賓士域 (BC) 2007 Q3 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2007 third quarter earnings conference call. All parties will be in a listen-only until the question-and-answer period. 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.

Thank you and good morning, everyone. With me today 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 take a look at our 10-K for 2006, our June 10-Q and our earnings release issued this morning. All are available upon request or by going to our website at Brunswick.com.

We appreciate your taking time to be with us this morning. We will try to keep our remarks brief and wrap up the call in about 45 minutes. Now I will turn the call over to Dusty.

Thanks, Kathryn. Good morning, everyone.

Let me begin by telling you we are upbeat coming out of the third quarter based on successes we have had in a number of areas.

First, with a decline of the U.S. marine market that we've been living with since the fourth quarter of 2005, we have been forced to play catch-up on an almost continual basis as we attempt to keep ourselves and our dealers healthy. As we have discussed on many occasions, a key focus has been managing our pipeline. We have had to continuously decrease production levels in an attempt to stay ahead of a declining market. As we went into the third quarter, we knew we had to make substantial progress in pipeline management before we and our dealers go into the winter season, and we did so.

Obviously, to accomplish that caused real pain to our margins. Production cuts, reduced sales, lower fixed-cost absorption and increased promotional spending, together with costs associated with plant closures and the startup of our newly acquired plant in North Carolina were all factors in our results. But, we now have nearly 3,000 fewer boats in our pipeline than at this time last year, and almost 2,000 of which are higher-margin fiberglass boats.

Our boat pipeline, measured by weeks of supply, decreased by one week to 26 weeks at quarter end versus a year ago. That is a significant milestone as it marks the first year-over-year decrease we've reported in about three years, which begins to bring stability to our operations. And, we did this in a market that was down double digits.

Second, we're producing earnings in this difficult environment and we are reaffirming our $1.20 to $1.30 EPS guidance for 2007. Pete will give you more details in a few minutes. Notwithstanding our earnings issues in our boat business, we have several businesses continuing to provide important contributions to our earnings: Life Fitness, bowling retail, marine parts and accessories, and our international marine and fitness operations.

Third, maintaining our financial strength is always important and it's even more so during a marine downturn like the one we're going through. Maintaining a sufficient level of cash is important, and as we ended the third quarter we had $328 million of cash and importantly, we continued to generate solid cash flow under these conditions.

So, all in all, we're in a good position in a difficult market. The marine industry continues to be down in double digits. We have discussed the factors impacting the industry for several calls now and there is no need to repeat them, but it is important to note that we see no easing of these conditions in the near future. The prolonged market decline in the outboard boat market is the primary driver of the $66 million in pre-tax impairment we recorded in the quarter for certain trade names in our outboard boat business. These businesses remain important to us and this charge in no way signals any reduction in our commitment to them. The market and accounting rules have collided on this one, and this is the result. Pete will speak shortly about this.

With that, I'm going to turn the call over to Pete.

Thanks, Dusty. Good morning, everyone.

As you saw in our press release, we reported earnings of $0.16 per share from continuing operations in the third quarter, excluding the impairment charge and a $0.04 tax benefit associated with prior fiscal years. That represents a 67 percent reduction in earnings from the $0.48 we reported in 2006, excluding a favorable $0.06 per share tax benefit.

Before going into the details for the quarter, let me spend a few minutes on the factors that led to the $66.4 million pre-tax impairment charge.

It is important to note that we have built our presence in the outboard boat market before the current -- and unprecedented -- marine downturn. The charge reflects the deep decline in markets for outboard-powered boats, as well as some share loss.

For example, unit retail demand in 2007 for aluminum boats over 16 feet is down 20 percent compared with 2004. If you look at the upper Midwest, where our brands have a much greater presence, the market is down 43 percent over the same period ... meaning almost half of this market has disappeared.

The weakness is not limited to aluminum outboard boats, but also the saltwater outboard market. Saltwater fishing boat demand is down 18 percent nationally versus 2004, but off an even larger 26 percent in Florida, where we tend to have a more significant presence. The Florida decline became much more pronounced this year as we've experienced a rollover impact from the depressed housing market.

Finally, it is important to keep in mind that the impairment charge in no way signals any lack of support for our outboard boat business. Just the opposite, in fact. We hold sizable share positions in important segments of the market, which will allow us to capture scale advantages in manufacturing and more over time. As an example, we announced last week that we're consolidating the manufacture of aluminum boats from a plant in Aberdeen, Mississippi, to one of our Minnesota production facilities, building on the previously announced shift of pontoons from Aberdeen to a pontoon plant in Indiana.

Please note that all of the numbers I'll talk about from this point forward exclude the impact of the impairment charge and tax benefits in the quarter.

Net sales of over $1.3 billion in the quarter were down by 1 percent versus 2006, led by a 10 percent drop at the Boat Group. That decline was offset in large part by double-digit growth at Fitness, mid-single digit growth at Mercury and a very slight increase at Bowling & Billiards.

The Boat Group experienced a 14 percent decline in sales in the United States in the quarter, offset in part by 12 percent growth internationally. The U.S. sales decline is driven by lower wholesale unit boat shipments, although our boat parts and accessories business posted solid growth. International growth was most pronounced in Latin America, Canada and the Asia-Pacific region.

Mercury reported an overall sales increase of 6 percent, a significant figure when compared against the Boat Group's decline. As noted in our last call, Mercury benefits from a greater concentration of international and P&A sales, accounting for 55 percent of its total, compared to 36 percent for the Boat Group. Mercury also has the added benefit of posting outboard sales growth, as these pipelines are in good order and we continue to ship more four-stroke models from our Japanese joint venture, where we suffered operational constraints a year ago.

Engine pipelines stood at 22 weeks of supply at quarter end, up from 17 weeks a year ago. The increase was driven by the additional four-stroke models from Japan, as well as due to boatbuilders ordering engines in advance of a regulatory change in California requiring catalytic converters on sterndrive engines manufactured and boxed after January 1, 2008.

Turning our attention to profitability, we saw consolidated third quarter operating margins of 1.5 percent, down by 410 basis points versus 2006. The decline is split almost equally between gross margins and operating expenses measured on a percentage of sales basis. Lower sales and higher discounting at the Boat Group along with unfavorable fixed-cost absorption across the marine portfolio, drove the gross margin decline.

Operating expenses grew by about $24 million in the quarter, versus the year-ago period. This is the same trend seen in the first half of 2007 and reflects a number of factors, including inflation, the weaker dollar, higher healthcare costs, marketing expenses for new product launches, restructuring costs and bad debt accruals for receivables at our bowling products business. Variable compensation expenses also contributed to the increased operating expenses, although this is largely the result of the reversal of incentive accruals in the third quarter of 2006, as the market weakened significantly in the second half of last year.

Let me also point out that we are seeing the benefit of restructuring activities initiated over the past year. The significant expense reductions from these activities, however, were more than offset by these cost increases I just detailed.

You'll also note that we reported a $7 million increase in "Other income" as we reached a favorable legal settlement that contributed $0.05 per share in the third quarter. Obviously, this is good news since our last conference call, and it's now factored into our revised guidance. But, this benefit will be almost completely offset in the fourth quarter by charges related to the recently announced closure of our Mississippi boat plant and a restructuring at our Belgian operation. I should point out that these nonrecurring items in total have had no net impact on the $1.20 to $1.30 per share guidance for the year.

Let's delve into our marine operations starting with some detail on the Boat Group's loss of just under $24 million compared to earnings of about $25 million last year.

The $49 million swing comes from three key factors:

• First, over half the shortfall is the direct result of reduced gross margins on lower wholesale shipments, coupled with the impact on fixed-cost absorption from lower production.

• Increased retail discount program and wholesale dealer support account for another quarter of the profit decline. Since we still have more work to do on cleaning out 2007 models from dealer inventories, continued support will be needed as we move further into the 2008 model year.

• Third, the remaining quarter is split between the impact from replacing Sealine's largest dealer who went bankrupt, as we discussed on our last conference call, the delivery slippage of several larger boats in September, and new product margin issues at one of our boat brands.

Turning to Mercury, operating margins were down by 100 basis points to 8.4 percent compared to the third quarter of 2006. An unfavorable mix shift is one key factor, as we sold more small horsepower four-strokes out of our Japanese joint venture. This was offset in large part by the strong benefits coming from our ongoing Lean Six Sigma efforts, along with successful cost-reduction efforts for outboard manufacturing.

In addition, at Mercury, we see the greatest impact from the weaker dollar of any Brunswick operation. Total currency translation for Brunswick contributed about $0.05 per share to consolidated earnings in the quarter. Let me just point out that that was included in our earlier guidance.

Turning to our non-marine businesses, Life Fitness posted an impressive 10 percent top-line growth. This was balanced across our U.S. commercial equipment operations, as well as international commercial and consumer markets.

Profit margins were down 130 basis points at Fitness due to higher R&D and marketing expenses in support of product launches across our commercial cardio product line. As we enter fitness' key selling season, we expect to post continued sales growth in the fourth quarter, and accompany that with improved earnings and margins.

In Bowling & Billiards, we saw 1 percent sales growth. The segment benefited from three new Brunswick Zone XL centers that opened this year, but the favorable impact was offset in large part by lower sales from our bowling products unit. We reported a slight loss in the quarter from start-up expenses for the new centers as well as one currently under construction, continuing operational challenges with the Reynosa bowling ball plant, and bad debt accruals at bowling products.

Let's now turn our attention to free cash flow and the balance sheet. As Dusty mentioned, we ended September with a cash balance of $328 million and a debt-to-capital ratio of 27.6 percent.

Given the uncertainty in the overall economy and the recent dislocation of the credit markets, it is important that we maintain a high level of liquidity. We consume significant cash flow during the first quarter of each calendar year as working capital builds in advance of the marine season. You can expect that our first priority is to keep our cash balance above $300 million as we move into 2008.

During the quarter, we bought back one million shares of stock for just over $28 million. This brings our buybacks year-to-date to 3.6 million shares. We have $251 million remaining under our current Board authorization. We obviously believe it worthwhile to repurchase stock at the current prices and you will see the program continue to the fullest extent possible. But, we will not take on additional debt to increase the program, and we will make sure that cash balances are at that $300 million level first.

Through the third quarter of 2007, we generated $101 million of free cash flow from continuing operations versus $83 million in the same period last year. The impact of reduced earnings and higher capital spending due to investments in the Navassa boat plant and the new Brunswick Zone XL is largely offset by a lower year-to-date working capital build compared to 2006. Through September 2007, our increase in working capital stood at $50 million, down from $144 million in the prior year. The single biggest factor driving that improvement is the lack of bonus payouts in early 2007, which obviously consumed cash, due to the weak marine markets in the prior year.

Looking at our balance sheet, we have some significant challenges ahead to reduce working capital by the year end, particularly for inventory, which was up $125 million at the end of September compared with a year ago. There are two key drivers. First, Mercury holds higher inventories in Europe due to market dynamics. Second, we have higher boat inventories in our own "backyard," including the large ... and expensive ... boats we did not ship in September. We have plans to significantly reduce inventories during the fourth quarter, due in good measure to the extended production outages we'll be taking during the Thanksgiving and year-end holidays.

You can also see that accounts receivable of $511 million is up $38 million versus September of 2006, despite the slight sales decline for the Company. International growth at Mercury is the key driver as we offer longer payment terms outside the U.S.

On a full-year basis, we continue to expect capital spending to run at about $220 million. 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 realized $0.29 per share in income from discontinued operations in the quarter. This is the result of the gain we realized on the sale of the fleet management business, and some associated tax-related benefits. With this sale, we have completed the divestiture of BNT.

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

Thanks, Pete. As we look ahead, we see the United States marine market continuing to be subjected to economic stress. 2008 will, in all likelihood, not be a rebound year in the marine industry, but we have much to look forward to.

Our Zeus drive and joystick docking system is now becoming available to consumers and demand is outstripping our ability to supply at present. We will get the supply and demand for Zeus under control and this is a high-class issue.

Axius, the sterndrive equivalent of the Zeus pod drive system, is coming to market in the spring of 2008. Axius just won the IBEX Innovation Award and we are thrilled by the reception of this new product. Zeus and Axius will drive demand and forever change the boating experience.

In addition to innovation on the engine side, our boat companies are working on an incredible array of new products to roll out next year for the 2009 model year. Life Fitness has rolled out its new treadmills and the new elliptical trainers will be released over the next several days. These releases will be followed by the new upright and recumbent bicycles early next year. These products carry new performance, interface and styling features and are receiving wonderful reviews from our customers.

We continue to open Brunswick Zone XLs and with each opening we get better returns. We plan to accelerate the pace of new openings to take advantage of this truly unique idea and the entertainment and services it provides to its patrons. We are pursuing outside financing to fund a good portion of this growth.

We continue the blocking and tackling needed to execute against our strategic initiatives. As we mentioned earlier, we announced last week the closure of our boat plant in Mississippi. This is a reflection of our march to improve our manufacturing footprint.

Our Dealer Advantage program continues to expand and we now have over 1,000 dealers participating in the program. We plan to offer the program to our fitness and billiards dealers over the coming months.

These and hundreds of other big and small activities have enabled, and will continue to enable, us to make significant progress in increasing our earnings power, as evidenced by our performance during this prolonged marine downturn. However, even with our successes, we believe we can, and should, do more. We will be sharing with you our thinking concerning how we plan to change Brunswick's earnings profile at our investor day event in December.

Thank you for listening. We'll now turn the call over to questions.

(OPERATOR INSTRUCTIONS) Michael Savner, Banc of America.

A couple questions, first, a very quick one and I apologize if I missed it. Did you explain where the $7.5 million of other income, which I assume is part of the $0.16 of adjusted EPS. Was that mentioned, Pete?

Yes, it was. It is related to a legal settlement we had. Basically that is $0.05 per share. And we just point out, Michael, and to everybody listening, that did not affect our overall full-year guidance here of $1.20 to $1.30, because there has been a number of restructuring for plant closures and also some restructuring we're going through in Europe for Mercury that is completely offsetting that.

Okay, sorry I missed that. Then going back to your guidance, you did reduce it a little bit. You brought it to the lower end of the previous range. I guess just conceptually, can you take us through -- when you spoke to us in late July, it sounded like you expected to absorb most of the downturn in the third quarter and so we would see a progression of improvement from the third quarter to the fourth quarter, but when we back into what the new guidance essentially is for the fourth quarter, it looks to be obviously lower than what you did this quarter. So how do we think about that change and combined with that, kind of a double question, how comfortable are you with the current inventory levels on your balance sheet? It is at its all-time high, 14 percent higher than previously. How do we think about that as you continue to manage the pipeline, but you're building up -- it appears to be a buildup of inventory on the balance sheet?

First, we are comfortable with the level of inventory on our balance sheet and Pete mentioned that. I want to make sure we highlight it. We're going to be taking significant outages in both engine and boat production in the fourth quarter. As we have been working with our dealers to plan for the quarter, we have a good view of where are all those -- where all the product is going.

A second item, and it was frankly a bit of a surprise to us, but we are working our way through it, is we had a group of large yachts that we did not get shipped in September and therefore they were hung up on the balance sheet at September end and we will be moving those through in the fourth quarter.

In terms of our guidance, the market continues to be in key states which influence the fourth quarter, California and Florida, really terrible. As we look at Florida, it is down 20 percent. California is down at 30 percent. We are -- and 40 percent of retail in Q4 actually happens in California and Florida. So as we thought our way through what we think we're going to be able to do in the fourth quarter, we factored that in. Do you want to add to that?

I would only add that we got some very preliminary information on industry trends yesterday actually and the initial data that we see supports a double-digit decline in fiberglass boats purchases at retail and is pretty much along the same lines as what we saw the second quarter, which was down 12 percent

Was that monthly or quarter-to-date data?

That is quarter, but is preliminary. There are some states that have not reported yet.

Okay, thank you very much.

Laura Richardson, BB&T Capital Markets.

This could be -- it is a simple question. It could be too simple, but -- or it could be hard, but I'm trying to understand for '08 it sounds like you're not forecasting a recovery, that's for sure. Let's say it was flat to this year in terms of the sales. Is the restructuring sufficient now that you would be more profitable on the same amount of sales in '08 than you were in '07?

Well it is a simple question and I do not want to be offensive at all, but it is one I am not going to answer right now, Laura, because I just don't want to get into giving guidance on 2008 yet.

Darn, I was hoping I could ask it that way.

Nice attempt, though.

Okay, thanks.

Ed Aaron, RBC Capital Markets.

I'm going to take a different stab at the previous question. You have talked about in the past about trough earnings this cycle being higher than trough earnings in the prior cycle. In light of the current market conditions, do you still have comfort with that statement?

Well, if you look at our performance this year with $1.20 to $1.30 per share, it is higher than $0.96 we reported back in 2001 and, as Dusty said, we're not making any comments yet about next year. We should point out though, too, that in our last call back in July, we indicated that we were taking our production down significantly just to make -- because production was falling -- excuse me, because retail demand had continued to fall and we wanted to stay ahead of the curve. When we talked about that, we talked about the fact that we tend to make pipeline corrections over the course of the model year, which would really run through the end of the second quarter in 2008. So you should expect that production rates and wholesale shipments, therefore, for some key pieces of our boat business in particular, and probably MerCruiser, would be at lower levels than they were in the first half of 2007.

Sure, that make sense. And then your outboard business is actually showing positive growth now. That -- the decline in the business led the rest of the industry by perhaps a year. Would it be fair to say that barring something absolutely disastrous that your broader boat business would be up in the 2009 model year?

Ed, again, in order for estimate that statement, we have to start factoring in what is going to happen at retail and I just do not want to start making that prediction right now.

What I will tell you, what you're seeing for outboards, as well, obviously for some of our aluminum boat businesses as well as for outboards, we saw the weakness there actually in 2005 before we started to see the weakness in the fiberglass boats segment, so we have been at this pipeline corrections for a longer period of time with those particular segments.

Remember, what we're doing right now is we are producing at a level well below retail demand. For fiberglass boats it was 17 percent cut in production this year. So what tends to happen is once you get the pipeline in good shape, you generally will see your production rates go up as long as retail doesn't drop any further. That is the impact that you're seeing right now with our outboard engine business as well as the fact that we have more of those small-horsepower four strokes now available to us.

Okay, thanks. That's helpful. On the engine side, the catalytic converter issue, we have heard that the overall additional cost is somewhere close to maybe $1000 per engine. Is that about right from a retail standpoint?

In the range, but here is -- it has got -- a lot will depend the size of the engine because with smaller engines that are carbureted engines, they first got to be made DFI and then from there, one can put the converter on them. So they will have a little more larger engines, which are already DFI are going to have almost nothing in terms of a percentage.

Okay, then final question just with your comments about your balance sheet inventory by the end of the year, can you give us some order of magnitude on how much you expect that to come down?

We are looking for a fairly significant drop and I do not wanted to give a specific number because it gets very difficult. You know, some of our -- actually, we're extending some of our outages over into the first week of January and it's a point-in-time number, but it's, at a minimum, many tens of millions.

Okay, thanks for taking my questions.

You're quite welcome, Ed. Thank you.

Hayley Wolff, Rochdale Securities.

Actually most of my questions were asked. Just a few more. Can you just comment in more detail on the slippage of the boats that are in inventory?

I can --

I missed your comments on them.

They were very large products and we did not get them completed to the customer's satisfaction during the quarter. Is that helpful?

Is there any way you can attach a number to that?

I would like not to, but it is big numbers.

Big numbers? Second, in terms of the half of the gross margin pressure came from the absorption as well as the discounting?

Half of it came from -- half of the $49 million swing in earnings at the Boat Group came from a combination of lower shipments as well as the impact of that fixed cost absorption associated with lower production.

Then a quarter was discounting.

Quarter was discounting, but I was talking about the dollar change in earnings for the Boat segment.

Right, is there a way to quantify -- because of the rebating that you did comes off your top line, right?

Yes, comes of your top line and it is reflected in net sales and goes all the way through to the bottom line.

Is there any way you can get a sense of what that might have cost?

Well, the discounting in total was 25 percent of -- 49, let's say $50 million, so that's $12 million, $13 million.

The margins at Life Fitness, I thought we were going to start to see some margin improvement in the second half of the year.

They are still right before their selling season in the quarter and what tends to happen is we are finishing up the R&D, which is running at a higher pace than the prior year. We are also spending more on marketing and promotional materials to get ready for the launches that are coming out that Dusty mentioned. So it is really kind of a timing impact, but as I stated, in the fourth quarter you're going to see the sales increases and you're going to see higher earnings versus the prior year as well as higher margins in the quarter. So you'll start to see the benefit of that this quarter.

Is there a way that as we look into 2008 on the lower sales volumes that the restructuring initiatives that you put in place over the past two years can be significant enough to overcome? Any kind of a modest sales decline in marine?

Again, I want to be polite, but I just do not want to keep talking about 2008, if I may, at this time.

Okay, I understand. All right, that's it.

Joe Hovorka, Raymond James.

A couple quick questions. The tens of millions reduction in inventory at year-end, is that year-over-year or from the third quarter?

It is from the third quarter.

Okay, would we see a year-over-year decline?

No, you probably will not. It is lower. We have had a couple acquisitions since then, which has ticked it up around $10 million, but we still believe we would probably be higher than we would be at year-end -- the prior year-end, although a fairly significant decline versus the third quarter.

Okay, then you gave the engine weeks number as 22 versus 17 weeks. On the third quarter last year, you reported it 20 weeks. What change? What is the three-week difference?

No, it is an excellent question. We are continually looking at those figures and what's proven to the difficult is our business switches more to -- or we're seeing higher growth in the international marketplace. We do not get good information back from the European market in terms of registration of that product and so we have actually done a more detailed analysis using export data from brands other than the Brunswick boat brands and we made an adjustment in that methodology to incorporate the international growth. So it accounted for about two to three weeks of reduction versus the same level last year.

Okay, so is that -- did you adjust all of your weeks inventory for engines going back?

Everything that I gave you, the 22 week and 17 weeks last year, are adjusted.

Okay, but if I look at like earlier this year you gave us 26 and 31 for 2Q and 3Q -- or 1Q, respectively?

No, those are not adjusted. If you hang on a second, I can get it for you.

Okay.

Is there a particular --?

I could actually just follow -- I would like to just -- because I am assuming you would adjust all of '06 and maybe all of '05 as well?

We can give you '06 and '07 right now. It might be better to give it to everybody rather than trying to handle it through a phone call.

That's great. Sure.

In the first quarter '07, we were at 28 weeks versus 26 weeks in the first quarter of '06. Then in the second quarter of '07, we were at 23 weeks, up from 18 weeks in the second quarter of '06. You have the Q3 data that I mentioned, 22 this year versus 17 in the third quarter last year. The year-end number, at the end of the fourth quarter in 2006, it was 23 weeks.

Okay and how do you -- I guess this question would apply to both boats and engines and maybe I'll just use the boat data since it goes back a couple of years. You did a weak better in '07 versus '06, right, 26 versus 27, but in '05 and really back through '02, you were around a 21, 22 weeks of inventory. Where are you -- is there a target you want to get to? Is the 26 weeks good enough? Do you want to be at 22? Do you want to be at 24?

A lot is going to depend on what we think is going to be happening at retail. I will tell you that today, in the market that we are in, I'm quite pleased with where we are on boat pipeline. As a matter-of-fact, I am ecstatic because with the declines we've had and then what we have had to do in our production rates etc. in order to get to this number has caused us to take almost heroic actions. You seen some on the bottom line. With this decline and knowing what our production rates are going to be for the fourth quarter, I'm for the first time in a while beginning to get comfortable about where we are.

So you do not feel that -- you feel 26 is okay? You do not need it to go to 25 or 24 for boats?

I would love to be at something much lower, obviously, so that there is a lot more consumer pull, but, yes, we can live with 26 very nicely right here. You will see us continue to work on the numbers as we go forward and it will continue to come down, but we had to take a lot of pain in order to get it here in this quarter.

Sure.

And remember what we said earlier, too, that the pipeline corrections tend to come over a whole model year and that is what we are running at. So you'll see continued improvement as we move forward.

Right, okay, and then just a couple questions on the write-down. Can you disclose which brands you wrote down and then can you also reconcile the gain in the outboard engine business and the timing of the write-down? It seems counterintuitive that as you're seeing an improvement in your engine side of your business in outboards you would be writing down the outboard boat brands as opposed doing it maybe a quarter or two ago or maybe just an accounting then, but --

It is in accounting thing. That is why I was very careful to say in my discussions we have had a collision here of accounting and market, with great deference to my very good friend Pete, who keeps me educated on this. I do not want to disclose the brands, but realistically I think we have told you everything you need to know to come to a conclusion.

Okay.

The delta, again, between why is Mercury off -- outboard is up, most of Mercury's growth, though, really was not in the domestic market. MerCruiser was down, but most of the growth really came from the international marketplace and the P&A businesses. As I stated in my prepared remarks, Mercury has 55 percent of their sales that are coming from the international marketplace. The Boat Group has about 36 percent for those same two, so it is really kind of a mix issue between the two businesses.

Okay, so it is in international boats and outboard engines as opposed to maybe domestic boat brands is what we're talking about.

Yes, international boats and engines as opposed to domestic, yes.

Okay. And the write-down, the impairment charge, this is where you take the undiscounted future cash flows and compare it to what is on the balance sheet and when it is less than that you have to do the impairment?

No, that would be goodwill. Nobody said accounting had to be reasonable. When you're looking at impairment for trade names, what you do is you basically have to put a value on the brand name and when you acquire a company, you sit back and evaluate what is the royalty stream somebody would pay you for its? So you forecast sales, apply a royalty rate and then you discount it back to the present. Remember, we bought these companies, did a lot of our acquisitions -- if you look at the timing over 2004, 2003 as the market was just coming out of -- it was entering a recovery phase. You are required to look at that valuation for trade names on an annual basis or more frequently, if market conditions dictate.

Then what happens is -- so we re-forecast sales and we'll obviously have sales at a lower level and we are anticipating excellent growth in those sales. Let me just take a hypothetical example. This is not how the math works, but if the sales are up 10 percent from the current level for a number of years moving forward and you are discounting them back at 15, it does not give you anything in terms of valuation for the trade name. So that is kind of the situation that we are in right now.

Okay. And then just one last question. You've mentioned I think a couple times the unprecedented declines here. We still had sharper declines in early '90s, right, or is this even worse than it was then?

This is worse and here is why. This is an interesting dilemma. The early '90s, I apologize. We can look statistically. These are approaching the early '90s. This company lost money in the early '90s.

Right, okay. That is all I had. Thanks, guys.

Hakah Ipekci, Merrill Lynch.

Two questions. One is recently the President of Volvo Venza -- or Penta indicated that there was some weakness in the small boat market in Europe, especially towards the end of the third quarter similar to what happened in the U.S. a couple of years ago. What is your take on that? What are you seeing in Europe just across different product lines?

The other question is on your last call, you said in the markets, the boat markets, going forward, the next peak could be lower than the previous peak and given the write-down today, are you feeling more cautious with the outlook? Do you think there is a permanent shift in the way people look at boats?

Let's do Volvo Penta question first in and around Europe. Europe continues to be a good market for us. I think Pete mentioned where a lot of the growth came from in the quarter and we saw great growth in Latin America, Asia and to some extent in Europe. So all of our brands, there wasn't any brands that are not U.S. brands that are based in Europe continued to do well. In terms of are we in a secular decline, I think that is your question?

Yes.

My judgment is no. Over time, I think this market is going to come back slowly because we have a couple of factors we have not seen in past markets. The housing market, availability of credit, insurance, etc. On the other hand, this entire industry continues to bring incredible new products to the market, the ability to get into boating is going to be significantly easier than it has ever been. The ability to boat and use of boat for family activities is going to be better than it has ever been. What we have got to do is work our way through these economic conditions and I have continued to be quite confident about where we will be once we get through this.

Thank you. Just as a follow-up, how's the dealership network doing? Obviously it is a tough time, but I know you have some initiatives in place to support them, but has there been increased weakness in that area? Are we seeing more exits these days?

Not seeing more exits and like during any difficult time, or as in any difficult times, there are some dealers who suffer more than others. That is why as we work with our dealer network and work on controlling pipelines, we need to continue to be good partners with them. That is evidence in the level of discounting that we did in the third quarter to help our dealers through.

I believe the dealer network compared to the early '90s through 2001 to today is doing much, much better. Most dealers operate their businesses much better today than they did 20 years ago. Yes, it is difficult for all of us, but the dealer network is holding up just fine.

Okay, great. Thank you very much.

Tim Conder, Wachovia.

A couple of questions. Back to -- just stay on the channel and wrap that up a little bit, how do you view your -- the channel inventories, Dusty, if you look at the industry versus yourselves of product that is 12 to 18-months-old and then product that is 18 months plus?

Versus the industry?

Yes.

I suspect there are going to be some dealers who are better than we and others who are worse than we. We are not concerned about 2006 model year boats. We still have some 2007 models in the network that we need to work our way through. We have spent a lot of money in the third quarter to do that and we are developing a view with our dealers of what we will need to do in this quarter as well as going into the winter boat shows in order to complete moving that out.

Tim, it is not, though, for the market that we are in, that worrisome to me at all. Had we not made all the progress we made in this quarter and undergone the earnings pain we did, I might not be as comfortable in saying that. But we are working our way through this one.

So with the progress, Dusty, that you made is it fair to say that you feel that Brunswick is in better shape than the industry collectively?

No. I suspect that there are some people who are in better shape than we are and some who could be in worse. I just do not know. I believe the industry overall is actually pretty healthy and everybody is managing this quite well.

I think we are in better shape, Tim, to manage through it than the competition, some of the smaller players.

Right, just given your position.

-- the strength of those companies.

Then, you mentioned product issues and one boat brands that surfaced as one of the issues in the quarter. Should we infer, given what you talked about in some of the large-dollar boat delivery delays that will slip into the fourth because of some issues, are those linked?

No. What we had is we had one brand that is coming out with new product and it is ramping up production. It is not hitting the margins it had projected for that product and that was the decline there, which is different than our slipping delivery dates on some large boats.

Okay. And back to the California issue there with the converters, first of all, what percentage (inaudible) California of the engines that will be impacted for the industry sales or for you? Then, again, will this cause a little air pocket in that segment? Maybe it is not material, but will it cause a little air pocket in the segment into '08 or if it is material?

First, California is dropping off on a monthly rate 30 percent a month. (multiple speakers)

Right, so it is becoming less important.

-- an impact which would have been barely double digits is less than that right now. Whether it creates a bubble or not is really going to be very interesting, so it is something I think all of us who sell boats into that state are going to be watching. The guess is, yes, there will be a slight bubble there, but it is certainly not going to be material.

Okay, then back to the SBOM initiatives, the strategic bill of materials, what type of timeline, Dusty or Pete, whoever wants to answer this, where are you in that progress and are we looking at model year '10 or '11 before that whole process is basically completed?

It will -- and I do not want to sound like a smart alec, Tim, it will be a never-ending process.

Right, right, understood.

We do have significant savings coming through in this year and we will have more savings next year and will have more savings the year after that.

Meaning model year '08, correct?

Calendar year '08. Model to calendar, it does not really matter, Tim, we're working our way through it and actually making significant progress.

Okay, but I mean if you just, again, you always wanting to continually improve, but if you had to say, okay, we started here at zero and here's where we are from our major initiative, our major push, our major upgrade, a type of percentage timeline, are we looking like 10, 30, 70, 100 over a four-year period, five-year period? Then you do the everyday incrementals after that? I guess that is where I am kind of coming from with the question.

I understand. If we go back to two or three calls ago, somebody asked me what inning are you in? To bring ourselves back, as we began talking about this a couple years ago and then we said five to seven years. I think the last time I spoke about this using the baseball example I said we're in the second inning and we are in the third inning now.

Okay, then one housekeeping and one other question. The problems with the ramp up in the bowling operations in Mexico seem to kind of be dragging out. Any additional color or time frame of conclusion there? Then, Pete, just more of two housekeeping items. What was your ending share count, either basic or diluted, at 9/30 and a normalized tax rate X the charges and everything?

As we look at the bowling plant, bowling ball plant in Reynosa, we are working our way through a list of items that had to get knocked off in order for us to have this fixed, Tim. We've gotten through a bunch of the big items. We think we have got our arms now around a few smaller items. We put a lot of resources into that plant in order to get it fixed. We have actually gotten up to the volumes we wanted now. We're just not getting the margins we want and we know the items that have to be fixed in order to get us to our margin count and, frankly, getting to the volume count was really important. Now we've got to go back and get the margin work done and we'd sure better be seeing it here by year-end or early next year.

I think with your question, Tim, on tax rate, the effective rate was 30.6 percent on a year-to-date basis as of the third quarter, and that is stripping out all the unusual tax items. That is for continuing operations.

Then with regard to the number of shares that we have outstanding, including common stock equivalents, etc., it is about -- it was just under 89 million at the end of the quarter.

Okay, and one last one, Pete, could you just remind us the percentage of sales from P&A both for boats and then also for engines?

We're asking ourselves whether we have disclosed that before.

I don't think we disclose P&A specifically, but the P&A and international combined were about 55 percent for Mercury, 36 percent for Boat Group.

P&A and international, so that lumps in domestic P&A also.

Yes and the international sales for the Company are roughly 32 percent -- excuse me, in the quarter it is about 35 on a year-to-date basis, so you can extrapolate off that. International sales for Boat Group were lower than Mercury.

Okay, great. Thank you.

Justin Boisseau, Gates Capital Management.

A quick pipeline question. What exactly are you measuring when you guys give the pipeline inventory? Is that just inventory at dealers?

No, it is in-transit, backyard and in the dealer.

The pipeline figures we give, we actually look internally at our own backyard inventory as well, but the pipeline numbers that we give you is product that has been shipped but has not been sold at retail yet. Some of that could be sitting in -- for, like on the engine side, could be sitting in the boat builder's plant. More often than not, it is sitting on a finished product in a dealer's hand.

Okay, so it's shipped but not yet sold.

Shipped and sold by us, but not sold at retail yet.

Right, right, and what are the remaining cash restructuring charges you expect for the year?

We're going to probably see -- that is part of our guidance. I think in terms of what we're going to see incrementally, the two things I mentioned, the European restructuring for Mercury coupled with the closure of the Aberdeen plant, is going to be about $0.06 per share in the fourth quarter. Those two items, and on a full-year basis, in terms of estimated charges, I think we are expecting to see something on the order of about just under $20 million for the full year.

Terrific, thanks.

You're welcome. With that, we've run over our time and I will apologize for that, but we wanted to make sure we take questions.

I thank all of you for listening and hopefully see most of you or all of you -- you're all welcome -- at our December meeting. Thank you very much.