賓士域 (BC) 2003 Q1 法說會逐字稿

Good morning and welcome to the Brunswick Corporation first quarter 2003 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session. Today's meeting will be recorded. If you have any objection, 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.

Thank you, Keith. And good morning everyone and thank you for joining us. With me today are George Buckley, Chairman and CEO, and Vicki Reich, our CFO. First, I will remind everyone during this call our comments will contain forward-looking statements about future results. Keep in mind actual results could differ materially from expectations as of today. For the details on factors to consider, please take a look at our 10-K for 2002 and earnings press release that we issued this morning, both of which are available, upon request, on our website at www.brunswickcorp.com. Since we are in the midst of earnings seasons and I know you are all very busy, we will try to wrap up in about 45 minutes.

Vicki would you like to get it start?

Thank you, Catharine and Good morning, everyone. This morning we announced earnings per share for the first quarter of 22 cents, up from 15 cents a year ago. This 47% increase in earnings per share came on an 8% sales increase and 60 basis point operating margin improvement. We achieved the margin improvement despite $9 million of higher pension, healthcare and insurance costs, which set us back almost 1 full point in operating margin. As well as higher R&D spending for new products, and higher marketing costs to drive growth in this sluggish economy. In addition to margin gain, we had good contribution from joint ventures, including our (inaudible) Cruiser, Disel Engine J.V. Overall we are (inaudible) with our results, especially in light of turbulent world environment, marked by untimely war for the Marine season, poor equity market returns that boost pension and insurance costs, sputtering economy, SARS, and just to keep life interesting, severe weather conditions that affected some of our key markets. Despite that, we remained 100% focused on executing our strategy. And while this exexternal environment means it will likely be a bumpy ride for a while, we are pleased with our strategy is showing up in our financials in form of sales and earnings growth, margin improvement, strong cash positions and improving return on invested capital. A walk through each business segment and give you color behind our operating results for the quarter, and then I'll close with comments on the balance sheet and cash flow.

Starting with the engine segment, which comprises Mercury Marine, and Brunswick New Technology or BNT. Sales were up 11% or 42 million for the quarter. We benefited from our strong global market position at Mercury and finally, a weaker dollar versus a year ago. Acquisitions in BNT and Mercury, including Northstar, IDS and Cambridge, also boosted sales. Absence the effect of currency and acquisition, engine segment sales were up a couple percent.

Modest growth in wholesale shipment reflects continued success in Europe and Asia and more normal stocking patterns at dealers and boat builders compare with last year when they were reducing inventories. These factors off thereto set reduction in US parts and accessory sales as war, weather and fears about the economy took their toll on the consumer. Engine pipeline inventories at dealers and boat builders remain in great shape, despite a slow start to the retail boating season. Inventories are at about 28-week supply, based on a depressed trailing 12 months of retail sales and about flat with this time last year. At this time in the season, this level of inventory is quite low. Turning to margins in the engine segment and speaking of bumpy rides, several factors conspired to depress margins by 200 basis points in the quarter. First, is continued shift to low-emission outboards which represented 50% of Q1 sales, compare wide 42% last year.

As we have said, it will take sometime to cross-produce more complex, low-emission engines. Second, reduction in high margin PNA sales in the quarter related to poor weather in key markets. Third, manufacturing costs and efficiencies resulting from production rate reductions we took during the quarter, as we adjusted for a slow start to the season. Labor and efficiencies, lower overhead and higher utility cost all dampened margins. Fourth, Mercury bears about half of the company's $9 million increase in pension, healthcare and insurance costs. These factors more than offset the positive effects of currency and slightly higher wholesale engine sales. While some of these margin pressures should be short-term, we've got our work cut out for us to overcome the shift to low-emission outboard engines as well as higher pension and insurance costs.

Our prescription includes variable cost adjustments as rapidly as possible as the economy goes through fits and starts. For example, we recently announced lay-offs affecting 200 hourly positions at Mercury. Permanent cost structure improvements focused global sourcing and lower cost manufacturing. George will expand more on these critical initiatives. Introduction of new gaming change products and technologies, including product X4stroke and Smart Craft electronics. And while not in our control at some point we do expect the economy to improve.

To give you a sense of where we are in the cycle, production volumes at Mercury in the first quarter were 25 to 30% lower than the volumes in the first quarter of the year 2000. Moving to the boat segment where sales were up 7% in the quarter. And more to engines, we saw a slow start at retail. We estimate that US retail boat markets were down 15 to 20% in the first quarter. Wholesale shipments benefited from some terrific new products which dealers were anxious to stock, as well as more normal stocking patterns compared with last year when dealers were reducing inventories. Results for our new products in virtually every brand confirm our belief that products with great styling, performance, ease of use and attractive pricing will bring in the buyers, even in a tough economy.

Pipeline inventory of boats at dealers remain at low levels and of excellent quality. We had an average of 27 weeks on hand, based on trailing 12-month sales, compared with 30 weeks a year ago. And at least as important to clean inventories are helping us maintain pricing discipline and position us well for upturn in sales once retail activity improves.

Margins in the boat segment improved 280 basis points, that's almost quadrupling, showing excellent operating leverage. Higher production rates, especially at Sea Ray, and lower sales discounts both contributed to margin improvement. U.S. Marine made good progress in the quarter on the road to recovery with much improved manufacturing cost efficiencies, and continued success of the new Bayliner 175 and in our new Meridian Yacht models. Please keep in mind, that like our engine business , the boat businesses are still operating at production rates that range from 20 to 40% lower than the cyclical peak in 2000. But further improvements in margins will come as the economy picks up and we press forward with cost reduction initiatives, including global sourcing and manufacturing.

Also in the first quarter, we made good progress in efforts to envelop our dealers with the best products and services to help them win in their markets. Brunswick Acceptance Company, JV Trend America began operations in January and is actively working with dealers to ensure long-term cost-effective access to floor-plan financing. Moving to fitness segment, where we continue to reap the benefit of continuous flow of new products, as well as our diverse global customer base. Sales grew 14% in the quarter and were up double digits in domestic and international commercial channels and our consumer channels. We continue to gain share in the club, military and vertical markets, which include hotels and schools. There was plenty of excitement at recent IRSA trade show around our new products, including variable stride cross-trainer and eye-lab display of future product concepts.

In addition to the growth, we were pleased with operating leverage in this segment. Operating margin of 10.5% were up full 200 basis points versus last year. Sales growth, cost-reduction programs and weaker U.S. dollar all contributed to the margin gains. In our bowling and billiard segment, sales were down 6% in the quarter as concerns about war and the economy dampened sales, especially in the billiards business. Bowling retail sales were up modestly in the quarter, which was good performance considering the weather challenges in the Northeast and Denver markets. Our refurbish runs with it's own bowling centers continues to attract crowds of bowlers and this summer we will zone 13 more centers. Cost management continues to pay dividends for us in bowling, where margins improved 50 basis points despite lower sales. The bowling team has done an outstanding job driving cost reduction throughout the organization, including global sourcing.

Shifting to the balance sheet and cash flow, free cash flow for the quarter was $74 million cash usage, reflecting return to normal seasonal working capital patterns. We are on track with our targets for $150 million of free cash flow for the year, which also anticipates capital spending of about $150 million. Working capital efficiency continues to improve. Working capital turns were 4.3 in the quarter and 8% efficiency gains compare wide 4.0 turns last year. We are seeing nice progress in our supply chain and inventory management programs, as well as good discipline in receivables and payables. Our balance sheet and liquidity remain strong, cash on hand was $280 million, nearly double a year-ago level and that the capital is on target at 35.6%. With that quick to of the financials I'd like to turn the call over to George.

Good morning, everyone. Good morning, Roger. And Thank you Vicki for overview of financials.

Given the weak economic situation that we find ourselves in, I hope we will all agree the first quarter for us was tremendously good news, as Vicki reported. For the most part, though, this good level of performance is more reflection of what is happening inside our company than what is happening outside. I'll tell you we have much more to do there ,and we are not at all satisfied with where we are in reality, I suppose, we never will be satisfied. To set the scene for you, I'll speak first about what will interest you most, that is what we are seeing in market from overall business perspective and then about our outlook for the remainder of the year.

The war in Iraq obviously caused a lot of uncertainty and distraction. While none of us can calculate the precise effect it caused, we have to be realistic and say it is too soon to tell how long-lasting the effects might be. So, before we get too optimistic after such a good quarter, we must remember the consumer psychology is key factor in both purchases and it may take time for that to recover. There are always a lot of moving parts in a company like ours. But I think for obvious reasons, there seems to be even more moving parts than normal this past quarter. So, I would like to tell you a little bit about the dynamics that affected our business in the first quarter and to some degree, we have to assume they will probably affect our business for sometime to come.

Let me first deal with negative factors that we saw during the quarter, then I will deal with the account balancing positives. On the negatives, while it always seems lame duck excuse when I hear it, the unusually bad weather across the much of the northern United States impacted sales and earnings for us. In particular, we felt sales and margin impact in marine parts, accessory sales, plus the bad weather and late holiday delayed the pick-up in sales we normally see this time of year. The PNA piece affects Mercury more than unit, and tight sales in this high-margin business were responsible for margin erosion that we saw at Mercury.

Secondly, in nearly all segments, depending on the business, we saw retail activity as against wholesale activity, which I will speak about in a minute, drop by between 15% and 20% in the year-over-year quarter. This is similar to the pattern seen by retailers in most segments of the economy. So we seem to be extreme examples in both directions, up and down. We saw weak retail effectors as far apart as billiards business and our fitness retail chain and across almost all of our Marine businesses.

The sole exception was at U.S. Marine, we saw strong retail sales, increases year-over-year, and I will talk about that in a minute. So, given the sputtering economy, we are bound to still be a little cautious about near-term retail market performance. We also believe this level of retail decline is most likely short-term blip, driven by global political events, poor weather and by SARS. Specifically we think this level of retail fall-off is unlikely to be maintained through the season and some pieces of it, such as PNA, for example, may even catch up as the weather improves. But, in contrast, we also have to hope the current range of negative events has not so frozen the ultimate retail consumer that we just destroy the market for another year.

Thirdly, overall Mercury's results were the ones we saw the greatest pressure this past quarter. Margin erosion at Mercury has been a challenge for us in the first quarter, but we need to put it in perspective. It is only domestic U.S. outboard business being impacted. At this stage, we have no reason to believe that (inaudible) United State Sales is anything other than temporary weather and late Easter-related phenomenon. Domestic sterndrives sales were very robust in the first quarter ,and unit volume increased by about 3% over last year. More over international sales to Mercury were good in all segments with sales up there in international by 17%.

Domestic wholesale outboard sales fell 2% in unit terms in the year-over-year quarter. So, our challenge here, I repeat, is purely domestic outboard business related one. So, what is happening here? As many of you know, so far it's being impossible for us to recover investments and higher cost in the outboard segment of our business as we shift down mix from classic carborator two strokes to low-emission directed injected two strokes or four strokes. This mix shift caused four point of margin loss. So, in summary, combination of low PNA sales, mix shift we just mentioned, low overall volumes, strong international growth, which mix us down a little, slower sales in largest engines and conversely drove in those areas where we share with Yamaha and (inaudible), all conspired to lower outboard margins. We do expect it to abate a bit (inaudible) it's new four stroke products.

These new engines will be Ferraris and Porsches of the marine business, and we expect it will benefit not just us but our dealers, as well. Finally, beginning in late summer of last year, we also saw flood of Japanese-made outboard engines that were brought into this country prior to the west coast long shore man strike that are now flooding the market at this low point in the seasonal cycle. Moreover, we also saw U.S. manufacturer being forced to do similar things, trying very hard to sell outboard engines but sometimes at huge discounts. We think this will bleed out of the success in the next quarter or so, and we have corrective actions being worked on now come I will not telegraph to the competition, but it certainly didn't help matters as far as sales where of our outboard engines were concerned. And we lost some domestic wholesale share along with it.

To complete the picture, Brunswick New Technology's numbers also included in the marine segment, the marine engine segment excuse me. Low margins as we absorb the start-up cost associate with the new initiates there in marine electronics and engine controls, among others. We expect to be in positive territory at BNT by end of this year. I think it is fair to say we are unlikely to see real relief in the domestic outboard (inaudible) until several things happen.

Firstly, that the economy recovers somewhat and volume improves. Secondly, our new four-stroke product is released. And thirdly, that we can complete the fundamental restructuring on the cost side of this business, which Pat Macky and his people are working on hard as we speak. Fourthly, like all businesses today, we have been burdened by increasing pension, healthcare and insurance costs, and it is not stopping. We estimate those factors cost us about $9 million in the year-over-year quarter, comparisons essentially 4 point of margin. By the way, in Mercury's share alone is more than half of the cost, as Vicky said.

Now, for account balancing positives we have seen in the market. Now, boat businesses we saw 7% year-over-year sales increase at whole sale. While off of low base, our operating margin quadrupled year-over-year from 1% to 4% and we expect that upward margin trend to continue now as the year unfolds. The good news is that while wholesale sales on average are up over last year, we are still seeing wholesale sales slightly less than retail. As the pipeline corrections take place here and there. We expect retail and wholesale activity to be in balance soon. Again, we are already selling what newly styled and innovative products, especially at Sea Ray, whose sales rose 9%.

And when we see return to more normal retail sales level pattern sales will grow as the pipeline fills again rapidly to respond to higher retail demand. Forecasting when that will happen, however, is more difficult. I am pleased to announce that in May, Mercury will release it's new 3 cylinder direct-injected optimax outboard engines. These are beautiful new engines, size in the 75 to 115 horsepower range, with fuel economy and performance even better than comparable four-strokes. Ours or anybody else's included. They are also lighter in weight and have better torque. They will add considerable power in our line-up to this (inaudible) segment that is growing the fastest. It will be important internationally where fuel prices are much higher domestically. And in off shore application where cruising range is an important factor.

The next point I would like to mention is sales growth in Life Fitness continue to well outstrip the market overall, with sales up 14%. This is extremely good performance in this economy, leading to excellent marketshare gains. Innovative new products are lead all this sales growth. So in total, margin of sales increases were both in double-digit increases, even with the political and economic distractions we have seen in the last three months. In bowling, while sales in bowling and billiard fell overall by 6%, lead by decline in 8% in bowling equipment sales, overall operating margins improved by 50% basis points to a very nice 9.9%. The decline in bowling and equipment sale system due to construction project timing and not something we are concerned about long-term. Even with everyone watching 24 hour war television, sale necessary bowling retail still grew by 1%, showing great stability in these unusual times. So, overall our bowling business did well. We are especially pleased to see continued operation improvement in bowling product piece of the business due to ongoing efforts of Peter Hamilton and his team.

It was also good news at U.S. Marine where sales were up 4% in dollar terms. Also unit volume was up 34% in the year-over-year quarters. It is no surprise that what is selling best are the small Bayliner 175 boat and new Meridian yachts. We have sold about 4,000 of this Bayliner entry-level model and expect it to remain popular throughout the coming season. To us, it proves again that innovation works. I can also confirm slightly larger Bayliner boat in this low cost, high margin series will be released in June to add to the production in (inaudible). It is our goal to have not less than five units in this low-cost high-series unit by 2004, which we will require building a second (inaudible) plant in Mexico sometime next year.

Please remember also, this product is not just about making and selling boats, but consider that with each one of these boats we also sell an engine. Our dealers also make lots of money on these boats. Moreover, now that we are well past break-even margin. The margins are these boats are significantly better than the ones we traditionally have made here in the U.S. So, overall, the mixing is up in both margins. We believe that by end of calendar year we will have run rate of 8,200 boats out of this one plant. Currency is also finally helping us in some overseas markets. Markets though translation benefits, but also by making this more price competitive here and there. Over time that will help drive increased volume.

I can also confirm we have been able to hold the engine market share we gained overseas and profitability of our international operations has generally improved. At this stage now, the quest for us is clear, is to continue to improve margins in an environment where we are getting no help from the economy, and not likely to get any for sometime to come. Looking at margins, 78% of our cost are above the gross margin line, and that bodes for effort in operational excellence. This quest for cost improvement margins comes in three primary forms. Firstly, in supply chain management, particularly in global procurement. Secondly improvement in labor costs, and lastly from improvement in overall productivity.

We spoken quite often in the past about supply chain initiatives, which now effectively are controlling inflation, and believe me, there is still great inflation out there in engine blocks, energy, in resins, in steel, all of which we use lots of. Let me say something now about manufacturing. We continue to make good progress in changing our manufacturing footprint to one that will result in lower cost for our company over time. I have already mentioned the continued expansion in Mexico, here are some others. On engine manufacturing we are committed to move the manufacturing of small commodity engines to Asia, where we have been building capability and sourcing components for sometime now. We expect to have sizable pieces of this work completed in the next 12 to 18 months, and our view we have no choice but to do this to remain competitive in the small-engine business.

Also, in manufacturing, I am pleased to announce we signed an agreement with new partner in Hungary to manufacture strength equipment for life fitness in Europe. We will be in production at new facility there in the fall. You can imagine that because of the large (inaudible) of strength equipment, it is vital for manufacturers products like this close to market. A second move in fitness, it is our plan to be manufacturing cardiovascular equipment in the European market in Hungary, again later in the year. Current plans have this product being manufactured in a facility adjacent to our bowling equipment plant in Hungary. Our existing bowling management team will manage the new plant, thus leveraging capabilities across two of our divisions.

Turning now to our marine business, we have spoken to you from time-to-time about growth initiatives we are planning in boat parts and accessories business. Strategically this fills a couple of roles for us. First, key to our goal of enveloping our dealer products and services that will help them and us succeed. Vicky mentioned earlier another component of this strategy, Brunswick Acceptance Company, our financial services arm. Secondly, new boat PNA business provides sells growth as well as margins that are overall accretive to boat margins. We are currently working on two deals in this area, and you should expect to hear more about them when the quarter unfolds. So, watch this space, we are making good progress.

We also continue to make good progress in (inaudible) manufacturing of boats. We have now made 1,200 boats with this process ,and we have finish development and improving of our preform blanket process that is the standard method for manufacturing of these boats. I think you all know that we believe this kind zero emission manufacturing to be the longer term future of boating.

I would like to say something now about the second quarter and year as a whole. Accurate predictions about the direction of the economy obviously remain difficult. We have even seen that kind of statement from the Federal Reserve Board and we don't profess to have any wisdom about this situation that they don't.

Overall, the U.S. economy appears to be going sideways to us. So, while ever this uncertainty remains, we are going to be cautious about both our spending and our sales for a while. However, we are not expecting a melt down of the U.S. economy or for that matter, of the recreational boating market, either. We may not see much growth in 2003, but are not expecting Armageddon, either. On the positive side, the war in Iraq is essentially over. Interest rates remain low and may yet go lower. The trending fuel price is now down. All these factors will help. World events will cloud the picture in the near term and we think it will take sometime before it clears, and the positive factors I just mentioned have a chance to gain momentum.

Confidence is the key. Until the consumer becomes more confident and increases demand for goods and services, capacity will remain underutilized, and the capital spending that creates real jobs will remain depressed. Low interest rates don't help capital investment when you have excess capacity. Here is what we think we can say. Given our best assessment of the future impact of current events, we believe our EPS for the year will be in the range of $1.40 to $1.50. For the second quarter we expect earnings to be in the bound of 50 to 55 cents. To bring more visibility to our assumptions, our financial plan always had earnings pick-up in the second half of the year. It was not on the Alice in Wonderland, jam to moral basis. Much was detailed cost planning lead.

We expect for example, Life Fitness will continue good sales and earnings growth. And you recall that their big quarter is always the fourth. As we have mentioned before, we have lots of new products being released at Life Fitness this year, that should help drive good sales and earnings growth. Moreover, the operational improvement at U.S. Marine continue to gain positive momentum and their financial plan shows continued improvements throughout the year with pace picking up toward the third and fourth quarters. New model releases that I spoke about earlier will help build that momentum.

We intend to continue our focus on operational excellence programs and innovation. Mercury releases big new four-stroke in high volume next year. We believe their sales and margins will then benefit from innovation just as our other units have done. We remain focused on the things we can control and steering our ship in the way to balance short-term needs, as well long-term goals. Overall, though, we are expecting reasonable year with lots still to do to improve our company further. Thank you very much for listening, everyone, I appreciate it. Now, we'd like to turn the call over for questions.

Thank you. At this time, we will begin our question-and-answer session. If you have a question, please press * 1 on your touch-tone phone. If you are using speaker equipment, you may need to lift your handset prior to pressing * 1. Should you wish to cancel the question or if your question has been answered, simply press * 2. Once again, if you have a question, press * 1 and * 2 to cancel. One moment while the questions register.

Our next question comes from Jill Krutick (ph) of Salomon Smith Barney.

Thanks very much. Good morning. Could you George, perhaps talk to us about Bombardier and their plan to get out of the business, and how that might influence your business?

Secondly, I am curious how you guys are continuing to see planning for SARS, and what kind of steps you are taking and what you are seeing so far having influence on your business?

And finally, related to the PNA moves in terms of acquisitions, it seems that you are getting into high-tech areas, like with Northstar and things of that nature. Do that put sort of pressure on you to maintain really high-tech products, does that put you in a different ballgame in terms of competition?

Thanks a lot.

Thanks a lot Jill.

Just a few words on Bombardier. Obviously the collection of markets they participate in would it would be really tough for those folks up there. It is in pretty much every segment of business, in transportation, airlines and recreational business. And you know, one level it is sad they have decided to exit that business. On the other hand, if you were in a dealer's shoes, your bound to be wondering whether this yet another sort of tempest or a typhoon and what you ought to do about it. So, I think the reality is, Jill, that there are some share gain opportunities there properly seize, and properly managed in a professional way that you can well understand that we intend to try to take advantage.

On SARS, we haven't seen a tremendous impact of SARS -- of SARS on our business at this point in time. We have seen some longer-range softening in orders, but only in small segments of our business. And, of course, what we hope is that the medical profession will get control of SARS. We don't know, for example, if it is weather-related, it's seasonal, it might abate naturally or what. But clearly in the area of the Asian economy, if it goes on for much longer I think it will cause bumpiness for all businesses.

In the parts and accessories business, we are actually very enthused about what we are doing there. The parts and accessory business in the high-tech stuff are really a little bit different. The PNA stuff really relates to after-market service of the dealer body, and our belief it is vital for us to sort of get next-day service to these guys. When a boat is out of the water, get it parked there quickly. Or when an engines out of the war, get it parted there quickly. So, that's about -- it's about a service model in the after-market. The move into marine electronics, Jill, are much more about a belief that we have that the product is -- the boat product is going to increasingly over time become more like cars. And so we see ourselves and have begun to do this now, designing boats that look and feel and fit together in a seamless, integrated fashion, not like some sort of jag-ended kit car. And so, the move toward high-technology segments we think brings greater value and greatness to our company, and completes a product line-up that just makes us -- just allows us and facilitates making a better product for customers.

: Great. Thanks a lot, George.

Thanks. Thanks a lot, Jill.

Our next question from Bill Learner of Prudential Securities.

Thanks guys.

Lets see two for Vicki. One, Vicki, could you talk about what the other income of 3.6 million represented in Q1? And then number two, what do you expect to be the amount of the charge for the California Life Fitness plant closing in Q2, and Is that included in your Chang Qiu guidance?

First, on the other income, that's principally joint venture income, which includes (inaudible) Cruiser, as well as some joint ventures in the bowling area, we are seeing nice results there. And a little bit of interest income, as well, with higher cash balance.

There's nothing extraordinary, I guess is what I getting at?

No, nothing extra ordinary in there. And on the Paso charge, yes, it is anticipated in our estimates for the next quarter, and for the year, 4 to 5 million dollars charges that will flow through the operating earnings to complete that closure. And about a million and-a-half will come in the second quarter.

Okay. Thanks.

Thank you. Our next question comes from Joe Hawkforker (ph) from Raymond James.

Thanks.

Actually, a couple of quick questions. When do you expect the low e-engine margins will get to the two-stroke margins, if ever? And secondly, the healthcare pension costs, is that going to one, I think you gave $22 million number for the full year on the last conference call, is that still a good number, and If so, would that indicate the impact would be less for the remaining three quarters of the year than it was in first quarter?

Joe, I will take the healthcare pension piece first. What we said is pension alone, the incremental cost would be about $22 million for the year. Adding in healthcare and insurance, we estimate 30 for the year. Given the first quarter experience it could be modestly more than that, but it is going to be in low 30s all combined for those three factors.

On two-strokes, Joe, I think it really is very, very hard to identify whenever, if ever, four-stroke margins are going to get to two-stroke margins. There more cost in these parts, and I suspect that we have a few counter-balances things going on Joe, as the cost-reduction efforts mature over time. We talked a little bit about this in the past. That will help lift margins, as we build volumes in that segment, it will help with margins because we will be able to buy better and leverage manufacturing better. There are even other factors going on which are, you know, in a sense behind the scenes and below the waterline, which are about designing all of these products in families.

For example, the new Project 'X' is actually six engines in a family with 95% common parts. And all of these are pieces of the puzzle that help to drive production efficiency, and because of their performance, help to drive pricing and margin. And I think there's -- it would be too bold to suggest that we expect those products to return to the very high margins of two-strokes. At this juncture Joe, it is too soon to make that prediction.

Okay, thank you.

Thank you. Our next question comes from Dean Gianoukos (ph) from J.P. Morgan.

Hi, just couple of questions.

First, can you give us a loss in US marine and what it was at the same time last year? Can you also tell us what the overall impact of foreign exchange was? And then could you tell us what your pricing trends were like in the quarter for your boats? And then finally, can you give us a sense of the cost savings on the plants you closed, and given you are cutting costs, where do you think you are versus the end game?

Thanks.

Do you want to take any of those, Vicki?

Sure on. Foreign exchange impact overall was 3 or 4 cents on the quarter. On as we saw on the top line it was about 20 million. So, we absorbed a lot of pain on currency in the last two years, and were glad to see it going the other way. It was consistent with our expectation there, because most of the movement occurred in back half of last year. And let me take (inaudible) as well on the closure there. Savings there will be about $5 million on an annual basis, so it's a very quick payback.

Let me pick the other points up if I can, Joe -- Dean, I mean, sorry.

On pricing, we in general rule we have not seen the kind of tough pricing we have seen in the automate business, with one exception. We are seeing it in the outboard business, and probably likely to go on for sometime. We try to play a delicate balance of not falling the pricing aggressively because you know what that happens. You will never buy another outboard unless it has some big promotion on it. These sorts of programs are little bit like ratchets. If you follow them down rabidly, you can never get them back up. So, we always try to play a balancing act of share versus price. Recognizing. And then if you can condition of the market to price promotions it is going to be like you are waiting for the next sale at Sears. So, we try to avoid that as best as we possible can.

On U.S. Marine, the quarter-over-quarter numbers loss last year and this year are actually very, very similar. Actually, what happened is we changed some methodologies in our accounting. We for example, are expensing more of the variations that we traditionally in the past capitalized. So, the quality of that loss is somewhat better than it was last year.

Can you just give us a number, please?

It's about five.

It's about $5 million.

Okay, thanks a lot.

Thank you. Our next question comes from Tim Conder (ph) of AG Edwards.

Yes, just a couple, Vicky, could you maybe just give us your updated outlook as far as year-over-year gains in sales for boats, engines, Life Fitness and bowling?

And George, with project X, will that be in introduced at the end of this season, i.e., in calendar '03? And then, are you seeing any share loss in outboards due to the delay in Project 'X' coming out? And then finally, it's a follow-on to the previous question with US Marine, where do you anticipate the loss for full year being?

Good question, Tim.

The full year loss is about half, in fact, a little less half what it was last year. But actually, the underlying numbers are better than that because we reestablished variable compensation this year at US Marine. So, that's the US Marine situation.

Some where around 12 million or so, George, would be fair?

Yes, you'll be close to the number there with that. On the issue of Project 'X', you will see this summer, Project 'X' engines in the market in low volumes. Really, where they will beat them is with customers testing them to the last final refinements of the product to make sure it is absolutely bullet proof. I mean, we are determined when this engine is released, it is going to have the best quality of any engine in the world. And to your question about how we see share loss as consequence of the delay, the answer to that is yes, in outboard domestic. And we probably will continue to see some pressure there until that engine is released in high volume next year.

And Tim, to your question on outlook for the year in sales by segment, no changes to our outlook for the bowling and fitness businesses. So, in bowling, still expecting low single digit, top-line growth. Fitness, you know, high-single digits, maybe 10%, and good margin improvement will continue in both those segments. On the marine side, we are somewhat more cautious than we were initially, just given the slow start at retail. And at this stage of the game, what we say is sales growth would be in the lower mid-single-digit range. And the key there is going to be retail activity in the pivotal second quarter, and also as we head into the second half dealer confidence around stocking for the 2004 boating season.

So, just to clarify, Vicky, for both boats and engines each of the low single digits for both?

That's right. Yes.

Okay, thank you.

Thanks, Tim.

Thank you. Our next question comes from Joe Yurman of Bear Stearns.

Hi, guys. Couple here this morning. Getting back to the question that was raised about the margins and the engine business. Is this a short-term phenomena, George or do you think the days of mid-double-digit top engine in the engine business are gone, and we should start to think about this given more of the investment in electronics, as well as maybe heightened regulation as bringing margins -- excuse me, in this segment of the business, and let's say the low double digits, that is the first question.

Second, curious which models you are currently manufacturing with your Mitt technology and I would imagine the volumes are still too low to see the benefit of that beginning to show up in the operating margins. But, if you could just comment on that.

And then lastly, maybe talking about the guidance, and how you heightened the top end of the range that you offered for the full year by about 10 cents. And I am just wondering if this is solely a function of kind of just being more conservative based upon your ability to sell in here in the high season or are the dial-back plans on selling and Project 'X' given some of the uncertainties in the outboard market that may ensue because of what is going on at Bombardier and some of the other Japanese competitors?

And that's it.

Let's see. Starting with outlook of the year, it's really a function of the economy and what we saw in the first quarter, more than anything that is causing us to take our guidance down to the lower end of the range. And first quarter retail in marine isn't all that critical, but on the other hand, it is setting a trend going into the second quarter that gives us pause. And frankly, causes us to spend more on marketing and promotions and being more aggressive in a tougher marketplace. So, our outlook reflects that kind of difficult market conditions in the marine segment

Okay.

On your the -- on your question, Joe, on the Mitt technology, it's in the early 20's, 23, 24 foot (inaudible) is where it is being used at this moment in time.

On engine your question about engine margins.

Hello.

We thought we got disconnected, Joe.

I am getting a fast busy. I thought you didn't want to answer the question.

We are, too, we will talk over it.

Please, Please stand by.

Joe, are you there?

Hopefully... I told them to reconnect to us.

Okay, Mr. Yurman has disconnected.

Our next question comes from Burt Koontz (ph) of Merrill Lynch.

Hello.

Excuse me, Burt.

Hello, is anyone there?

Hi, Burt.

Hi, okay, great, thanks.

Somebody else on the line there.

Okay, most of my questions have been answered, I just go over some maintenance stuff. What was capex for the quarter? And then, if you could talk about what I guess typical question, plant production capacity levels stand?

Capital spending in the quarter was $20 million, and in terms of capacity utilization, we are still running pretty low, Burt, we're still in the mid-70s.

Okay. All right, appreciate it. Thank you.

I think we've come to the end of our time limit here, I want to thank everybody for participating in our call and if you have follow-up questions, please give us a call. Thank you very much.

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