ACAT

Arctic Cat Inc. (ACAT)

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Arctic Cat, Inc. (ACAT)

F4Q2011 (Qtr End 03/31/2011) Earnings Call

May 12, 2011 11:30 am ET

Executives

Shawn Brumbaugh - IR, Padilla Speer Beardsley

Claude Jordan - President and CEO

Tim Delmore - CFO

Analysts

Rommel Dionisio - Wedbush Securities

Craig Kennison - Robert W. Baird

Jimmy Baker - B. Riley Investment Bank Research

Steve Baughman - Divisar Capital Management

Joe Hovorka - Raymond James

Phil Anderson - Longbow Research

Presentation

Operator

Welcome to the Arctic Cat's fiscal 2011 yearend earnings conference call. (Operator Instructions) This conference is being recorded today, Thursday, May 12, 2011.

I would now like to turn the conference over to Shawn Brumbaugh.

Shawn Brumbaugh

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 the fiscal year ended March 31, 2011.

Participating in our call today to discuss the company's performance will be President and Chief Executive Officer, 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 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 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 to Arctic Cat's CEO, Claude Jordan.

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 fiscal 2011 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 financial performance for the full year. At the beginning of the year, we set out to grow sales, improve gross margins, increase operating expenses as a percent of sales, improve earnings per share, increase cash and reduce dealer inventory. All of these initiatives were accomplished.

In regard to the individual businesses, during the fiscal year, snowmobile sales were up 12%, driven by both the U.S. and international markets. Additionally, with sales up, we were successful in driving North American dealer inventory level by 22%, which should position the snowmobile business well as we head into fiscal year 2012.

Dealer inventory reduction has been an ongoing part of our strategy, and we've made significant strides in lowering the inventory over the last few years.

In addition, retail sales for the snowmobile industry in North America also rebounded this past year and showed strong growth throughout the year. Especially strong snow conditions in North American markets contributed to the industry gains.

Based on the industry growth this past year, we believe the industry retail sales would grow by 5% to 10% in the fiscal year 2012. With the expected increase in industry retail sales, our lower dealer inventory, combined with the recent launch of 23 all new snowmobiles, representing 75% of our 2012 model year lineup, we expect a great year for our snowmobile business.

On the ATV business, sales decreased 4% through the year, primarily due to North American sales as the business continued to focus on reducing North American dealer inventory in a continuing difficult market. With this focus on dealer inventory, we were successful in lowering dealer inventory by 21%.

We did see an increase in sales in our international ATV business as we continue to expand into new countries, in the Middle East, South America and Russia.

Industry retail ATV sales for North America had another difficult year as sales decreased by approximately 17%. Although North American industry retail sales were down, we were able to gain ATV share during fiscal year 2011.

Some of the highlights from the retail side were the introduction of the new heavy-duty utility, Side-By-Side HDX unit, which has performed well since being launched in July 2010 as well as the recently launched value-priced 350 4x4 automatic and 425 EFI 4x4 automatic, plus the new XC 450 for crossover model, combining 4x4 capabilities in a sport ATV. These last three models were all launched during the fourth quarter.

As we look forward by development, it will once again be an area of focus. As shown during our March dealer show, we were planning to launch a new sport 5x5 vehicle called the Wildcat, which will be a new segment for us. Based on the initial feedback we've received from our dealers, we expect this to be an exciting addition to our model year 2012 lineup.

Sales of our parts, garments and accessories business rebounded nicely and were up 2% for the year. Primary driver in the improved sales performance was our snowmobile parts, equipment business, both of which benefited from excellent snow conditions throughout North America and Europe.

Additionally, our recently launched Drift garment business continued to show strong year-over-year increases.

In regard to operational performance, as we stated at the beginning of the year, our goal would be to improve gross margins, control our operating expenses, reduce factory inventory and the end the year with more cash on our balance sheet.

In the area of gross margin, our initial goal was to increase gross margin by 100 basis points to 200 basis points, which was then revised upward to 200 basis points to 300 basis points. During fiscal year 2011, we had seen improvements to gross margin, primarily driven by a higher volume, currency, product mix, product cost reduction efforts and higher selling prices on select models. These actions have resulted in a gross margin improvement in fiscal year 2011 by 330 basis points.

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