賓士域 (BC) 2002 Q3 法說會逐字稿

Good morning and welcome to the Brunswick corporation's third quarter earnings conference call. All participants will be in listen-only mode until the question and answer session period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Kathryn Chieger, vice president, corporate and investor relations. Ma'am, you may begin.

Good morning everyone. Welcome to our third quarter call. With me are George Buckley, our Chairman and CEO and Vicki Reich, CFO. First let me remind everyone that 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 details on the factors to consider, please look at our 10-K for 2001 and our earnings press release issued yesterday afternoon. Both of which are available upon request or by going to our web site at Brunswick.com. We're in the middle of a busy season we'll try to wrap it up in 45 minutes. With that I'll turn the call over to George.

Thank you, Kathryn. Good morning, everybody. It's my pleasure to take this opportunity to speak to you about the recent events of the past quarter. And specifically I'd like to cover the following items. First of all, the good performance we've reported for the third quarter and secondly some of the opportunities and challenges that we face in the coming year, and our outlook for 2003. Before I begin, let me briefly review again how we go about achieving our strategic objectives. We remain relentlessly focused on first developing and introducing continuous stream of new innovative products into the marketplace. This is evident in all of our business units. A launch of meridian yachts and the new strength of training products from Life Fitness. Those are some and but you've heard about many others in the pipeline. Second, achieving best cost. As you've often heard me say, we believe cost is the ultimate competitive deadly weapon on products. Our global sourcing team is continuously identifying opportunities for savings in all of our divisions and wee reflecting all of this progressively in our manufacturing footprint. Third, nurturing and protecting our strong franchises of which we have a world class collection. Better than almost any company you can name.

You should expect us working on some very specific ways to enhance them in the coming months in much the same way we did in the billiards business three years ago. We've proven the positive brand building works for us so now we intend to extend it formally to other brands in the coming months. Fourth, enhancing our distribution channels the strength of our dealer networks is critical to the success and we're blessed with the best in the world the recent acquisition of IDS leading dealer management system is one example how we can bring value to our dealers. Our early work in building (inaudible) And accessory business is another example. I expect to hear more soon how we expect to reach out to our DS leading dealer management system is one example how we can bring value to our dealers. Our early work in building (inaudible) And accessory business is another example. I expect to hear more soon how we expect to reach out to our orders with real will offer lasting value. Fifth, in our[Gap in audio] Overall the past quarter was quite a good one and I'm pleased to report that we earned 26 cents per share right in line with our expectations. This compares to seven cents per share last year,. In some sense that makes for easy comparisons. But net earnings are up almost 300 percent year-over-year. And that is even with some of the high pension, health care and bonus costs I'll be speaking about momentarily.

Sales were also good for the quarter. They were up 11 percent to 900 million. In fact, we reported double digit top line growth in all three of our segments, marine engines, boats and recreation. The good organic sales gain was aided by the acquisition of hat TRES, also which we bought in the fourth quarter of 2001. Absent the acquisition organic growth for the company was up still a full eight percent. Not bad in a tough economy like the one we're suffering now. Through good operating expense control we were able to more than offset the effect of higher pension insurance and variable compensation costs. To give you some idea of the size of this challenge, the incremental cost year-over-year for these items will be about 60 million dollars for the full year. So that was some hurdle to overcome. We also remain focused on good capital expenditure control. Directing this mainly at new product introductions. Capacity expansion will not be needed in any of our businesses for some time. But we have spent some capital in moving a few operations to low cost locations and you already know about that. So for the full year we believe that cap ex will come in at something around 120 million dollars, give or take a little. As a result of all of this effort, we reported a significant improvement in operating earnings that nearly doubled year-over-year to 47.3 million dollars, operating margins reached 5.3 percent, compared to 2.9 percent a year ago. This is great leverage on an 11 percent sales increase and I'm very glad this part of the recovery equation for us is finally gaining traction. Loan interest expense and higher joint venture income also helped contribute to the significant increase we saw in net earnings.

Controlling inventories and receivables remains a priority and we continued to AK sell in this regard. We think our switch to what we call BVA or Brunswick value-added is a metric for determining variable compensation has significantly helped us. And my colleague Vicki Reich deserves all the credit for that idea. As regards receivables, DSOs are down overall year by year by full two days at the end of September. Our inventories are down by a further 25 billion or five percent below what they were a year ago. Even on significantly higher sales. These numbers exclude the acquisition we completed in the interim. Our earnings performance along with good working capital management has consequently generated 254 million dollars of free cash flow through the first three-quarters of the year. So liquidity is excellent. Consequently, our cash on hand lessened to 368 million dollars at the end of the quarter and our debt to capital ratio stood at 33.7 versus 36.3 percent at this time a year ago. I think you would all agree that good working capital management has been one of the great features of our performance during the down cycle this past two years. I'm very proud of our management and employees for what they've done in this area. They have made it all successful during this difficult period of the economic cycle.

Now let's take a look at what's happening in each of our segments beginning with marine engines. Mercury marine reported a 12 percent sales gain to 426 million dollars in the quarter, while operating earnings rose 41 percent to 51.7 million dollars. Operating margins improved to 12.1 percent compared with 9.6 percent in the third quarter of 2001. Sales were up across the board with a particularly strong performance coming from domestic outboard and domestic stern drive engines. To put this into perspective it's important to consider the relationship between retail and wholesale sales. The obvious question one asks is how can wholesale sales be up when retail sales are still down and not result in an increasing pipeline inventories? Well, it's all about relative flows into and out of the pipeline. Please remember that last year in light of slow remaining demand OEMs were reduced on focusing their inventories. They were limiting their engine purchases and meeting out demand by selling out of inventory. This year wholesale customers returning to more normal stocking patterns, while our customers are buying more engines this year than last year, their wholesale purchases are still below what they're selling at retail.

Consequently, marine engine inventory in the field has been further reduced and currently represents about 17 weeks of supply compared with about 21 weeks of supply at the same time a year ago. So great news there. High balloons helped drive the improvement in operating margins offsetting the margin shift in product mix to low emission outboard engines. Currently these low emission engines represent 40 percent of outboard sales compared with 37 percent a year ago. These engines, which are friendly to the environment, are more sophisticated, contain more parts and therefore more expensive to manufacture.

Also, being relatively new to the market, we have yet to maximize the potential of mature cost reductions on this increasing low emissions volume. We are, however, making progress in this area and over time will get a lot better at it. We're gratified that boaters have embraced our market leading technology. Turning to the boat segment, sales were up 10 percent in the quarter to 334 million dollars. The sales gain was driven primarily by the acquisition of hat TRES yachts which was not in the year ago quarter. Absent the acquisition boat sales were up just slightly. As we discussed in the past we're seeing a resurgence in demand in smaller boats run about which is offsetting continued weakness and larger cruisers and yachts. When we go to inventory we're seeing the same dynamic in boats that we described in marine engines. While in many categories wholesale segments are up, we continue to bring pipeline inventories down despite weakness at retail. Inventories are now at all time lows and as an industry I think we have to watch that situation or it could become a problem. Excluding hat TRES our boat segment inventories are down 16 percent versus a year ago. Field inventories currently represent about 20 weeks of supply compared with 27 weeks of supply at this same time last year. But most boat manufacturers have not fundamentally shortened their manufacturing cycle times. So for a given fill rate a particular level of inventory is going to be needed no matter what. Inventory cannot continue to fall ad infinitum. Some good news also on early boat show results in Europe.

Our UK unit, Sealine, reported sales up almost double at the south Hampton boat show. Again we believe in the coming year sales will still be event driven. The boat segments operating performance was affected by a number of factors, including costs associated with the start of our new plant in Mexico, the launch of the meridian brand, other new product development which we haven't completed yet and the reinvention of our U.S. marine division which had an operating loss of about seven million dollars in the quarter. Without this factor, the operating margins would have been about 2.2 percent modest but at least improving. We continue to make steady progress toward improving the operating performance of this unit, while moving ahead on the new product front. But there's yet much to be done and we think there's probably another two years of rebuilding left yet to take this unit back fully to the roots it understood and did so well. Affordable family boating. The Bayliner 175 is, by the way, part of that journey. During the quarter we premiered a new line of yachts on the meridian brand.

We're. currently offering seven models ranging from 34 to FWAET feet, including pilot house, sa Dan and half cabin configurations we believe this line fills the need of boat terse who spend more time on the water than at the dock. Some other good news. We're also seeing continued success in our Bayliner 175. Our 17 foot entry level run about that features a boat engine and trailer package with an MSRP of 9,995 dollars. At year-end we'll be at about 4,000 units capacity in our new plant in Mexico, but we're still in a position of demand exceeding our ability to supply. As a response from our dealers and consumers has been overwhelming. Full tilt, this plant has the capacity to build about 8,000 boats per year, and you should expect to see more of these high quality attractive priced point boats in the coming year. Finally, in our recreation segment, which consists of our fitness equipment, bowling and billiards business, sales for the segment totaled 197 million dollars, up 13 percent on the year. And we reversed an operating loss a year ago to an operating earnings of 9.7 million dollars. In this segment Life Fitness sales were up a whopping 22 percent in the third quarter.

With contributions coming from the marshal and consumer segments in both the domestic and international markets. This is in a market that industry statistics say has grown only about three percent this year. Life Fitness is a unit whose brand has always been strong but which is now firmly come right to the top of this industry. While there's been much written recently about the health club industry, both here and abroad, it's important to understand that the major club chains only represent about 10 personality of the global commercial equipment market. Life Fitness's customer base is very diverse and fragmented, it spans the military, large health club chains, small club chains, retail outlets, recreation centers, university athletic departments and professional sports teams. Our 11 largest health club customers only account for 14 percent of our equipment sales. I'll say it one more time. Our 11 largest health club customers only account for 14 percent of our equipment sales. I know this is much smaller than most of our investors realize. Life Fitness success is directly attributed to strong share gains in the major club chains as well as aggressively penetrating the regional and local club channels and the vertical markets with our direct sales force and global network of dealers. Being a global supplier of card I can't remember vascular and strength equipment as well as the success of (inaudible) Has offset the slow down of purchases from the other larger chains you can see it in the sales growth we've been experiencing.

The other component of our recreation segment is in our bowling and billiards business. We continue to see steady performance from our retail bowling centers, especially those that have been reimaged as Brunswick's own family bowling centers. The newest zone which opened in July in (inaudible) Pennsylvania is performing well above expectations in fact the sales of this has (inaudible) After it reopened albeit in the slower summer months. To date we've converted 22 of our 106 domestic bowling centers. Due to the proven success of this concept we've also decided to accelerate the pace of which we're converting these existing facilities. The bowling capital equipment and products business also reported improved sales and break even earnings in the quarter, compared with an operating loss last year. This is the result of a lot of hard work to reduce costs, improve supply chain management and rationalize our product and distribution channels. More is yet to be had here, though. With three-quarters in the bank, two that has unfolded pretty much in line with our initial assumptions with all the usual puts and takes, balancing out in the end. As expected, sales growth is coming from contributions from acquisitions, from new products and from higher international sales. All of which are offsetting lower domestic retail demand for (inaudible) Products. Our cost reduction efforts have offset higher pension, insurance and variable compensation costs. As we have said, pension and insurance costs alone will be up about 15 million dollars versus 2001. On the pension front, not dissimilar from most other U.S. companies, plant performance is down 14 percent through September. While we don't have a requirement to do so, we are likely to make a voluntary cash contribution to the plan of about 50 million dollars this year.

In addition, depending on the value of the plan assets at the year-end, we could be required to take a noncash charge to equity but between 70 million and 100 million. Nevertheless, even in the higher case, our debt to capital ratio would still remain near our 35 percent target. As I said, the year has unfolded about as expected. Therefore, we're sticking with our EPS estimate but narrowing the range between a dollar 10 and a dollar 15 a share, representing 15 to 20 percent EPS growth for the year. For the fourth quarter, this would imply EPS between 18 cents and 23 cents, compared with a three cent loss in the year ago quarter. So again good improvement. Making an estimate for 2003 is obviously much more difficult. Given uncertainty about the seemingly perfect storm of a suffering economy, poor stock market performance, the mood impact of governance trends, the possibility of a war in Iraq, higher oil prices and consumer confidence, on the other hand we'll probably be benefiting soon from a small notch down in interest rates. As I said before, we buy our crystal balls at the same place you do and pay about the same amount of money.

Nevertheless, I will give you the benefit of our crystal ball thinking at this point in time. We'll start by making a few assumptions, with all the usual caveats we haven't completed our budgeting process we're in the small season for domestic marine sales there's a lot of uncertainty concerning economic, geo political oil prices and market factors. So with that preface to my remarks, I'll attempt to give you a range for outcomes. Assuming a slight uptick in marine retail demand, some pipeline replenishment marine sales could be up about three percent next year. We expect bowling and billiard sales to grow in the low single digits and continue strong performance in the fitness department and overall sales growing in the nine to 10 percent range. Considering the impact that the stock market is having on our pension plan, we expect pension expense to be up as much as 20 million over 2002 levels. With probably no rest spite on insurance costs, including those for health care. At this time we're also assuming that improved margins on higher sales and operating improvement would more than offset pension expense, that losses at the U.S. Marine operation would be reduced from roughly 25 million loss expected for 2002. We'll continue to take actions across the company to improve operating efficiency and as always any costs associated with these actions would be taken through operating earnings not through special charges. Given that complex scenario we estimate that EPS would be up somewhere between 22 to 45 percent, thus reaching between a dollar 40 and a dollar 60 per share next year. I do realize that this is a very wide range. However, it's our best estimate at this point in time knowing what we know. We will obviously be working harder to do better. But for planning purposes this is where we think it will all land.

In conclusion, despite what is going on around us in the marketplace and in the field of corporate governance, we will continue to manage our company in a physically prudent manner, focus on innovation, product quality, a rock solid balance sheet and strong cash flows. In fact, in these times I remind myself again that we are benefited very much by the fact we build and sell real things to real people for real money. Come next spring, this would be a tough three years for all of us in the marine market. But I'm encouraged by the fact that we have a fine management team producing what I call a tough forge of economic adversity, because of that we're a far better company and far more able to deal with it than we were three years ago. Our geographic Cal and product diversity helps balance these factors better. With that thank you very much for listening and I'd like to open up the floor for any questions that you might have. Thank you very much everybody for listening

At this time we'll begin our question and answer session. If you have a question, please press star one on your touch tone phone. If you're using speaker equipment you may need to lift the handset before pressing star one. Should you wish to cancel your question or it's been answered press star two. Once again if you have a question press star one and to cancel question press star two. One moment while the questions register. Our first question comes from Dean Genowkis (ph).

Dean Genowkis (ph): First you talked about pension expense being up 20 million. Can you talk about the insurance variable comp and health care in '03 versus '02 and second when you talked about U.S. Marine needing a couple years to get where you want to go, can you tell us the key objectives you'll be doing over those two years?

Thanks, Dean. I'm going to give that first part of that question to Vickie.

On insurance next year, that will be up modestly about another five million next year. Variable compensation, since we have restored levels of bonus accruals this year I would not expect any increase next year. And on the health care front, we've got a pretty good job despite some pretty difficult market conditions. Market averages will be up about 13 percent next year and we're going to hold our increases to less than half that. Mainly through efforts to consolidate plans that were very diverse across Brunswick.

Dean Genowkis (ph): Does that pension expense, 20 million, include any change in your assumption?

No, it does not.

Dean Genowkis (ph): Thanks.

Dean, did you want more information on U.S. Marine?

Dean Genowkis (ph): Please.

The key objective there, Dean, are obviously to drive up margins and we have a long-term plan that produces some pretty attractive margins. Though I'm better off at this stage not quoting what they actually will be. But in terms of key objectives more product will be moving more to cost manufacturing locations, some very vigorous efforts on low cost sourcing, leveraging productivity. There may be some more plat MRA*NT closures we have to deal with perhaps in the supply chance in (inaudible) Plants. There the principle object is we're -- added to that is much better distribution for the meridian brand.

Dean Genowkis (ph): Thank you very much

Thank you our next question comes from Burt Koontz of Merrill Lynch.

Burt Koontz (ph): Good morning, everyone. How much of the marine engine growth is due to stern drive versus outboard? And I'm just thinking, if the large boat market continues to language QUISH will it translate into weakness stern drive.

It's mostly in stern drives.

Burt Koontz (ph): I'm sorry?

Most of that growth we spoke about was in stern drives.

Burt Koontz (ph): Is it correct then if we don't see recovery among the larger boating segment, can we expect that growth would continue or would we have to level off that expectation.

On the very large boats, dean, the propulsion is usually inboards and it's diesel. And so that decline shouldn't put pressure on stern drives. I don't think. In fact in a perverse way what's been happening is buying patterns have been moving down market and may then prefer the stern drive. So it probably would be the opposite conclusion.

Burt Koontz (ph): Maybe I just wasn't defining the large boat correctly. One other question what is the current level of manufacturing capacity utilization firm wide versus a year ago? You've talked about that in past calls about those, as I understand.

It will be in the 70 percent range plus or my opinion news, Burt.

Burt Koontz (ph): Thank you

Our next question comes from Joseph Yerman with Bear Stearns.

Joseph Yerman (ph): Tremendous job running the business in this environment. Just a few questions, George. In terms of the marine engine segment, what part did the T and A business play on that? The stronger operating contribution this quarter? And I had a question about capacity that was just answered. And Vickie, if you could just break out the inventory with the three components. And secondly, just for my edification in terms of the rating agencies, do they look at your free cash flow generation in aggregate in terms of possible upgrades to ratings or do they look at the marine business and they'll have to see an uptick in that before changing their estimates?

I think first on the rating agencies certainly the marine businesses are very important to our cash flow generation. Though they do look at the total company. And Life Fitness in particular has become an increasingly important part of our cash flow generation. So they look at the whole thing.

We're just looking up the precise contributions from P and A relative to the other bits and pieces here.

About 10 percent, Joe.

Joseph Yerman (ph): 10 percent?

Yes.

Pretty much in line with the rest of the -- 10 percent on P and A compared to a blended 12 percent. So looks like it's pretty much even with the average. But we have mentioned earlier that the growth favored stern drives rather than outboards.

Joseph Yerman (ph): I understand.

Our next question comes from Joe Verka (ph) With Raymond James.

Joseph Verka (ph): Two-part question here. Yesterday marine max reported a pretty strong quarter. Their comp store sales were up 13 percent. And if I've done my math right their purchase of boats was up more than that. Given the size of Remax as your largest boat customer, if I back into a number, it like the rest of the dealer's' purchases would be down in the quarter. That's the first question. The second question is, Remax's sales are generally skewed more towards larger boats. In fact, they made comments that larger boats became a larger part of their mix in the full year. That would seem to go counter to your comments that small boats are outselling large boats. I'm curious how I reconcile all those points, the fact that Remax looks to be outperforming the rest of your distribution channel and they're doing that selling large boats.

82, one thing to make clear, I think when we talked about large boats, we're talking about the larger cruisers and starting something about the mid 30 foot and going up. If you talk to marine max you ask what they're talking about in larger boats they're talking about the hatter (ph) as side, 5060, up to 150 foot product. So there's that difference.

Joseph Yerman (ph): They gave a number saying their average ticket is 89,000 this year versus 84 last year. I don't know if that helps at all but I'm assuming there's some skewing there because of the Hatters (ph), but I just expect on a unit basis don't sell as many Hatters (ph) as they do 65 foot Sea Rays.

That's the difference between mix on units versus mix on sales.

Joseph Yerman (ph): Is it correct, did I do the math right that the rest of your distribution excluding marine max would have actually had down sales.

I don't know that you could make that assumption just because some of the factors that we talked about in where a dealer's inventories and pipelines were a year ago versus today. So that if they're replenishing at a higher rate than they did a year ago, then their purchases are going to be up as well.

The Remaxs (ph), they've done a great job on controlling their inventory, they've been good at it. And when Mike, I'm guessing it was Mike that you heard speak, when Mike would speak about sales, he's talking about retail sales, when we speak we're speaking about wholesale sales. So my guess is that certainly overall at the wholesale level we'd expect marine max to do better. They're the higher quality distribution. But I don't think because of the retail business wholesale and the great inventory that those guys have done that we can necessarily jump to conclusions that the balance of the network did badly. I think it probably needs a bit more sophisticated an answer than that. We'd be happy to try to help you think through that off line if it's okay with you.

Joseph Yerman (ph): One point. I did understand the difference between retail and wholesale that's why I was looking at both purchases. And their purchases in the quarter looked like they were up 20 million dollars versus what they bought last year at wholesale. If I'm doing this right, it looks like your wholesale shipments to dealers were up, excluding acquisitions, in the five to ten million dollar range.

Just a second.

Joseph Yerman (ph): I'm sorry?

Just a second.

Joe, it has to do with the pipeline correction at sea Ray and particularly at Marine Max. They're still bringing down inventory. They were last year it's just a comparison between how much of those inventories were come down last year versus this year.

We'll try and help you off line get some specific information that will help you.

Joseph Yerman (ph): That's great. I'll follow-up after the call

Our next question comes from Scott Bearing (ph), Credit Suisse First Boston.

Scott Bearing (ph): Could you comment on what the gap is between the margins in low emission outboards versus standard outboards. And then George, in particular, I'm curious as to where you think that 40 percent mix of low emission outboards could go. Then just as a follow-up, could you comment on the Mercury's market share trends, particularly since bomb barred yea reentered the market?

Vicki Reich (ph): I'm not going to let George answer the question on the margins. But suffice it that they're lower than the nonlowee (ph) for now.

Scott Bearing (ph): George W. Buckley: So evidently I'm blocked from answering that question, Scott. But let me talk about market shares. There's obviously a lot of dynamic going on in the marketplace. And bomb barred yea has reentered the marketplace. Remember when you're looking at market share trends, there was for one time a lot of residual inventory from the old OMC company. In fact, some of our customers and competitors kind of bought a lot of that stuff at that time fire sale. That's got to go through and feed into the retail channel. So there was quite a lot of swapping around in the channel. Overall, though, outboard and stern drive shares, according to the data that we have, have remained pretty much flat year-over-year and so Mercury is market share is somewhere in the early, early 40 percent in the domestic market. This is outboard I'm speaking about.

Scott Bearing (ph): Just that mix on, where do you think that 40 percent goes, George, over time?

You mean over time? Over the long time, Scott, by 2006 most of those engines have slated out of existence not the DI engines the directed two stroke engines are not. I think over the next two years, Scott, you'll see that move increasingly followed by 2006 you're going to see that as maybe as much as 80 percent of the market will be four strokes. And I can't give you an accurate answer on that, but there will be a preponderance of four strokes in the market. Obviously the only two strokes in the market- outboards, of course, will be the direct injected opt fix and direct injectors, optimax fix (ph) and amara HPTI type engines (ph).

Scott Bearing (ph): 30 to 40 percent mix shift is going to accelerate over the next couple of years?

I don't know if you want to say accelerate it will just continue to grow. I wouldn't want to suggest necessarily the rate is going to grow but the mix is certainly going to change. And as we said earlier, many of those engines are new, Scott, and the cost reduction exercises are only just maturing behind the scenes, chase to improve the margin. So I think you'll see a couple of counter balancing impacts. Obviously the share of those engines versus the total growing but also the margins on those engines improving as we improve productivity, volume bills, prospects get done and also keep in mind that that shift is only a U.S.-led phenomenon. You might recall in an earlier conference call we pointed out that not in terms of dollars, but in terms of total outboards sold, we sold this past year more outboards outside the United States than we did inside the United States.

Scott Bearing (ph): On U.S. Marine. I think you mentioned a 25 million dollar operating loss there this year..

Yes, sir.

Scott Bearing (ph): Could you remind us what it was in 2001 and what your expectation was for 2003.?

Our public announcements on that were in the late 30s. I think 38 was the number we announced. That was last year I'm speaking about.

Scott Bearing (ph): For next year?

It will take us a couple of years to close that gap, Scott. We're not going to give a specific number at this point. We're still in the midst of budgeting, but expect some significant improvement next year.

Scott Bearing (ph): Great. Thank you very much

Our next question comes from Jim Conder of AG Edwards.

Jim Conder (ph): In your marine guidance for next year, George, are you incorporating the incremental impact of the new genmar (ph) contract, number one. In the third quarter can you quantify the contribution from couple minimums and as it relates to the pension, I think you lowered your discount rate or planned return assumption to nine percent. Refresh us there on those metrics that you're using and then you said you could potentially take a noncash charge in your debt to equity would be around 35 percent, assuming the high end of the charge range but that would not have any impact to covenants, just if you could clarify that.

Let me pick them up one by one and Vickie will pick up at least one of these. Yes, it does include the genmar contract, whatever contribution that makes. On the Cummins (ph) joint venture, that will add I think -- it will add a few million in OID.

For 2003.

For 2003. So you'll see a little bit of pickup in that. On the noncash charge, there are no impacts on our covenants, none whatsoever. And what was the other question, Tim? TWA it was on the pension?

Jim Conder (ph): If you can talk about the discount rate.

The rate of return on assets, we took it down nine percent which it's been for two and a half years to nine percent we're looking at it at that for next year if we're looking at it at nine or take it down modestly from there. The discount rate is end point determined. So there's obviously some variability how that will come out at the end of the year. We're planning on it being around seven percent.

Jim Conder (ph): Vickie, would you maybe take that down to eight and a half as much if you would reduce that further on the plan return?

Too early to say but yes we're looking at something in that range.

Jim Conder (ph): Two other brief ones. Just an update on your discounts and sin of outlook for the upcoming boat season and follow up on a previous question, just the details, Vickie of the inventory break down, the three components.

I'll take the discount question while Vickie is looking up the inventory. On the discounts, obviously -- of course there's no consistent patent in this -- across the same of every unit. It's not. Strangely enough in U.S. Marine, we've seen the estimate. We've seen improvement in the gross (inaudible). On the CRay (ph) areas, there's no reason to believe at this moment in time, Tim, that it's going to be any worse than we've seen in the last two years. It doesn't mean if market conditions don't improve at some stage you won't see that kind of pressure but we've not seen that kind of pressure yet.

Jim Conder (ph): Great. Thank you, George.

Tim the inventory break down is finished goods 254. Down from 289 at this time last year. Work in process, 195. That's up from 145 a year ago. Principally because of the hat terrace acquisition that was not in the year ago numbers they had work in progress which was funded with customer deposits and raw materials are about even versus a year ago at 64 million.

Jim Conder (ph): Thank you.

What we might see, Tim, by the way, in just the same way we did last year, we might see a little bit of pickup in the raw as we stock long lead items just in case there's a pickup next year.

Jim Conder (ph): George, along that line, how fast or say there's a pickup in the economy, things start to look better during the first quarter, what's your response time? If you're saying three percent up now for 2003, what could be your upside potential there on a year-over-year organization the response rate, just kind of pick a high and a low.

I don't know if I can forecast that number at this stage, Kim. All I will say is the average cycle time is virtually short on all the products. Small boats will go through a plant in two weeks. So this is not a long -- it's not a long lead time. It's the big boats where you see that. The engines the same thing is true there. If you look at the pipeline from sort of the worse case of ordering materials to an engine coming out, it can be months. But the actual manufacturing cycle time, as long as you've got the raw staged is relatively short. That's why we're doing that, to make sure we're well positioned to respond rapidly.

I think we've reached our time limit here. I would like to thank everyone for participating in our call. If you have taken follow-up questions, we'll be around all afternoon. Thank you again and everybody have a nice weekend

Thank you for participating in today's conference call. And have a good day.

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