賓士域 (BC) 2006 Q4 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2006 fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). 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.

Good morning and thank you for joining us for our quarterly earnings call. With me are Dustan McCoy, Brunswick's Chairman and CEO, and Pete Leemputte, our CFO.

Before we begin our remarks, 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 the details on the factors to consider, take a look at our 10-K for 2005, our 10-Q for the September quarter and our earnings release issued this morning. All of these documents are available on request or by going to our Web site at Brunswick.com.

We appreciate your taking time to be with us this morning, especially in the midst of the busy earnings reporting season. So we will try not to tie you up for more than 45 minutes. Now I will turn the call over to Dusty.

Thank you, Kathryn, and good morning, everyone. By now you've seen our press release, but let's repeat the headlines. The 2006 full year came in at $2.28 diluted EPS, excluding the tax benefits we described in our press release. This was right in line with our previous guidance of $2.40 to $2.46 [because] that guidance did not include restructuring costs for the actions we announced in November, which reduced EPS by $0.14 before the tax benefits.

We've got a lot to cover today, but when we're done, I hope to leave you with three messages.

First, we're meeting our promise to you and ourselves. While we are in a cyclical industry, we will perform better during any current cycle than during the previous cycle. In 2006 we performed well in a declining market, as evidenced by the fact that our EPS at $2.28 was well in excess of the $0.96 reported in the most recent downturn in 2001. We are demonstrating our ability to manage our company through the peaks and troughs of a highly cyclical industry.

Second, we're staying focused on our strategic objectives in spite of these difficult market conditions. And at this time, I want to thank our management team and our 28,000 Brunswick employees around the world for both their contributions and performance in this very tough market environment.

And finally, as you saw in a series of announcements in 2006 and early this year, as we stay focused and execute against our strategies, we're continually improving our productivity and efficiency. These improvements enable shrinking -- pardon me -- our manufacturing footprint, flattening our organizational structure, executing on strategic initiatives across our businesses, and a myriad of other benefits. In the coming months and years these activities will continue, and they will become more and more a part of our operating persona.

Pete will give you more details in a minute, but as you saw in our press release, we ended the year with earnings from continuing operations in the fourth quarter of $0.22 per share, excluding the tax-related benefits. In the 2005 fourth quarter, we reported earnings on the same basis of $0.68 per share.

Our results are right in line with our previously announced expectations, as I said. But as you have heard us say many times before, in the cyclical marine industry, we have to manage our pipeline inventories well. Retail marine markets remained very weak during the final quarter of the year, with near double-digit percentage declines in both engines and boats versus 2005. Our sales and earnings reflect our reducing production volumes to manage inventories.

The fourth quarter only accounts for 6% to 8% of full-year unit retail sales to customers. Therefore, we have to be cautious in extrapolating from these off-season indicators. But, the comparisons should have been a bit easier. You may recall that we started to see significant weakening demand at retail in the fourth quarter of 2005. While many of the fundamentals that drive buying behavior have settled down or even improved, we have not yet seen any sustainable increase in retail demand.

So, going into 2007, we are planning our year on the basis that marine retail markets will not improve. And in fact, we're assuming retail during the year will be down in the low- to mid-single digits.

While some progress was made in the fourth quarter, we believe that our pipelines still remain too high, particularly for some select product lines that carry higher-than-average markings. Therefore, we will continue to pull down our wholesale shipments through at least the first half of 2007, and, obviously, reduce volumes to put greater pressure on both gross and operating margins.

In addition, we are assuming that price increases will not fully offset inflationary pressures on our raw materials and labor costs. And while we will see the benefit of our restructuring actions, this, too, is offset by higher research and development spending and additional work on our strategic objectives.

All of these factors have led us to forecast earnings for the full year in the range of $1.65 to $2.00 per share. The comparisons will be particularly tough in the first quarter, as results were noticeably stronger in the first quarter of 2006 than for the rest of the year. In addition, because marine pipeline corrections should continue through the second quarter, we expect that our results for the year will be more back-end weighted than would normally be the case.

If I could, I'd like to take this time to make a few comments on the overall U.S. marine market. Looking back, the last peak for the marine industry was the year 2000. Retail demand declined significantly in 2001 and continued to decline through 2003. While we saw a recovery in 2004, into the first two or three quarters of 2005, industry retail units never reached prior peak levels before they began to drop again. In fact, 2007 industry units are expected to be at the lowest level we've seen since 2000.

We think many temporary factors are at work as we look at these comparisons, including disposable income and the price of boats. These factors serve to decrease demand, but our strategies and good execution have positioned us well. A quick look at these factors gives us a good view of how we're performing.

First, our analysis shows that disposable income is one important driver of retail volumes for boats. On an absolute basis, disposable income is still growing; though the rate of growth has slowed. But even more importantly, the dollars actually available to families for use in purchasing nonessential items decreased in late 2005 and 2006. The costs for gasoline, food, automobiles, schooling and healthcare, to name a few, fluctuated or increased, and ate into the income available for larger-ticket consumer discretionary items.

The second factor is the pricing of boats themselves. Not surprisingly, boat price increases are inversely proportional to demand. Looking at industry statistics, the average price of power boats in the U.S. rose 5% during 2005, which is the latest year for which we have any data, on top of a 3% increase in 2004. At work here are low-emission regulations for outboard engines and underlying inflationary pressures for components and key raw materials such as aluminum, copper and resin.

When you consider these factors, our financial performance is seen in a different light. Despite lower retail volumes, our EPS guidance for 2007 is still expected to be almost double the [top] earnings of $0.96 per share delivered in 2001. This performance highlights the fairly dramatic changes that have taken place within our company. It reflects a sound focus on improving costs across the enterprise and securing our cost position to ensure affordable product. Our Bayliner 175 entry-level runabout is a good example that.

Our performance also reflects strong international growth in our marine operations. In the past five years, our international sales have grown at twice the rate of our U.S. sales, and you will see a renewed focus on building our global marine presence in established markets such as Europe, as well as emerging markets.

Other factors contributing to our success include the increasing benefits of building a boat parts and accessories business and posting significant growth in engine P&A, contributions from our various boat brand acquisitions, and the steady expansion at Bowling & Billiards as well as at Life Fitness. This list is not exclusive, and we know we have much more to do. But our successes have only spurred us to move faster because we can feel the change. When these factors are coupled with a return to more normal economic conditions, we will be uniquely positioned to capitalize. Thus, while we can't control the cyclical nature of our markets, we can choose how we respond to these business conditions. Our promise has been to seek ever-increasing earnings versus the prior cycle at both the peak and at the trough. Our financial results in 2005, 2006 and those expected in 2007 demonstrate our ability to do just that.

Pete will review the financial impact of the restructuring we announced last November a little later on our call. I also draw your attention to the marine reorganization we announced last week and the early retirement option Mercury announced earlier this week. These are good examples of a continuing stream of productivity and efficiency improvements we're pursuing.

As we reduce our manufacturing footprint, become more efficient, realign our organizational structure, implement initiatives across businesses and undertake other similar activities, our organization will continue to become flatter and faster. This will enable us to ensure a quicker response to the marketplace. This is not a new thrust but a natural evolution, and in the coming months and years these events will become a part of the normal way we operate.

With that, let me now turn the call over to Pete, who will provide some details on our fourth-quarter results.

Thanks, Dusty, and good morning. We reported fourth-quarter earnings from continuing operations of $0.47 per share. Excluding the $0.25 per share tax benefit, our earnings came in at $0.22. That's down 68% versus the $0.68 in the fourth quarter of last year, also excluding special tax items. I should note 2006 fourth-quarter results include charges of $0.14 per share associated with the restructuring actions we announced in early November. So, let me start with a few comments on those activities, those restructuring activities.

Weak market conditions in our marine operations led us to look for savings to create the headroom for continued investment in our strategic initiatives. The actions we have taken will result in cost reductions of $26 million during 2007.

Total restructuring charges recognized during the fourth quarter were $19 million, with two key drivers at work. First, a little more than half of the expenses are severance charges, reflecting the elimination of about 75 hourly and 230 salaried positions. On the hourly side, this reflects the production cuts we've made due to weaker marine markets, as well as the initial stages of shutdown of two boat manufacturing plants and consolidating production to existing facilities. On the salaried front, we took action after a fairly thorough review across our operations, with the goal of work elimination or reduction wherever possible.

The second key driver relates to asset write-downs and impairments accounting for over a quarter of the total restructuring charge. There are a number of specific assets involved, including some manufacturing equipment at the two boat plants being closed. The biggest contributor, however, relates to our Bowling & Billiards segment. We are realigning distribution for our bowling products business, which includes pin setters, bowling balls, supplies and the like, in some select international markets, and that contributed to the impairment charges.

As was detailed in our November announcement, additional charges from our restructuring activity will roll over into the current year. For 2007, we expect an earnings impact around $10 million, or about $0.07 per share, for actions identified to date, bringing the full impact over both years to $29 million.

Looking at our fourth quarter, sales fell about 1% to $1.37 billion. Organic sales, excluding acquisitions, were down a little over 2%, with significant growth at Life Fitness being more than offset by declines at our domestic marine operations and at Bowling & Billiards.

Operating margins were down by 500 basis points versus last year. Restructuring charges account for 140 basis points of the decline, and there's another 50 basis points due to the benefit realized in the fourth quarter of 2005 from incentive awards foregone by our prior CEO. Of the remaining 310 basis point drop, two-thirds was seen at the gross margin line and one-third from higher operating expenses, measured on a percentage-of-sales basis.

The gross margin drop was due in part to fixed-cost absorption at our engine and boat plants from lower production and wholesale shipments. We normally take shutdowns during the fourth quarter around the Thanksgiving and New Year holidays, and, in many cases, those were extended to help reduce dealer and OEM pipeline inventories. Unfavorable product mix was also at work, since pipelines have been heavier for higher-margin cruisers and the MerCruiser sterndrives and inboard engines that power them.

While the low level of retail activity in the fourth quarter limited the ability for more significant reductions in pipeline inventories, progress was made. There was 34 weeks of supply of boats in the dealer channel at year end, up from 31 weeks a year ago. This three-week increase compares to a five-week, year-over-year increase of inventories at the end of September.

For our engine business, inventories stood at 26 weeks of supply at the end of December, flat with the prior year. We posted a week's increase in engine pipeline inventories back in September.

Since the fourth quarter is the key season for our non-marine businesses, let me comment on those briefly.

At Life Fitness, we saw impressive 9% topline growth, with strength in both domestic and international markets. Operating margins in the quarter were down due to higher R&D spending in support of new products, a mix shift to lower-margin strength equipment, and higher freight and installation costs. On a full-year basis, margins for Life Fitness came in at 9.7%, the highest of our four segments.

The Bowling & Billiards segment reported a 5% drop in sales. We posted good growth in our bowling retail operations; however, the coin-operated billiards business remains weak overall. But the biggest driver of the sales decline was at bowling products. We had a large capital equipment shipment in the fourth quarter of last year, which resulted in a difficult quarter-over-quarter comparison. Reduced sales contributed to the margin decline, coupled with higher spending for the transition of bowling ball and coin-operated billiards tables to Mexico. But the most significant driver of lower earnings and margins came from the $4.5 million in total restructuring costs, including the asset impairments I mentioned earlier.

Switching to taxes, we recognized $0.25 per share in special tax benefits in the fourth quarter, due to the completion of tax audits from prior years, both in the U.S. and abroad. Our effective tax rate for 2006 from continuing operations, excluding all special tax items recognized throughout the year, came in at 30.2%. That's down from the 32.6% seen as of the third quarter, because Congress finally extended the research and development tax credit in December, and we also benefited from growth in international operations located in lower-rate environments. In 2005, our effective tax rate from continuing operations was 31.3%. Please note that our earnings guidance of $1.65 to $2.00 per share assumes an effective tax rate during 2007 around 32%.

Our guidance also assumes topline growth to be relatively flat, down slightly at the midpoint of our range. The softness in our domestic marine businesses is somewhat offset by low- to middle single-digit growth in both our Fitness and Bowling & Billiards businesses, as well as international marine growth.

We expect operating margins to be down by about 100 basis points, at the midpoint of our guidance, driven by a number of factors, including -- lower wholesale shipments as we continue to reduce marine pipeline inventories; the impact of fixed-cost absorption for lower production; price increases, which will be more than offset by the inflationary pressures on raw materials and labor.

Spot prices for a number of commodities peaked in the late summer, but our supply contracts often have a natural lag built in, which smooths out the impact from spot price fluctuation. But, we don't expect to see any immediate relief.

Restoration of variable compensation expenses will also be at work, as well as the benefits of our cost-savings actions, net of continuing investments and strategic initiatives. And finally, growth in our international marine operations, as well as our Fitness, Bowling & Billiards businesses.

Please note we've also assumed the repurchase of several million shares of stock, although this benefit to EPS will be offset in large part by the increase in our effective tax rate that I just mentioned. And as Dusty highlighted, due to the pipeline corrections we'll be taking in the first half of the year, our earnings will be more second-half weighted than what we would typically experience.

Turning to some comments on our balance sheet and free cash flow, we ended the year with a cash balance of $283 million. During December we retired $250 million of debt on schedule using proceeds raised in the $250 million debt offering in the third quarter.

Free cash flow from continuing operations totaled $153 million in 2006. That's down from 210 in 2005, excluding the impact of the MarineMax stock sale. Lower earnings and a greater build in working capital compared to the prior year were the key drivers, and were only partially offset by higher depreciation and amortization expense and a drop in capital spending.

You will note that working capital increased by $93 million during 2006, versus a $54 million build in 2005. That may be surprising to some, given weakening marine markets. In fact, this is a similar trend to what was seen during 2001 in the last downturn, and is driven by the timing of our variable incentive plans.

We paid out bonuses -- obviously, using cash -- in early 2006, based on the record performance delivered in 2005. Our variable compensation plans in most of our marine operations and at corporate for 2006 will not pay out due to the marine downturn, but that won't benefit free cash flow until 2007.

The other driver of the working capital build in 2006 was higher inventories, which stood at $862 million at year end, up from $817 million a year ago. About $20 million of this is from the acquisitions completed during the year; another $10 million came from higher raw materials and work in process at Hatteras, as our order rate picked up and we started up the new Swansboro, North Carolina, plant acquired in 2005.

The other key driver of higher inventories was sales growth and new product launches underway at Life Fitness. Inventory turns for the Company did drop by about 3%, as would be expected in a downturn. And we also have lengthening supply chains with more product and component parts sourced out of Asia, so that is also having an effect. Reductions in our inventories will continue to be a focus in 2007.

On the capital expenditure front, spending came in at $205 million, down from $224 million in 2005. Capital expenditures at our base marine operations were down 20%, which were offset only in part by spending at newly acquired businesses and the joint purchase of the St. Petersburg Marina with MarineMax.

Lower marine capital was also partially offset by a 19% increase in expenditures at our Bowling & Billiards operation. The move of both bowling ball and coin-operated billiards table manufacturing to Mexico was the key driver, coupled with investments in our newer Brunswick Zone XL bowling retail centers. These Zone XL centers have an expanded footprint, with up to 48 lanes, along with larger game rooms, meeting facilities, bars and dining options. We currently have five XL centers operational and plan to open another three this year. During 2007 we'll be looking at financing options to accelerate growth in this business.

For those who are modeling cash flow in 2007, let me point out that we currently expect capital spending to run around $190 million, with depreciation and amortization expense around $175 million. Our cash balance of $283 million at year end is particularly impressive in light of the $86 million we invested in acquisitions during 2006, as well as $196 million for our share repurchase program. During the fourth quarter we bought 1 million shares of stock, bringing the full-year total to a little more than 5.6 million shares, or about 6% of our outstanding base. When coupled with the $55 million dividend paid in December, we returned a total of $251 million to shareholders during the year -- well in excess of our free cash flow.

While investments to fund Brunswick's growth will be our highest priority, we continue to view our stock as an excellent investment at current price levels. As a result, we intend to be as aggressive as possible with the share repurchase program during the coming year.

We reported a loss of $1.04 per fully diluted share in the fourth quarter from discontinued operations at Brunswick New Technologies. The results, which, obviously, are quite disappointing, include a loss of about $0.12 per share from BNT's normal quarterly operations. Heavy discounting and an increasingly tough competitive environment in Europe was at work throughout November and December, which is the strong selling season for the personal navigation device, or PND, business.

In addition, we recognized an after-tax impairment charge of $86 million, or $0.92 per share, right in line with our December announcement. The charge was required when we concluded that gross proceeds net of costs to sell the business would fall below BNT's then net book value. After the charge, the year-end net book value for BNT stood at $35 million.

Although the fourth-quarter results did slow down the divestiture process, we continue to move forward with interested parties. Our original intent was to sell BNT in its entirety to one purchaser. We have broadened the effort to also include the possible individual sale of BNT's three distinct businesses -- PND, marine and our wireless OEM operation, which sells vehicle tracking systems and software for small fleets.

With that, let me turn the call back over to Dusty.

Thanks, Pete. As we enter 2007, our strategic directions remain the same. We're focused on the five pillars of our strategy.

First, bringing the best product to market across the Company. We'll launch 47 new boat models in model year 2008, which begins in July of 2007. Mercury will be exhibiting some dynamic new sterndrives and outboards at the Miami Boat Show in February. Life Fitness continues to focus on developing innovative new products that excite its customers and help health club owners retain their members. And even our bowling retail centers are bringing some new customer service models to market.

Second, distributing our products through a holistic model that brings greater profit opportunities to our dealers and OEM partners, while offering world-class service to consumers. You'll see a very exciting package of dealer programs designed to do just that in Miami as well. We call it the Brunswick Dealer Advantage. This will be the first comprehensive program ever introduced in the recreational marine industry by a manufacturer focused solely on improving dealer profitability.

Third, we want to be the best cost manufacturer in all of our segments. You've heard about some of the plant consolidations we already have underway in our boat group. We will continue to shrink our manufacturing footprint while maintaining capacity, we'll continue our march to develop and source against a strategic bill of material, and we'll develop systems engineering, platform design and platform manufacturing capabilities across all of our brands. [And, in fact], there is much more going on. As an example, we're now delivering the cost savings from manufacturing bowling balls in Mexico, bringing some meaningful margin improvement to this business.

Fourth, be global. International growth has been a steady hallmark of Brunswick in the past six years, and we continue to emphasize even more opportunities to help offset the weakness we're seeing in the United States.

Fifth, attract and retain the best talent, which we continue to do through our recruiting and leadership development programs.

The management team here at Brunswick, along with all of our employees, is fully dedicated to continuing to drive for ever-increasing earnings growth at both the peak and trough of the cycles. While we have to play with the cards we're dealt in the marketplace, we can ensure that our strategic initiatives pay out for our shareholders over time. We've delivered on our commitments in this downturn, and believe that the success of our strategy will benefit our consumers, our dealers and our employees as we move forward.

In conclusion, I want to recognize a longtime Brunswick senior executive, Peter Hamilton, our Vice Chairman and President of the Boat Group, who will be retiring at the end of this month. I want to personally thank Peter for all he has done over his 11 years with us to build Brunswick into the leading company it is today. He will be missed.

With that, thank you very much for your attention, and we'll now take your questions.

(OPERATOR INSTRUCTIONS). Edward Williams, BMO Capital Markets.

Just a couple of questions. First of all, Dusty, can you give us some color as to the differences that you've been seeing between the U.S. and the European marine markets, and the timing of when you expect improvements to occur in both of those markets?

First, in the U.S. marine market, as I said during our prepared remarks, we plan on 2007 being the lowest retail year that we've seen since 2000. As we look to Europe, we see that market as fundamentally being flat, but with share opportunity for us, with potential growth in the high end of the market.

In terms of timing here in the U.S., I wish I could tell you. The fundamentals that drive buying behavior are beginning to swing our way, and we've not planned for that, [just to be blunt], as we go into 2007, because we don't want to be in a position that we've got to do crazy things fast if we don't see the market coming back. So, we're planning for the market to be down.

If the market were to turn back on us, we're very well prepared to go forward. We've got the pipelines in good shape to accomplish that. The pipelines are not where we want them to be if the market continues to decline. So, we're going to be able to react either way.

In Europe, in terms of when that market will begin to grow again, frankly, we have a little cloudier view. We think in certain markets there that we will begin to see uptick in 2007, and in others -- for instance, such as Germany -- we will not. There was some news out of Germany this morning that was not particularly encouraging. But we also, as I say, see other markets that will do well.

Another place that we need to get on the table are emerging markets. We see real opportunity in the Middle East. We see real opportunity in Mexico and Latin America. And longer-term, we see opportunity in China and India. We've begun to put people in place in those markets. We have the product. We need to do better, though, in getting real talent on the ground to understand the market and understand the best way for us to distribute product there. So, we've begun to move people into those markets at a relatively rapid pace. I hope that's helpful.

It definitely is. Looking at the week's supply of inventory, I don't know if you guys happened to have the number for the end of March '06 in front of you, but could you talk about what your goal is to see that number be at the end of March of '07, what sort of relative improvement you hope for? Or relative -- maybe it will be an increase in week's supply of inventory -- but what that number, or what that delta might be?

Let me answer it this way. We never set definitive targets in any particular quarter in comparison to a quarter in another market's time. What we attempt to do is gauge where we need to be based upon what we see occurring in the marketplace that we're living in. And again, the weeks we have would not be at all troublesome to us if we were planning for the market to be up. But because our planning says the market is going to be down, then we need to go attack that pipeline and not let it build anymore. In fact, we would feel better if it were down. I'm not trying to avoid you at all; it's just that comparing to another year when retail could be in a different situation doesn't really compute for us, frankly.

I think you'd expect, like we said, we're going to make progress throughout the first half. So, we're up at the end of 2006; we're probably going to be up slightly at the end of first quarter; then more progress in the second quarter.

The last question for you is the cost-cutting initiatives. Are there more initiatives that should take place in the first half of '07, or are they largely in place at this point?

We have a number of initiatives on the table, and we continue to look at our ability to execute against them, because each of these initiatives are a bit disruptive at the time they are undertaken. So, we're balancing the benefits to be obtained from other initiatives against making sure that we go accomplish what we have to do operationally.

Ed Aaron, RBC Capital Markets.

A couple questions for you. I'm having trouble reconciling your sales growth expectations for the marine business, in terms of your reported sales plans versus what you expect at retail. It seems like they're going to be down at about the same rate in 2007. I'm trying to figure out how you're going to be able to reduce the pipeline inventories with wholesale growth roughly matching retail growth.

Actually, when you look at it at the high-end of our range -- first let me start with that -- we expect, as, I think, Dusty pointed out, low single-digit retail declines. So, let's say 2 or 3%. And we do fully have incorporated in our plans the fact that wholesale shipments are going to be lower than that to make the pipeline corrections we want. So that is serving as the base. But keep in mind, the sales dollars that we report are going to factor in price increases, which probably are running something close to 2% for the Company as a whole. We also have international marine growth which is coming through. And as well, there's always some increase in pricing that you see from just contenting on boats, in particular where you might sell more electronics, things like that, that has an impact. So that gets us to slightly -- those factors get us to slightly positive territory at the high-end of our range. Then you layer in on top of that -- that's for marine operations only. Then you have the Fitness and Bowling & Billiards growth on top of that, that gets us to kind of low single-digit growth at the high-end of our range. Honestly, though, too, if you look at the midpoint and you look at low-end, the $1.65, we do expect reported sales declines, both at the midpoint and the low-end.

You've been giving us weeks of supply data going back, I think, to 2002. Are those 2002 weeks of supply numbers good baseline targets for us to think about in a weak market environment?

I'm looking at the data to get a better sense of it. Actually, in 2002, and particularly for the engine business, we were at a pretty low point. In some cases we had MerCruiser inventory down, so engines overall at the end of that year were probably around 22, 23 weeks. We could do a little bit higher than that and be absolutely happy with it.

On the boat side, we've got be careful, too, because we now have aluminum boats, and so our mix has changed since we started reporting numbers there. But overall, for fiberglass, when we look at it, that, too, was probably a little bit low. We probably could do -- at the end of the calendar year we're not uncomfortable with something around 30 weeks of supply. And I think at the end of 2002 it was a little bit lower than that for fiberglass.

One more quick question, if I could. MarineMax has commented that their planning on ordering about 8% less from you for this current model year. Just doing the math on it, it doesn't seem like the rest of your customers are cutting their orders by any less than MarineMax is for that period., which is just kind of surprising, given that it's always seemed that MarineMax is kind of outperforming the market, and might have a little bit more tolerance for inventory than some of the other dealers out there. If you could just maybe comment quickly on that. Thanks.

If you're still on, Ed, I want to make sure I understand the question, which is -- if MarineMax is down 8%, our guidance must mean that other dealers are not going to be down that much. Is that the point?

Yes.

I actually wasn't aware of what MarineMax had said. But we are quite comfortable as we're looking at boat shows and looking at our commitments across the entire dealer network where folks are going to be and what we think our production levels are going to be. So, I'm not really able to jump into the MarineMax comment, frankly.

The only thing I would point out, you've got to be very careful, because they tend to be very skewed towards Sea Ray. And you've heard us talk about how our cruiser pipeline inventories were higher than some other parts of the Company. That's partly the -- in large part kind of what's driving their performance. When you look at some other brands, we're in better shape than that. So, the overall weighted average is not at that same level.

Elizabeth Osur, Citigroup.

Just a couple questions. First, Dusty, you made reference to international growth. I'm just wondering if that's a signal that you're going to be reconsidering European acquisitions over the next year.

Good question. I'm always looking at European acquisitions. The real issue in Europe is always the multiples against EBITDA at which those acquisitions get priced. Therefore, we're not planning that we'll be fortunate enough to find any at the right price, and our international growth is going to have to be more oriented towards organic activity.

And I was hoping, either Dusty or Pete, that you could sort of, kind of help us understand the business model a bit better, and maybe give us a sense of what kind of margin compression you get at either a higher-end boat or a lower-end boat with a 5% decline in unit sales. Just give us a little bit better sense of the fixed versus variable cost structure of high- versus low-end brands, or the margin sensitivity.

We don't give margin information out by size of boat, as you know, but let me just try to help clarify it for you. We have talked about in the past that margins, once you get into kind of the mid-20-foot range and higher, tend to be greater than margins below that level, a curved shape like that. And when you sell one less small boat, you would think your gross margin decline is going to be smaller than if you're not selling one larger boat. But then it comes into the fixed cost absorption. And honestly, the biggest drops we've seen at retail have been on the low side.

So, if you look at our -- so it really -- the fact gets mitigated when you're looking at the size of the boat once you take into account those production hits and the fixed cost absorption.

If you look at our overall gross margin, we're in the 20 to 25% range. You're going to expect them to be higher than that; something 30 to 35% is honestly not out of line when you look at the gross margin line.

And the only other thing I would say to you, too, that might help you a little bit is if you look at our 2006 performance versus 2005, our operating margins for Marine were down roughly 250 basis points, a little bit lower than that when you strip out some of those restructuring costs. But as Dusty said, we saw declines kind of in the mid single-digit range for 2006. We're actually expecting something similar to that in our guidance with 100 basis point decline in 2007 for operating margin. I'm giving you a lot of numbers here. But we're going to be worse than that at the marine business, something potentially 150 basis points or so. And we are -- the percentage decline you see at retail and, actually, even to some extent at wholesale in the two years is fairly matched. But we're not expecting as big of a margin hit, quite honestly, in terms of the drop in 2007 as we saw in 2006 for our marine business.

That's really helpful. Thanks, Pete. Maybe just one final question. Could someone just address why we're seeing so much inventory pressure in boats but not in engines, what the difference is between those two businesses?

Let me jump in on that one. For both our outboard-powered boats and our outboard engine pipelines, there is a much different skew toward being actually even lower or flat with last year than is true on our sterndrive-driven boats and our sterndrives. And we've been able to keep up with the changes in the market with outboard engines and outboard boats at, frankly, a more matched pace than we've been able to do with our sterndrives and sterndrive engines. And that's because we began to see the outboard decline much earlier in 2005 than we did sterndrive and sterndrive engines, so we're still playing a bit of catch-up.

The other thing I would add there, Liz, too, is remember those are units, weeks of supply in units. And there's a lot more outboard engines sold than there are MerCruiser sterndrives and in-boards. So, that tends to weight that engine statistic toward the outboard side of the business.

Dean Gianoukos, J.P. Morgan.

Just a couple questions. First, on the discounting side, can you give us a sense of how things are progressing this time versus the last downturn? I know before you guys had really not wanted to cut prices too much, and if you lost volumes you were okay with that. So, I'm curious where you stand now versus where you were last time. Secondly, just on overall production, how far are you down off the peak now, and how far down did you go off the peak last time? Thanks.

First on the discounting, discounting has been up slightly. And it has been, in my view, driven a lot, especially in and around outboards and outboard products, by competition that we needed -- that we have needed to respond to. And it wasn't quite the same in 2001 because we had a different competitive mix.

How much worse can that get going forward?

At some point, the discount leaders have got to improve their margins and start making money. So, we're in for the long-term battle with them. But again, as I say, at some point they're going to have to come to their sensibilities in my view.

In terms of your question on where do we stand in production relative to the last downturn, I think, 2001 was the trough. We're down slightly versus where we were in 2001 kind of overall. It does vary quite a bit by brand. So, we have picked up market share at US Marine since that period in time, so that's actually a little bit up. But for Sea Ray, we've held share basically flat to down slightly versus 2001.

How far did you come off? Was it like 30% you came off? In both cases were you down about 30% off the peak?

No. It was -- when we went into the 2001 downturn, retail dropped off roughly 15%. Production was probably down about 20 to 30, depending on the specific brand. And it is -- but we never hit the same peak as back in 2000. 2005 was our next peak. We're probably off a similar percent, maybe a point or two less than that, because the peak wasn't as high.

So you're off about 20 to 30 now again, or so?

Compared to where we were in 2005 in some cases, yes. Depends on the brand.

If I may do a quick advertisement, that's why we're so proud of our results. We're living through the nightmare, if you will, that we saw in the market in 2000 to 2001. We're reliving it, and operating this place in a very different structure and making a lot more money, even in spite of those decreases.

Timothy Conder, A.G. Edwards.

Back to the international side of the question, a question that's been asked, what is your -- what was your marine percent of international sales in '06? And if you want to break that down by boats or engines, if you want to. And then, regarding your guidance, at this point and, I guess, maybe working off that midpoint of your guidance, are you implying that dollar sales in marine in the second half will be flat year-over-year?

On your first question, on international sales as a percentage of total, we ran at 32% in 2006 for the Company overall. Given the size of Marine, it's very close to that average in total. And Mercury is higher than that, slightly, and Boat group is a little bit lower than that, in terms of the average. I'm sorry; your second question?

The guidance that you've given, does it imply that marine dollar sales in the back of '07 will be flat or slightly down?

It's going to be flattish, to be honest, because we expect them to be down more in the first half of the year because of the production -- the production cuts we're making, the reduction in wholesale shipments to keep the pipeline in good health.

Okay. And then, of the new model year SKUs that are going to come out in '08 at this point, any thoughts as to the percent of those, or maybe to look at it another way, the percent of your total SKUs to where you're starting to implement your strategic bill of materials? And then, a similar question related to your Zeus drive. I think, Dusty, you were alluding to that in some of the powertrain comments. If you could -- based on what you're looking at for your '08 model lineup.

In '08, we will have Zeus in place, primarily as a Sea Ray option at the start of the model year. And then, as we progress through the year, you'll see it going to other brands. We will be -- and I don't want to steal our thunder from Miami, because our Mercury folks have done a magnificent job. You will see us introduce both propulsion systems and the ability to dock with them in other types of boats that will be -- will have the same impact for the boater as will Zeus. I think enough said there.

In terms of percentage of sales that this product -- these new products will begin to take hold in 2008, it will be relatively small in model year 2008, because consumers haven't had full access to this and gotten to see it on the dock, etcetera. And I think we'll begin to see a real uptick in 2009.

The first part of your question, Tim, I think, went to more our High Performance Product Development process. Right now, all of our new product is going through that process in all of our fiberglass companies, and is beginning in our aluminum companies.

In terms of the strategic buy, how much is going through the strategic bill of material, etcetera, we've begun to make real progress in chunking up the bill of material across all of our boat lines. We're near completion on the bigger items. And in 2000 -- calendar year, now, 2007 and 2008, you'll see us begin to accelerate on down the strategic bill of material.

And then, last question. As it relates to the China plant that you opened in the first quarter of '05, and then were ramping up, and then there were some supplier issues qualifying suppliers over there and bringing product from the U.S. over there, components, and then shipping finished product back. Is that ramp -- qualifying suppliers, everything from that perspective -- where do you stand there? And then, as far as any additional shifts from boat manufacturing into the Reynosa facility.

First, as to qualifying suppliers, we are done in China. Well handled by the Mercury organization. It was a bit slower than, perhaps, we thought when we started. We've completed that, and getting great quality, really great quality out of that plant. And we're tickled to death with it, and we're beginning to realize the cost savings.

In terms of moving additional production into Reynosa with US Marine, I will only say it is something we look at continually. And we believe long-term we are not done with our manufacturing initiatives in Mexico.

I do apologize; one housekeeping. Pete, what was the ending share count at the end of the calendar year at 12/31? Not the average, but the ending at 12/31.

The average was, obviously, 93. We ended up about a half-million lower than that, at 92.5 or so, on 12/31.

Joe Hovorka, Raymond James.

A couple questions. One on the -- you commented about production being off 20 to 30% from 2005 in this downturn. Why don't we see that in the numbers? Your boat production was down 4% if you ex out -- or your boat dollars were down 4% if you ex out your acquisitions for '06. But if you go back to 2001, we saw it down in dollars that 20 to 30% range. So, why can't we see it this time?

I'm sorry. The numbers overall versus 2005, the percentage decline was lower than what we saw in 2001, and particularly with -- remember some of the issues we had at US Marine. We had lost share there, and it all kind of came to roost in 2001. So, the brands that were probably at that level, we fixed it so for those particular ones we're not down anywhere near that amount.

And in some cases, with the aluminum ones, aluminum businesses that we had as well, we were already making pipeline corrections in 2005 for those brands, so -- and that affects a good portion of our unit volume for both. So, it isn't as pronounced, probably, on an overall basis.

So we'll never see dollars down like we saw them in 2001 is what you're saying?

I'm sorry?

We won't see dollars decline like we saw in 2001 from the production cuts.

Likely not. I probably should add, on top of Pete, a couple of things. The mix of products has changed significantly since 2001. We have many more buyers buying larger boats with lots of add-ons, and that really brings the dollar count up today, even though units may be down as compared to 2001.

Next, we have a very different international picture than we did in 2001, and we mentioned that. Next, we've had our boat group P&A business get up and running since 2001, and that has helped. And then lastly, both Life Fitness and Bowling & Billiards have had sales increases during this time. So, when you add all that up, it disguises a bit the unit decline that we've been working through.

And I would point out, too -- this isn't something that we mentioned in the call here, but -- when you look at organic growth in our marine business in 2006, it actually was down over 4%, sales dollars. It gets masked by all the acquisitions that we've done, too, over time.

Right. What was your retail down in '06? I don't know if you could say units and in dollars.

On a unit basis, we said mid to high single-digits overall.

Could you give dollars, or no?

No. We don't translate that into dollars.

Laura Richardson, BB&T Capital Markets.

Just was wondering, as you've -- we've been talking production the last couple comments, and, I guess, two questions related to that. One in terms of all the work you could do to become really efficient in sourcing and manufacturing of goods how far along that process do you think you are? And then, two, how do you think about balancing standardization and mass production and economies of scale with boat building, and especially the higher-end brands, maintaining what is special and unique about those brands, or the cultures of those companies that you've acquired? So, just general thinking on that stuff would be really helpful. Thanks.

I'll jump in and Pete can supplement with me. In terms of all that we're doing around sourcing and platform work, etcetera, how far along are we -- I think the last call I got the same question, and I said I think we're in the second inning. Today I would tell you, I think, we're in the third inning. It's about midway through the third inning. We're not fouling off a lot of balls so it seems to be moving along pretty well.

In terms of what are we going to do around brand uniqueness, that is a great question. We get it a lot. And it's something we spend a lot of time thinking about. Perhaps the best way for us to describe it first is we believe it's achievable. We look in the car industry and there have been enormous failures in people who have attempted this, but there's also been enormous successes. In an organization, we look at certain Toyota plants, where a -- I don't know all the doggone -- a Corolla, a regular Toyota and a Lexus all come out of the same plant. So, as we're beginning to think about this, we're thinking of under the deck, is the best way to describe it for those who are perhaps not as familiar with the boat as us. And everything under the deck that is not brand-specific can be standardized, designed and engineered across different types of boats.

When we get to certain above-deck features and styling, which will not be impacted by the common things we can do under the deck, that's where we'll need to maintain brand uniqueness. We are really comfortable with it. We have begun quietly to build certain brands -- different brands of boats in the same plants over the past year and a half, and we're -- nobody can tell that they've come out of the same plant because they're in fact different boats. We've been able to get the scale of manufacturing by running them both down the same line.

It's interesting you picked a Japanese manufacturer as the example, rather than a U.S. auto manufacturer.

We have -- it's an excellent point, but we have studied other industries where, I think, the standardization has led to more commonality across brands that has actually hurt the brand. And we are definitely trying to avoid that.

We have gone way over the time that we said we would do. I have no idea if there are other questions, but if I'm being rude in cutting anyone off, please give us a call as soon as we get off this call, and we'll be happy to take any further questions. I sincerely appreciate everyone's time today, and I especially appreciate it during the earnings season, when many of you are trying to follow lots of different companies. And we appreciate the time that you've given us today. Again, I apologize for the fact that we've gone way over.

Thank you for participating in today's teleconference. You may now disconnect.