on the products side, wow can we go ahead and we will build the product and using less material, less hours. So, we are always looking at efficiencies Lean and 6 Sigma have come a much bigger focus for us.

Specifically within 6 Sigma, we have got numerous people now that have been trained throughout the business that we have confident looking for ways to go ahead and improve our gross margin as well. And then the final thing I would say there is no doubt that here with product development when we build new product. We look at the gross margin all the way through and how we can improve that gross margin with new products coming out. Once you launch a new product, it’s very difficult to go in and improve the gross margin is best to catch it in the design page and that’s a major area that we look at as we are launching the new products.

Beth Lilly – Gabelli Investors

Okay, alright. Thanks so much. That’s it for me.

Claude Jordan

I bet.

Operator

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

Joe Hovorka – Raymond James

Thanks guys, I may have missed this, but you comment on what your ATV retail was for the quarter?

Claude Jordan

We do not what we said was, we were down slightly below the marketplace and we were down below last year as we were competing against an extremely tough quarter last year.

Joe Hovorka – Raymond James

Down below, so your retail was down, not just down more than or less, not underperforming initiative but actually down.

Claude Jordan

Here it’s vitally down, yes.

Joe Hovorka – Raymond James

Okay, okay, but you are saying that’s comp driven as suppose to anything else.

Claude Jordan

Primarily comp driven, we had a very strong action in the quarter last year’s first quarter was the highest market share we had ever achieved.

Joe Hovorka – Raymond James

Okay. And how about side-by-side retail, could you comment on that?

Claude Jordan

Again, I said that our overall side-by-sides was up about 84% on retail.

Joe Hovorka – Raymond James

Thank you. I apologize for missing that. Another question on your number of dealers that are now currently selling, can you give the number of apps that you use, but what percent are selling a lot right now?

Claude Jordan

Joe. You next question only having deal as I have on the side-by-side.

Joe Hovorka – Raymond James

Actually, I won’t do that, I promise.

Claude Jordan

Okay. In that case I will face it over roughly well over a half of our private dealers are carrying side-by-side today are carrying Wildcat.

Joe Hovorka – Raymond James

And do you want that to be a hundred or where can it go or where do you want it to go, I mean, with the order minimums, I know there’s a lot of small dealers that right now may be not be carry in the Wildcat, but would like to carry the Wildcat (indiscernible)?

Claude Jordan

Yeah, that’s really quite down since we initially went out there and said we want to take out each dealer pricing order for Wildcat that is basically gone away and so, when I look at it today, there are certain dealers they carry our powers that would not carry a Wildcat because it just doesn’t fit their marketplace. And so, if you got trials in their narrow trails and you got the Wildcat at 50-inches wide, they may go hit and say the Wildcat get a 50-inch model maybe I’d be interested in carrying it, but with the model you have today it’s too big for the trails and that’s not probably fits my marketplace.

Joe Hovorka – Raymond James

So as we are seeing the products that are out there for Wildcat, you think your penetration of dealers is probably where it should be and then if and when you introduce a 50-inch or any other Wildcat products that may increase the penetration.

Claude Jordan

I think that’s true and even today, we continue to add every week we add Wildcat dealers.

Joe Hovorka – Raymond James

Great, that’s all I have, thanks guys.

Claude Jordan

Alright, thanks, Joe.

Operator

Thank you. And our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Gerrick Johnson – BMO Capital Markets

Hi guys, just a follow-up on the current drought situation in Middle America. Is that has any impact on your Prowler sales or particularly the HDX.

Claude Jordan

Yeah, I can’t say that it has. HDX, since we launched it back in 2011 and it’s been out there about a year and a half. It continues to do extremely well. It’s a great model. The extended chassis, we got the air shocks on it because one of the largest cargo box in the industry. So, I think people like the way to see on it, they like the performance. We work from the engine quieted down some, so, our retails on HDX item continue to be strong so, I haven’t seen, but they were strong before the drought. So, I can’t say that was a contributing factor.

Gerrick Johnson – BMO Capital Markets

Right, okay. So just trying to get to help the farm community and other portion of your customer base out there, and how they’re feel about buying products like that right now?

Claude Jordan

Absolutely they are a significant part and a very important part, but we have not seen a change with the drought in the up or down. We’ve seen a steady flow in terms of retail in that unit.

Gerrick Johnson – BMO Capital Markets

Okay, alright. Thank you.

Operator

Thank you. (Operator Instruction) And I’m showing no further questions. Please continue.

Claude Jordan

I appreciate everybody joining us today. As a recap, we are excited about the strong start of the fiscal year 2013. As we look forward to the remainder of the year, our focus will continue to be on growth, product development and operational excellence. We appreciate your time today and look forward to updating you again in October. Thank you.

Operator

Ladies and gentlemen, this concludes the Arctic Cat Fiscal 2013 First Quarter Earnings Conference Call. If you would like to listen to a replay of today’s conference call, please dial 1800-406-7325 or 303-590-3030 and enter access code 4552191 followed by the pound sign. We 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!

Source: Arctic Cat's CEO Discusses F1Q 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts