賓士域 (BC) 2007 Q2 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2007 second quarter earnings conference call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections you may disconnect at this time. I would now like to introduce Kathryn Chieger, Vice President of Corporate and Investor Relations. Ma'am, you may begin.

Good morning and thank you for joining us for our quarterly earnings call for the second time. With me are Dusty 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, please look at our 10-K for 2006, our March 10-Q, and our earnings released issued this morning. All are available upon request or by going to our Web site at Brunswick.com.

We appreciate your taking time to be with us this morning especially in light of our call last Friday and given the number of other companies in the leisure space hosting conference calls today. We will try to keep our remarks brief.

Now I will turn the call over to Dusty.

Thank you, Kathryn, and good morning everyone. We don't have much more to say today about the remainder of the year. However, I will quickly highlight the main points for those who may not have listened in when we spoke last week. First, as I said, the marine industry is facing retail demand that is at the lowest level since the National Marine Manufacturers Association started publishing data back in 1965. We said last week that we are trending towards powerboat retail demand somewhere in the 260,000-unit range, which is below the prior industry low of 277,000 units in the early 1990s.

Second, while industry data is still being gathered, preliminary statistics show domestic retail demand for sterndrive and inboard powered fiberglass boats down 13% in the second quarter and data that we received just last week shows the month of June alone was down 15%. As you know, the second quarter accounts for 40% to 45% of full-year retail demand.

If we look at certain geographies we see the impact on this segment of the difficult housing market in, for instance, California where June was down 37%, in Florida where June was down 22%. We cut production aggressively throughout the first half of the year, with wholesale shipments down over 20% on a unit basis for our fiberglass boats, a steeper decline than the retail fall-off. While the number of units in our pipeline has dropped as a result, pipelines are not falling at an acceptable rate.

Engine pipelines stood at 26 weeks, up from a 21 weeks a year ago mostly due to MerCruiser sterndrive engines. Boat pipelines stood at 26 weeks, flat with the prior year, but still significantly higher than the targeted 22 to 24 weeks we would like to see at this point in the season. And certain segments of our fiberglass pipeline stand at levels above 30 weeks.

Third, we see nothing on the horizon that would lead us to conclude that weak retail trends will reverse. As a result, we are making further reductions in production and wholesale shipments to help ensure the continued strength of our company and our dealer base. Our efforts to reduce dealer pipelines are at various stages depending on the brand or product line, but for many key segments of the marine portfolio the effort will continue through the 2008 model year, ending in June of next year.

Finally, the net result is that now we expect earnings for 2007 to fall within the range of $1.20 to $1.35 per share. The remainder of this call will focus on some additional insights to our second quarter financial results. And I'll turn the call over to Pete to handle that before I wrap up with some closing comments.

Thanks, Dusty, and good morning everyone. As you saw from our press release this morning, we reported earnings of $0.65 per share from continuing operations in the second quarter, down 30% from the $0.93 we reported last year, excluding $0.06 per share of special tax items. Net sales of $1.52 billion in the quarter were down by 1% versus 2006, led by mid-single-digit declines in both the Boat group and our Bowling and Billiards operation and offset in part by double-digit growth at Life Fitness.

The sales drop for the Company was centered in U.S. markets, which fell by 10%. This was largely offset by impressive 17% top-line growth in markets outside the U.S., up from the 6% increase we saw in the first quarter.

The growth in international sales was broad-based across our Boat, Engine and Fitness businesses as well as geographically, coming from Latin America, Europe, Asia and the Pacific Rim, along with Canada. International sales accounted for 38% of the Company's total sales in the quarter, up from 32% one year ago.

Our marine operations saw a benefit not only from international diversification, but also our parts and accessories businesses, which accounted for 17% of total marine sales in the quarter and grew in the mid-single digits. The strength of markets outside the U.S. and in parts and accessories is important because together they account for about half of our total marine revenues. They can't, however, fully offset the significant impact from a very tough marine market in the U.S.

You will note that Mercury overall sales were basically flat in the quarter while total Boat sales fell by 5%. This modest discrepancy is due to the Boat group having a smaller percentage of revenues coming from sales outside the U.S. and from parts and accessories as compared with Mecury. Even more important are the lower wholesale shipments in the Boat group, which were off by 15% to 20% through the first half of the year.

While we saw a similar trend with our sterndrive engine shipments, our Outboard Engine business saw slight unit volume growth, as its pipeline inventories are in reasonably good stranding, and we are shipping more low- horsepower four-strokes from our Japanese joint venture.

Before shifting to a discussion of our profitability, let me highlight the drivers of sales changes at our non-marine businesses. At Bowling & Billiards, we reported a sales decline of 6% in the second quarter driven in large part by lower sales of bowling products. The ramp-up of our new bowling ball manufacturing plant in Mexico is behind schedule. The billiards industry is also seeing some of the same weakness that is affecting other large ticket consumer discretionary purchases, but share gains are helping to soften the impact. At our retail centers, contributions from Brunswick Zone XLs opened within the last year remain on track.

Life Fitness' 11% sales increase has been driven by strong global sales of commercial equipment. Sales into the consumer segment, on the other hand, continued to lag behind 2006, confirming a trend we have already noted in both our marine and billiards businesses. New product innovations, such as our treadmills with integrated iPod connectivity, will play a key role in our success and the continued research, development and marketing investments we are making will result in the launch of a complete new line of cardiovascular products in the second half of 2007.

Turning to profits, operating margins for the Company fell by 310 basis points compared with the year-ago quarter. Gross margins were off by 120 basis points, while operating expenses measured on a percentage-of-sales basis drove the remaining 190 basis point slippage. The most significant factor affecting the gross margin drop is fixed-cost absorption associated with lower production at our marine operation.

In our conference call back in April we had stated that the second quarter would show tough production comparisons affecting gross margins just like the first quarter, but at that time we believed the second half would show an improving trend versus 2006 because we were reducing production rates last year in response to the market downturn. That is no longer the case. Production in our key marine units during the remainder of the year, with the exception of our outboard engine business, will fall below 2006's weak levels.

Retail programs and wholesale discounts also had a measurable and unfavorable impact on gross margins in the quarter at our Boat brands. The higher-than-desired level of pipeline inventories coupled with the model year changeover means that this impact will continue with a heavier weighting towards the third quarter as we move 2007 models at retail.

The timing of the spending is an important consideration when estimating earnings for the last two quarters of 2007 because, as I said last week, increased retail and wholesale program support will have a greater effect on our financial performance in the third quarter than fixed-cost of storage on lower production. So a long with the seasonally-strong contributions from our non-marine businesses, we believe our second-half earnings will be more heavily weighted to the fourth quarter.

It is important to note that the benefits of our cost reduction efforts and operational efficiencies were evident in gross margins during the quarter, although they tend to be overwhelmed by the impact of lower production on fixed-cost absorption.

The $26 million increase in operating expenses resulted from a number of factors including inflation, particularly for health care, additional restructuring costs, the impact of a weaker dollar internationally, and legal accruals and settlements. In addition, variable compensation accruals in total were higher in the second quarter compared to 2006 when no bonuses were earned at corporate or most of our marine businesses. Further, research and development spending increased, most notably this quarter at the Boat group as well as at Life Fitness.

Finally, the operating expense increase also was affected by a nonrecurring gain from an insurance settlement in the second quarter of 2006. All these items were offset in part by cost savings from our restructuring activity.

With regard to operating earnings at our non-marine businesses, the sales increase at Life Fitness did not translate into higher operating earnings due to faster growth in international markets, which carry a lower-than-average margin, and higher R&D and marketing spending in support of the previously-mentioned new product introductions. At Bowling & Billiards the $2.7 million loss seen in the second quarter, which is the weakest season for this segment, is attributable to the cost from the legal settlement related to a property disposal from the 1990s, and the poor performance from the Reynosa ball plant.

Let's now turn our attention to free cash flow and the balance sheet. We ended June with a cash balance of $279 million and a debt-to-capital ratio of 27.4%. During the quarter we bought back 1.6 million shares of stock for just under $54 million and an additional 400,000 shares have been purchased this month. This brings our buybacks year-to-date to 3 million shares. We will continue our repurchase program on a steady basis moving forward using our available cash balances, saving debt capacity to pursue profitable growth opportunities. We have $266 million remaining under our current Board authorization as of today.

During the first half of 2007 we generated free cash flow of the $66 million from continuing operations, up from $34 million in the prior year despite the drop in earnings. We used $50 million less cash this year to build working capital and lower capital spending was also a positive contributor. The favorable working capital performance is due in large part to the elimination of variable compensation payouts from our 2006 incentive plan, as noted earlier.

Looking at our balance sheet you will see the accounts receivable of $575 million is up 6% versus June of 2006 despite the slight sales decline for the Company. The significant international growth was the driver here. Our domestic marine businesses carried very low receivables, as we get paid by our dealers' floorplan financing at the end of each month or through the sale of Mercury's OEM trade receivables to our financing joint venture with GE. Inventory financing is not as prevalent in Europe and other regions, although we are working to change that. So, we offer a longer payment terms to our dealers.

Our inventories stood at $933 million, up $59 million from last year. The increase comes from the Boat group and our own backyard inventories are too high at several key Boat brands. Our further cuts in production are set to address the issue and will lead to significant reduction in our own inventories during the remainder of the year as well as those of our dealers. The ramp up in production at Hatteras' Swansboro Plant is another important factor driving the inventory increase.

On a full-year basis we expect capital spending to run at about $220 million for the full year. This is up from the $190 million previously reported, which did not include $29 million acquisition of the Navassa, North Carolina manufacturing facility we announced several weeks ago. The Navassa transaction allows for the closure of our Salisbury, Maryland plant, the consolidation of Bayliner and Maxum cruiser production in a state-of-the-art manufacturing facility, and provides much-needed capacity to produce larger Meridian yachts on the East Coast. Excluding this purchase and our higher investment in new Brunswick Zone XLs, capital spending would be down by almost 20% compared to 2006.

Depreciation and amortization expense is expected to come in around $175 million for the full year.

Before turning the call back over to Dusty, let me finish by pointing out that we announced an agreement to sell Brunswick New Technologies' wireless operation to a private equity group that included a number of BNT's senior managers on July 16. We have closed on the transaction since then, bringing in $35 million in cash on top of the $31 million raised from the sale of the personal navigation device and marine electronics businesses. We have a number of smaller assets remaining that we expect to sell shortly, closing out the divestiture process.

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

Thanks, Pete. Let me end by first thanking the 28,000 employees of Brunswick for their continued hard work and positive mindset through tough market conditions. None of us can control the macroeconomic environment that we are facing, but we can control how we respond through our focus on the job at hand, whether that be the development and manufacture of innovative new products or help making our dealers and distributors, along with our OEM customers, more successful and profitable. Our team has done just that and I am very proud of the way we are performing.

In addition, and just as importantly, we are focused on the future. Times as such as these present opportunities and we clearly have opportunities to move faster in the many initiatives I have been describing for several quarters. It is our view that our initiatives can be implemented and results seen quicker during times such as this. We are excited and there is a great reason for that excitement.

Whether it is the Dealer Advantage program, manufacturing rationalization, sourcing, engineering, product development, or becoming a truly global company, we are changing and building a future Brunswick that will operate at a world-class level for the benefit of our industry and our customers.

Thank you very much for your attention and let's now take questions.

Thank you. (OPERATOR INSTRUCTIONS). Ed Aaron, RBC Capital Markets.

Great, thanks. Good morning, guys.

Good morning.

So a few questions. First of all, if you look out over the long-term, say, like the next five years, and you consider all of the organizational plans that you have, what do you think your portfolio of Boat brands is going to look like down the road compared to today? Do you expect to have meaningfully fewer brands in the future than you have right now?

We will have fewer brands and fewer models.

Okay. And then on the pre-owned side, I would be curious to get just your general take on the used boat market right now and you know we have heard some indications that maybe the used was perhaps holding up better than the new market and you have got some -- you have talked in the past about some plans to develop a broader preowned boat business and I was just kind of curious to know where you see the used market and where you kind of stand with that initiative?

We see the used market doing very well and as we are out spending time with our dealers, for many dealers used boats are a significant element of both their cash flow and profitability during times such as this, Ed. And that is understandable, because fundamentally used boats are cheaper than new boats. And as we look at it, it looks like to me it is about four to one used to new and the fundamental pricing once it all settles out looks like to be about 30% of what a new boat costs.

The question then is that -- and you are right, we have been looking at it and working on it -- is what can we do to help our dealers become more effective there? And we are looking at two or three programs that would like not to comment on for competitive reasons right now, Ed, but we will be rolling those out because it is an opportunity for both us and our dealers during this market.

Okay. Thanks. And then just one question on the Fitness business. What is the mix of your commercial versus consumer sales in Fitness approximately?

It is about 85% commercial, 15% consumer.

And it had been at about that ratio consistently over the last few years?

Yes, it has been, give or take a percentage.

Okay. Thanks guys.

That residential or consumer market is a tough place to go and we keep our toe in that water very carefully.

Understood.

Thanks, Ed.

Tim Conder, A.G. Edwards.

Thank you. Just a couple, Pete you alluded to the P&A was 17% of your total marine revenue in the second quarter. Can you break that down a couple of ways, maybe break down the P&A between boats and engines or if you want to break it down between U.S./international and then -- or also, if you want to just look at marine as a whole and kind of break that down U.S. and international, just give us an update. That is question number one.

Question number two is, where do you feel comfortable with somewhat of a minimum cash balance area? And then question number three, Dusty, this is I guess a follow-up to Ed's and a follow-up to maybe what had been outlined somewhat by the Company a year or two ago, with the used program, are you still pursuing a certified used boat or program similar to I guess Toyota was throwing out as an example, but other automakers do?

Okay, your first question on P&A, you know the split of our P&A business that was 17% of total marine sales and it is split pretty equally at this point between both Mercury's parts of business as well as the Boat Group parts business.

Okay.

And on the international side, Ed, we said that it was 38% of sales for the Company overall. Actually, when you look at our marine business, given that it is 80% of the Company, that is pretty much the marine split, but more heavily weighted at the higher number for Mercury than it is for Boat group.

Okay, great. Thanks.

You asked about the minimum cash balance and I may have missed the earlier part of that piece of your question or was it just that.

That's it, Pete.

In order to answer that it depends where we are in the year. I think in general the floor we would like to see is $200 million, but you would probably want to have a slightly higher balance than that as you move -- as you get toward the very end of the year because we use a lot of cash in the first quarter. So it depends where you are in the season. We would probably be more comfortable with a the $200 million once you get into the second quarter and probably third.

Right. Okay.

Tim, on the used program, you will recall we did run a pilot program in five different locations around the U.S. We were quite happy with those and we will be reacting accordingly, again, as we go forward.

Great, great. Thank you, Dusty.

You bet.

Laura Richardson, BB&T.

Yes, thanks. Just a couple of quick questions for you all. I was just on the MarineMax call and they were starting to think about 2008, which for them starts a little earlier than you, I know, but they were saying they think the best industry guess at the moment is in 2008 sales are down maybe mid-single digits instead of this year's double digits. Do you share that thinking and I guess I have one follow up after that.

Well, our year doesn't start until January 1 and, Laura, I don't think at this time we ought to be predicting what the market is going to do. As we have said, we are building our company on the basis that the market will not be growing and as we get a little closer to 2008 I think we will be able to get a better view better view of what we think the market will do.

Okay. That's fair. And then the follow-up was going to be -- and I asked them the same question too -- is let's say even if the industry is down overall, is there market share that you anticipate gaining that could make your sales and earnings better than the market as a whole?

The answer is yes, but I think the better answer is over the long term we believe all the things that we will be doing will be strengthening our position in this market. In the short term, chasing market share costs a heck of a lot of money and the real way to gain market share is to be there with a lot of great models, with new innovation in them, help our dealers become more successful, and begin to attract some of the better dealers in markets, and begin to get our manufacturing footprint right so that we can take a lot of cost out of our system. We have realigned our entire sourcing organization, I guess is the best way to say it. We are beginning to see impact there, etc., etc., Laura. You know me, I can go on for 45 minutes about this, but I think to chase market share in the short-term is just that, chasing it. We just need to keep making ourselves better and it will come to us.

Okay. And actually your comments made me think of one more question. I think MarineMax was talking about some really innovative '08 products that they were just dying to start selling, but they need to move through some '07 model year inventory first. But, what's innovative in the '08 product line, because we seem to be just talking about the negatives and not the positives like the product innovation?

First a thank you and God bless you for that comment. Let me first talk a minute about moving through this 2007 product. One of the big things driving our earnings guidance for the remainder of this year is a lot of money to help our dealers move this product and I want to be very clear about that. We are operating much better than we even thought we would after doing restructuring and continue to pursue a lot of our strategic initiatives, but we are putting a bunch of money into getting this 2007 product moved.

Now, as we begin to look at what is coming in 2008, as we show things we have talked about now for a while to the dealer and to consumers, we are actually concerned about how quickly we can get this -- whether we can meet consumer demand I think is the best way to put it -- and that is Zeus. We now call the ability to have fully-articulated gasoline sterndrives, actually we had called Apollo. That was the project name and we will now be calling the product Axius. And there again, if I get going I will spend 20 minutes talking about it.

But the point you are making is very, very important. We are continuing to spend on new product development and innovation and we are not going to back off that, because again, over the long term that is what will drive us to success. And if we are really open about what we have been doing and we talked three years ago about the fact we were commonizing our product development processes, which we have gotten done. Now what we are beginning to see is this much closer connection between our engine and our boat business and the ability to move product development at a much more rapid rate.

We have brands now who in this dealer meeting are showing up with 10 and 11 innovative new products, rather than the normal four or five. And as we continue to spread that across the whole portfolio -- and we won't get it done in one year, but by golly, we are marching on it -- all of our brands now have a feeling of, okay, what can we really get done and what can we get into the marketplace? Now the flip side of that has got to be we have got to start taking some models out of the mix, because it cost us a ton of money to have things that particularly don't sell well. But our growing confidence is that our product is going to be very strong and our product development is going to drive us and we have just got to keep doing it.

So I didn't get a listen to MarineMax's call. I am happy they are as excited as we are. They have been a great partner, but I will also tell you we have got dealers everywhere who are just as excited as they are.

And you know -- this is the last thing I will ask you -- what specifically they are excited about in your '08 lineup? I asked them that question.

No, I love your questions.

Well, I will ask them, and I will get back to you guys.

Okay. Well, I can tell you what they are excited about is Zeus, Axius, and at least three of the new boat models that were there, and that is what we talked to them about at Sea Ray. We have still got some other brands to go through with them at additional dealer meetings.

Okay. Thanks a lot and good luck.

Hayley Wolff, Rochdale Securities.

Hi there. I have a couple of questions. First, the divergence in the performance of engines and boats, do you expect that to continue in the second half? And then granted that MarineMax is not your only customer, but they commented that model year orders would be down 15% in dollars and you commented that your own internal inventories were too high. When you add those together, is that a reasonable starting point for forecasting for the next 12 months out? And then I have a few other questions after that.

First the question on divergence of engines and boats, we would expect that trend to continue. I mean, with Mercury the outboard pipeline is in good shape. We have got new small horsepower engines that are coming from our joint venture with Tohatsu and since the pipeline is in good shape there, that trend will continue. And really, though, when you move outside that, the dynamic at MerCruiser for our sterndrive inboard business is very similar to what we are seeing for our fiberglass boats. So, yes.

And whether the MarineMax statement they view -- what did you say Hayley?

They commented on their conference call that their orders for model year '08 look like they will be down 15% in dollars. You know, that coupled with your comment that your internal inventories are too high, is that a reasonable starting point for forecasting for the next 12 months? On your U.S. business?

Likely, with the one caveat that none of us know two things -- how the 2007 models are going to move that we are working on right now through programs, and what is going to begin to happen in retail as we begin the entire new cycle of fall boat shows, winter boat shows.

Okay.

Fair enough?

Yes.

And just to point out both those conditions, if you will, MarineMax purchase for the new model year as well as our own backyard inventory was factored into the guidance that we released a week ago.

Okay. And another question, one is as you think about rationalizing brand, how do you manage that with your dealer base? And one other question, does this pullback in marine units help you put in place your SBOM initiatives at a faster rate or are people just looking for shelter? How does that dynamic work?

Let me answer that one first. Necessity is the mother of invention and during times like this it is actually much easier for all of us in the organization to get focused on what needs to be done, work with more urgency and much more focus. So actually I think that was a bit of my last comment, Hayley. Times like this will give us the opportunity to move quicker than would normal times or even good times.

In terms of rationalizing brands, yes, of course it is an issue with a dealers, but as one goes through the rationalization, actually the dealer body leads us through that to some extent, because if we have brands that are not doing well and are not profitable for dealers neither of us do well with that. So the goal, again, is always to make the dealers more profitable and as we work with dealers in understanding what is really selling and what the marketplace is accepting and our own research, those answers actually become quite clear and easy to implement.

Okay. Thanks, Dusty.

You're welcome.

Dean Gianoukos, JPMorgan.

No, I am all set. Thanks.

Thanks, Dean.

(OPERATOR INSTRUCTIONS).

It appears we have no further questioners, Dusty, so again, we would like to thank all of you for participating in our call.

And as always, we genuinely appreciate your questions. There are always quite good and quite insightful. Thank you.

Take care.

Thanks for participating in today's teleconference and have a nice day.