賓士域 (BC) 2002 Q2 法說會逐字稿

Good morning and welcome to Brunswick Corporation second quarter earnings conference call. All parties will be listen only mode until the question and answered period. Today's meeting will be recorded. If you have any, objections you may disconnect. I will introduce Kathryn Chieger. You may begin.

Good morning, everyone. Thank you for joining us on Brunswick second quarter conference call. With me today are George Buckley, chairman and CEO and Vicki Reich, our CEO. During this call our comments will include certain forward-looking statements about our future results. Keep in mind that our actual results could differ materially from expectations as of today. For the details on the factors to consider, take a look at our 10-K for 2001 and our earnings issues or press release this morning. Both of which are available upon request or going to our website at Brunswick.com. I know a lot of companies are reporting earnings today, so we will try to wrap things up in 45 minutes. With that, I'll turn the call over to George.

Thank you, Kathryn. Good morning, everybody. I'm very pleased to have this chance to speak to you all again about our good performance at Brunswick this past quarter and to share with you our outlook for the remainder of the year. Before I begin, I'd like to briefly review strategic objectives. We remain focused on first, developing and introduced continuous stream of new innovative products into the marketplace. Starting to show customers that Brunswick has products that consumers must have in all our market segments. I will update you on some of those in just a minute.

Second, controlling costs, as you heard me say before, we believe that cost is a ultimate competitive deadly weapon. So we remain focused on this as key weapon on strategy. This cost strategy extends to product as well as to administration and productivity.

Third, nurturing and protecting strong franchises in which we have a world class collection, better than almost any company you would name. You should expect to see us working on various ways to enhance them in the coming months ahead. Billiards has been amazingly successful and others out in due course. Great brands, great price and sustainability.

Fourth, enhancing distribution channels. Whether this is through internet access, new outlooks for acquisitions, improved customer service or enhancing relationship, outlook is due to our success and much more tangible things happening in hours between now and end of the year in this area.

Fifth, striving for operations excellence and then leveraging the capabilities across all Brunswick divisions. Our ongoing emphasis on financial discipline, conservative policies and operations excellence will lead to solid earnings and serve our shareholders well over the long term. This has been our approach now and nothing has changed. It will continue full speed ahead. The success of our efforts here is evidence in our second quarter results. The past quarter was quite a good one. I'm pleased to report we are in in 51 cents per share, expectations between 40 and 44 cents a share. This also compared to 77 cents a share last year. We had good year over year improvements, even though some segments of the economy didn't cooperate with us. Biggest factor in driving financial performance was 10% increase in sales. This was driven by strong contributions from Mercury Marine, Life Fitness and bowling products in best businesses, and incremental sales we acquired from Sealine and Hatteras which is business we acquired in second half of 2001. Good sales gain at Mercury was a bit erratic timing wise and sales bounced around quite a bit during the quarter. Started out strong in April, dropped off significantly in May and early June, driven in part, we believe by poor weather in the northern United States and Canada. It affects sales of new products but means people aren't out boating. When they're not out boating they're not using oil, lubricants and breaking propellers and it slows down sales which is high margin for us. Bad weather this time of year curtails product sales, but downward shift in margin too as well as selling fewer parts and accessories in the mix. We saw some of this happening in this quarter.

Along with good sales our inventory and cash flow performance was extraordinary good in the quarter with cash flow totaling $170 million. I think all of our investors will agree this has been one of the great features of our performance this past two years. Very good work in capital management. I'm very proud of employees what they have been doing in this area and made it successful during this economic period or cycle. As a consequence, inventories in extremely low levels across the country. Dropped 9% year over year, excluding contributions made from acquisitions.

Looking at dealer inventories, boat pipeline is down 29% compared with a year ago. This time of the season boat inventories are typically 26 weeks on hand, whereas we are currently sitting a little over 20 weeks on average. This implies much more rapid recovery once the marine industry demand turns positive, which we believe it will do next year. It will pull very interesting inventory and manufacturing choices at the end of this year and beginning of next. We also kept a tight hand on the capital expenditure tiller and receivables and payables too. Held up no capital expenditure, feeling we do innovation is one of the keys to our future. Consequently, cash on hand blossomed to 335 million at the end of the quarter and our debt to cash ratio stood at 34.8 versus 37.2 at this time a year ago.

I'm also pleased to report the quest operations is excellent, gathering momentum in different ways throughout the corporation. Involving products and Life Fitness cost cutting initiatives, supply chain improvements and product line rationalization were all behind a 360 basis point improvement in operating margins in recreation segment. This new operating focus has really begun to take hold there and the folks in those businesses have done very well in bringing in intense focus to bear on this new opportunity. The company in total, however, margins are still tracking a little below years ago levels, although steadily closing the gap bit by bit. Operating margins in the first quarter were down 520 basis points and second quarter they were down 110 basis points, versus same quarters in 2001.

Last year the first half was still reasonably good for us. Second half improvements this year we expect that for the year overall margins will be on a par with 2001 levels and continue to build momentum from there. Margin pressure area during the quarter was in marine engine business. This is primarily due to the gradual shift in product makes to low margin four stroke and two stroke outboards as convention two stroke engines legislated out of existence in the USA and Europe.

Outboards constituted 41% of outboard sales this year, versus 34% a year ago. Also as I mentioned earlier, sales of higher margin past accessories were smaller percentage of the mix in the quarter due to cold weather in April and May. There's another subtle factor at work also. In these newer product areas, cost reduction activities are not nearly as mature as in other areas and expect they will deliver steady improvements over time in newer product areas. Pure classification move, earnings from diesel engine joint venture with Cummins now appear in the other income bracket. In addition, across a company we're expecting higher healthcare costs in 2002. We worked very hard, however, and have been successful at keeping the rate of increase well below the national trend. Primarily by consolidating and harmonizing all of our healthcare, life insurance and disability plans across Brunswick. This has allowed us to reduce administrative costs, streamline claims processing and leverage our suppliers. And like most companies, our pension costs have been impacted by low market returns on our investments.

Also the year to year comparison reflects the fight that we have budgeted and our accruing for variable compensation in 2002. As you may know, we paid no annual bonuses either in corporate or most of operating divisions last year. The one cloud in our sunny day this quarter was at U.S. Marine where due to product planning and production problems we suffered problems after year strange over that cost us lost sales. More importantly, it cost us lost margin as suffered inefficiencies in factories, high shipping costs. Orders were not the problem here, production was. All of these were connected with U.S. Marines domestic plants. As always is the case in any business, we have puts and takes in the quarter, but all and all, we're very pleased with the results this year. Looking ahead, the most difficult challenge for any company announcing earnings today is to figure out what will happen in the economy. Forward order book is in good shape, recent volatility in the stock market will likely erode consumer confidence and put increased pressure, especially on larger boats at retail. We plan to continue our conservative, and stress the word conservative here, approach for financial planning in the forecasting. Second half we'll have much easier year or year comparisons and expect to show significant sales and earnings. Boat inventories are in great shape, new products are coming out, so we believe we will be well positioned when the economy recovers.

Further, our fitness and bowling business is tracking ahead of plan and benefiting from cost reduction, production rationalization and supply in each. 8% sales increase in recreation segment this year is planned. The weakening U.S. dollar helping us in overseas markets and over time expect sales to increase there above plan. It will also make aggressive pricing at our Japanese competitors harder to do here in the U.S., or at least to do it profitably.

In addition, marine businesses sales are overall better than expected. We estimate they will be up 5 to 6% by year end. All we have are operational issues to address, we're making steady progress realizing our vision for U.S. Marine. Introduction of our Bayliner 175 has gone long way to establishing Bayliner as the brand synonomous with family boating. We reduced product offering and closed five boat plans last year to improve operating efficiencies. These and other - through these and other efforts expect to reduce loss to 25 million in 2002. It is clear, however, that the reinvention of the business is likely to take another two years of hard work. Given good results we're raising range EPA estimate to $1.05 to $1.15 per share from $1.05 to $1.10 per share in the previous quarter. To reflect more optimism, we want to do it conservatively. This will imply EPS in the second half of 40 cents to 50 cents per share, compared with 4 cents per share earned in second half of 2001. Now let's take a look for a minute the status of game plays we talked about last quarter.

Those of you who attended the forum in Knoxville last May, you had an opportunity to drive our Runabout, retail price at $9,995. Consumer demand for new entry level family boat exceeds expectations and out stripped our ability to supply. This is because boats are being made in a new plant in Mexico with many new suppliers. For the moment, we have restricted order intake of the boat at about 2,000 units in 2003 model year, so can expect we're working hard by adding extra workers and extra shifts. In addition, many of suppliers to the facility are new to the industry and require time to hire and train workers and ramp up production. So to maintain quality at highest level, we deliberately restricted output at the new plant and expect to be at full capacity which is designed to be 8,000 to 9,000 units by 2004 model year, which I'll remind you is the middle of 2003. This should perfectly position us for recovery in the U.S. economy. As we work to our capacity, our intention is to release more attractive price points at this point. Firmly targeted growth by making boating more affordable and market share gains and doing it with higher margins than has traditionally been the case. We believe such products will grow acceptance of boating, increase sales and profits and make the company infinitely stronger over time. Expect also to see significant reposition of some segments of our family yacht lines in the next month.

Life Fitness, success of new consumer cross trainers and treadmill introduced this year is helping to drive double digit sales gains of consumer products, despite economic uncertainty. We've had strong orders too on the new independent stair stepper product and new bike. New Life Fitness management team really beginning to get into the stride now not to use a pun. Planned introduction of products, especially designed to European consumers, will help increase share and further penetrate the market.

Another game change is a new family of large outboards that we will launch next year. It is going very well and letting dealers and boat customers try engines toward the end of the year. We believe they will be as enthusiastic about the product as we are. Anyone who witnessed the demonstration at Brunswick technology forum will attest to a smooth, quiet running and powerful acceleration. More details of the next item will be announced by Mercury soon, but in short form I'm pleased to announce effective July 27th we hired Clous Brustaw (ph) who was the former engineering director in Germany as vice president of research and development of Mercury. This shows continued emphasis as a key differentiator to our competition. Our mall technology was also on display in Knoxville market today manufacturing development appears to be in good shape. So far we made about 200 boats with the new technology and roll out of exciting new manufacturing technology will continue in the coming months and years.

In conclusion, despite what's going on around us in the marketplace and in field of corporate governors, we will continue to manage our company and in a fiscally conservative and prudent manner focussed on innovation, product quality, rock solid balance sheet and strong cash flow. In fact, in these times I remind myself we are benefited very much by the fact we build and sell real things to real people for real money. People working at Brunswick continue to show hard work, courage, creativity and focus. I'm very much privileged to be their leader and they have proven that even though times may be tough they don't have to be all bad. With that, thank you very much for your kindness in listening. I'd like to open the floor to any questions that you might 00:27:29 have.

At this time we'll be in question and answer session. If you have a question, press star one on telephone touch pad. If you're using speaker equipment, you may lift the handset prior to pressing star one. If your question has already been answered, press star two or to cancel. Star one to ask and star two to cancel. One moment while we compile our registers. Chris Cox from Goldman Sachs.

Good morning, guys. Nice quota. Comment on other income line. Looks like you had a little bit in there. Is that specifically the Cummins J.V. engine and target what the J.V. could contribute for the full year.

I'll pass the question over to Vicki.

Other income and expense line reflects couple things. Half of that is improved performance in joint ventures which includes bowling joint ventures, cost production and Cummins modest positive contribution from MerCruiser this quarter. As we stated previously, we expect J.V. Cummins to be about break even for the year, as there are start up costs and seasonality factors. The other elements in other income and expense is foreign currency, piece of foreign currency improvement in the quarter which balance sheet remeasurement shows up in other income and expense.

Over time we expect it to grow.

Can you also comment on what pricing trends you've seen recently at retail?

We haven't seen enormous pressure on price. I think that's probably about a surprise to many people, not just analysts but even inside the company. We obviously have very strong competition from the Japanese, but there's no - been no serious pricing pressure so far that we've seen.

Actually, Chris this is Kathryn. Average price on boats is up year over year.

Last question. Will you expect to break even at the new plant in Renosa on the Bayliner 175 this year, or is that something we should assume for next year?

VICKI REICH: Marginally positive and positive contributor next year.

Thanks.

Joe Yerman (ph) from Mersterns (ph).

Hey, guys. George, without giving actual numbers on the utilization or capacity, can you comment to the extent that the fixed costs are being absorbed by current products and maybe with that in relationship to this points in the season last year? And for Vicki, you cite the free cash flow generation which is enormous over the first six months. What about - I guess 86 million is coming from the income taxes line. I'm just curious as to what that might stem from. Just a couple housekeeping questions as well, if you could break down inventory from the finished goods, whip and raw materials. Thanks.

Let me pick up capacity one while Vicki is getting precise numbers on the inventory breakdown. Capacity obviously depends on how you define it. I think we have had some of the conversation before. For example, some of our boat units they work single shifts a day, four days a week. On that basis they are running in the mid 70s, probably improved a little bit this year over last as we were running down production last year and ramping it up this year. So we have plenty of capacity whether either engines or boats or for that matter in other businesses fitness and bowling products. Capacity is not an issue. Only person I remarked on it in my comments was in the new Mexican plant jump ramping up and obviously are going through all of the issues of developing suppliers and bringing on quality products. Seems to be working very well by the way. But we're very conscious that make sure we don't step and being very prudent in managing the particular capacity. Capacity is no issue, sort of root of your question, Joe. I'll pass inventory question to Vicki. She has the precise numbers for you.

In terms of utilization, second quarter fixed cost absorption situation was really a nonfactor, about a push versus a year earlier. That's a big improvement versus the kinds of trends we were seeing right up through the first quarter. It is our expectation in the back half that that will flip to the positive that we will be absorbing more fixed costs in back half of function of production rates being up considerably, versus where they were in the second half of last year. On the breakdown of inventory, finished goods were 273, work in process 199 and raw materials 54.

The question about the free cash flow?

Yes. Free cash flow 86 million in taxes. Let's see. Igloo, yes, tax benefits on the Igloo divesture was piece of that about 20 million. The rest of it is really just timing of provisions versus payments.

In terms of the discontinued operations, will you continue to see the benefit from a tax standpoint throughout '02 or should that be it?

That's pretty well cleaned up. Cash flow from here on out is from continuing operations. Actually, year to date the only benefit we're seeing in the cash flow number is the 20 million from Igloo.

Great. Thanks a lot.

Thanks, Joe.

Next question comes from Tim Conder from A.G. Edwards.

Offer my congratulations, George, and everyone for a great quarter.

Thank you.

If you could clarify, Vicki, more on the absorption. You said it is kind of neutral in the second quarter your over year, if I heard you right, but be significant benefit as your production would be higher in the back half of the year?

That's right. That really pertains to the marine businesses. You know, there were some pluses and minuses if you look at production rates this quarter versus a year ago second quarter, but on balance they were about equal. Going into the second half, we anticipate that production rates in our marine businesses will be up, you know, double digits in most businesses against the second half of last year.

That was the time, if you remember, Tim, production rates and driving out of the system. Poor absorption and depending on specific business we're speaking about, you know, relatively low production rates. Life Fitness, of course, was doing gangbusters in the second half but marine businesses were not.

If you could also give us a brief update, year to date, George, where you see your engine share, both in outboards and sterndrives and inboards. Given the decent cash flow, I don't know if it is too early yet here given where we are in the cycle, what your thoughts or considerations over the next year or so instituting share of purchase plan?

Tim, on market share, what we forecast was that we saw the - we believe we see the market share peeking in the late 40s and believe that as OMC came back at us - now bombarded, came back at us, slip back at that and domestic market, but expect it to hold on to market share more vigorously international because OMC had lost a lot of their distribution internationally. That has really been about the way it has panned out in outboard business. I think we slipped back a couple points of market share about what we expected. In the sterndrive business, there's a lot of development going on in there. We anticipated because we have a very good forward planning process in place which Pat Macky (ph) put in place at Mercury that gives us visibility on engine. So we - we ramped up production early and anticipation of pick up in sales of MerCruiser. Our friends and colleagues at Volvo didn't do that so we got the edge on them.

Now we have recently caught up in that backlog and our friends at Volvo are still behind. So actually quite a number of moving parts in that business. But I suspect that it will be the typical ebb and flow of a point here and there, pick up a point, lose a point. There has been no significant either gains or losses there, Tim, in that - in that area.

Okay. Great. Thank you.

Thank you.

Next question comes from Joe Verka (ph) from Raymond James.

Morning, everybody. Couple questions. One, did I just hear you give some production rates on - for the last half of the year for marine? I missed that.

Did you say up double digits?

Yes, up double digits.

Boating and engines combined?

Yes. Varies considerably in small boats, big boats, outboards, sterndrives, but overall, yes.

Would that be acquisitions?

Yes.

Acquisitions on top of that?

Yes.

Shortages in U.S. Marine that you talked about impacted sales and margins, have those all been solved right now or are you still going through issues?

Still working through them.

So impact on the margin side still on the second half?

That's probably a bit - depends on how you assess it year over year. You know, we give, I think in the fourth quarter conference call we gave some numbers on what we thought we lost in the business last year. It was well into the mid 30s. So -

At U.S. Marine?

U.S. Marine. We don't expect the number to be anywhere near that. We estimate press release 25 million. So the margin pressure will still be there. But toward the back end of the year, if we've done our jobs properly, it ought to begin to ease.

You said U.S. Marine lost 35 or upper 30s last year?

That's correct.

Great. That's - I think that answers what I have right now.

Thanks a lot.

Next question comes from Dean Geanukis from J.P. Morgan.

Quick question. Saying here inventory is down in 21 weeks of supply you think versus 26. Are you comfortable with 21 weeks or do you anticipate squeezing more and more out of the channel as you go forward?

Dean, thank you for your question. As you can well imagine, there are lots of initiatives going on all over the company. One of the reasons why we got such great cash flow here is people have driven the working capital. That is not going to change the feature of our sort of push for operations, excellence in the company. On the other hand, kind of hinted at this in this in my review, some places in the pipeline - the pipeline is clearly not dry. You can see that from the numbers. But you know, it may be that it puddles along the pipeline rather than the continuous flow.

One of the interesting and exquisite questions we're going to have to answer around the end of the year and early part of next year is exactly where are we comfortable? Because on the one hand we don't want disease of too much inventory, but I would rather not have the other disease of lost sales. We will see how the turn improvement can get done and let's hope that we can continue to improve in that area and not have to add too much inventory in total.

Thanks a lot.

Take care, Dean.

Next question comes from Burt Koontz from Merrill Lynch.

Good morning. Most of my questions have been answered, one additional one with regard to field inventories. Tell me a little bit about age of inventory. I guess what I mean is the composition of inventory boats over a year old at the dealers.

We have tried to be very diligent at making sure we don't have too many of the birthday boats as we call them in our company. You know, we have done that not only by flushing them out of our own finished goods but offering promotions in a number of different places to help dealers drive them out into retail. So unless Vicki has got some precise breakdown of the numbers, I don't think she does, the general - general consensus is that inventory is not only low, it is clean. Don't have a lot of colloquial junk in there. We don't. It is very good inventory for us and for our dealers. We have very little in the way of finished goods anyway in boats.

Thank you very much.

Thank you.

Next question comes from Derrick Holmes from Victory Capital.

This is Eric. Could you give a little color on sales of large boats at the end of the second quarter and if you have any indications of what's going on so far in July?

I don't know that we have at our fingertips a details breakdown. But the place where we have seen the - the stickiest in terms of inventory is in large boats - sorry. So I can't - I don't have anything at my fingertips to actually give you, Derrick, but we believe that's where - where the - I don't know if I should call it a problem where challenge will remain during the balance of the year. Sorry can't give you more data. I don't have it at hand.

So Sea Risk and large boats going forward but haven't heard anything yet from your retailers?

If there would have been, I would know it. Just - it is one of those sort of instinctive intuitive things looking at marketplace and see this is where pressure is likely to be.

Thank you.

Thank you.

Next question come from John Emrick (ph) from Brikuliate Capital (ph).

Let me add my congratulations to the work you did this quarter.

Thank you, John.

Put in the press release and mentioned before increase in pension costs and insurance costs this year. Relating to pension costs, do you have a year to date kind of performance on pension assets? Maybe not to date but June 30.

Bouncing around so much but don't have anything updated through today but through June 30th we're down about 4%. Our assumptions in the pension plan, we have moderated long term pension return assumption. Taken down this year from what was historically 9 and a half percent to 9 percent. Again, this is a very long term point of view. Based on assumptions we're using in our plan, our expense for pension will more than double this year. It will be round numbers, 20 million as against 9 million this year. So it is a big cost to swallow.

That's actually what I'm trying to figure out now. Does that happen again next year because either pension assets are down, you know, 5% from the year while liability grows? I don't know what you do with expected return of assumptions. Maybe stays the same, but pension expense doesn't go down I don't think in '03 unless market changed dramatically.

That's something we're obviously modeling as well. If equity markets stayed down again, we could be looking at additional incremental of ten or 15 million again next year.

Just because, kind of the question of the day, option expense, only like 6 cents, I think for you guys historically. Have you thought much about what you're going to do with that next year?

Option expense, we're generally supportive of the expense accounting treatment. But it is our point of view that we ought to wait for this some clear accounting guidance on a couple of fronts. 123 today doesn't allow you to expense options retroactively. Only looks prospectively. In addition, the methodology used to value the options is still something that people are all over the map on.

Give you little choice there.

So what our point of view on this is we will make quarterly disclosures in 10Q in addition to the required annual disclosure in the K. If you look retrospectively and prospectively, it is 10 cents a share for Brunswick.

Thank you very much.

Turn the call over to Ms. Chieger for closing remarks she may have.

Thank all of you for joining us. If you have additional questions, we will be around to try to help you out. Thank you for joining us on our call.

This concludes the Brunswick teleconference. Thanks for attending. Have a 00:46:59 great day.