Arctic Cat, Inc. (ACAT)
F3Q2011 (12/31/10) Earnings Conference Call
January 27, 2011 12:00 PM ET
Shawn Brumbaugh – Padilla Speer Beardsley
Claude Jordan – President and COO
Tim Delmore – CFO
Chris Twomey – Chairman and CEO
Rommel Dionisio – Wedbush Morgan
Craig Kennison – Robert W. Baird
Bill Anderson – Montgo Research (ph)
Joe Hovorka – Raymond James
Previous Statements by ACAT
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I would now like to turn the conference over to Shawn Brumbaugh. Please go ahead ma’am.
Thank you. And thank you for joining us this morning. I’m Shawn Brumbaugh with Padilla Speer Beardsley. Before the market opened this morning, Arctic Cat released results for its fiscal third quarter ended September 31, 2010.
Participating in our call today to discuss the company’s performance will be, President and Chief executive Office Claude Jordan and Chief Financial Officer, Tim Delmore. Following their remarks, we will have time for any questions.
Before we begin, please note that some of the comments made today will be forward-looking statements regarding the company’s expectations to future performance. Such statements are subject to risks and uncertainties and actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today’s news release and in the company’s filings with the Securities and Exchange Commission. We encourage you to review these documents for a description of risk factors that may affect results.
Now, I’ll turn the call over Arctic Cat’s CEO, Claude Jordan. Claude?
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 quarter as well as the progress we’ve made in operations as we continue to focus on profitability and reducing inventory. Following my comments Tim Delmore our CFO will review our financial performance.
Overall, we are pleased with our performance for the quarter, especially our increased earnings. Year-to-date, we have continued to improve gross margins and are holding operating expense as flat as a percent of sales. Both of which have contributed to the improved profitability of the business. We are also seeing increases in the sales for our snowmobile and ATV businesses, while continuing to reduce dealer inventory for both of these businesses.
Snowmobile sales for the quarter were up 33%, primarily on increased international sales, but also in the North American markets due to timing of shipments.
We continue to focus on matching wholesale to retail to ensure that dealers have the right product during the high retail season and to drive dealer inventory lower.
For the quarter industry retail sales increased primarily due to excellent snow conditions throughout a large portion of North America. Based on what we have seen in retail sales through December, we are increased in our assumption on snowmobile retail sales and now belie that the industry retail sales will increase 5% to 10%.
In addition, to increase industry retail sales we continue to monitor North American and the dealer inventories as an important measure of our overall dealer help.
At quarter end, our dealer inventories were down 19%, compared to the same time last year, which will position our snowmobile business well as we look forward to next year.
Sales of our ATV business rose 1% in the quarter, driven by the sales of our new side-by-side vehicle, the Prowler HDX heavy duty utility vehicle which is designed more for the utility market than the recreation market.
Sales were also positively impacted by the international market which have seen large increases year-over-year. In addition, we also launched three new ATV models during the third quarter and expect to start shipping those during the fourth quarter.
The three new models includes a value price of 350, 4x4 automatic and value price 425 EFI 4x4 automatic and the new XC 450 crossover model combining 4x4 capabilities and a sport ATV.
As with the snowmobile business we continue to match retail and wholesale sales with the goal of reducing dealer inventory.
Year-to-date, ATV and Prowler dealer inventory is down 26% while at the same time we’ve been successful in increasing market share for the quarter in year.
Sales of our parts, garments and accessory business for the quarter rebounded nicely and were up 6%. Primary driver in the improved quarterly sales performance was our garment business which showed strong sales on our garment – our drift garment product line. Over the year, we expect our parts garment and accessory business sales to be flat.
In regard to operational performance we’ve stated at the beginning of the year, our goal would be on improving gross margin, controlling our operating expenses, reducing factory inventory and ending the year with more cash in our balance sheet.
In the area of gross margins, we revised our goal during the last call to improve gross margins during the year by 200 to 300 basis points.
During the third quarter, we have seen improvement in gross margin, primarily driven by higher volumes, product mix, product cost reduction efforts and higher selling prices on selected models. These actions have resulted in our gross margin improving in the third quarter by 430 basis points compared to the same quarter last year and year-to-date we have seen our gross margin improved by 370 basis points.