賓士域 (BC) 2007 Q4 法說會逐字稿

Good morning and welcome to the Brunswick Corporation 2007 fourth-quarter earnings conference call. All participants will be in a listen-only mode until the question and answer period. Today's meeting is being 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. Thank you, you may begin.

Good morning and thank you for joining us for our year-end 2007 conference call. 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. Please 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 September 2007 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. Given that we are in the busy earnings reporting season, we will try to keep our remarks brief and wrap up the call in about 45 minutes. With that, I'd like to turn the call over to Dusty.

Thank you, Kathryn. Good morning and thank all of you for joining us today. You obviously can't see Kathryn, Kathryn had rotator cuff surgery on her right shoulder. She is decidedly right-handed, so we're having great fun watching Kathryn attempts to be a left-hander.

Thanks, Dusty.

So if coffee spills on me or something during this meeting, we will know who to blame.

As you have seen from our release, we ended the fourth-quarter of 2007 and the year as we'd expected. Given the volatile economic conditions in the quarter, we're satisfied we did well in light of the circumstances.

Fourth-quarter earnings were $0.09 per share and the year came in at $1.23 per share. In each case, excluding special tax benefits and for the full-year the trade name impairment charge. I want to thank my fellow employees for an outstanding level of commitment and performance in 2007. They should be very proud and I am extremely proud of them.

I'll take just a few minutes of your time to speak about our Marine, Fitness and Bowling businesses in turn before I turned the call over to Pete. 2007 was, to say the least, a very tough year for the marine industry. We saw total industry boat retail demand, aluminum and fiberglass, decline 11% in the first quarter, 12% in the second quarter, and 6% in the third quarter. Preliminary fourth-quarter results had the industry down as much as 14%, with fiberglass boats down about 18% and aluminum off about 7%.

The fourth-quarter is a very small, off-season quarter with less than 10% of the annual volume retail. But we shouldn't draw too many conclusions from these preliminary numbers. However, we cannot ignore the continued downturn and the quarter in the context of the overall slowing of the retail growth in the United States. By any measure, 2007 was a difficult year.

And while I know we sound a bit like a broken record on call after call in times a such as these, we must keep our product pipeline as thin as possible to ensure the continued health and future prospect of our dealers. As a result, we have been producing product at levels below retail demand for several quarters now. We ended 2007 with the fiberglass unit pipeline at 34 weeks of trailing twelve-month sales, down one week versus 2006. But the number of fiberglass units in the pipeline is down over 10% versus 2006. We are now back to 2004 levels. The year-end aluminum pipeline is at 33 weeks, up one-week from 2006. The number of aluminum units in the pipeline is down 5% versus 2006.

So we're doing a good job of managing the pipeline, but obviously it comes at the expense of earnings. As we enter 2008, the picture remains cloudy. We are early into the boat show season and there is no clear message emerging from boat show results, if they can ever be an accurate predictor of the market. On a show-by-show basis, some brands are up and others are down and it changes from show to show. That said, buyers are still showing up and good brands with new innovative products and features offered by good dealers are selling.

Our Fitness business had a great fourth-quarter, which is the most important quarter for that business. Sales were up 11% and operating earnings were up 12%. We have been steadily investing in this business and we are beginning to see the impact of new products, great global focus and the benefit of higher volumes on fixed cost absorption. For the year both sales and earnings were up for the business, but mostly the improvements occurred in the fourth-quarter.

Our Bowling & Billiards business also had a nice fourth-quarter. While a small portion of our total business, our Brunswick Zone XLs are an important part of our business moving forward. And we have been investing in the business processes and infrastructure that accelerate growth of our new XL centers, with the goal of opening a new center each month by the end of 2011.

Before I turned the call over to Pete, I should also mention our global growth. Our sales outside the United States continue to grow and now constitute 36% of our total sales, up from 32% in 2006. 2007 domestic sales for the Company were down 5%, but sales outside the U.S. were up 12%. Our Engine, Boat and Fitness businesses all posted double-digit percentage growth versus 2006 for sales outside the United States. While the dollar's relationship to other current season is clearly helping our international sales, our employees are highly focused on becoming more global and their efforts are really having an impact.

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

Thanks, Dusty, and good morning, everyone. As you saw in our press release, we reported fourth-quarter earnings from continuing operations of $0.09 per share, excluding a $0.05 tax benefit associated with prior fiscal years. That is down 59% versus the $0.22 we reported in the fourth-quarter of 2006, also excluding special tax items.

I want to quickly point out the impact of restructuring charges on the quarter-over-quarter comparison. In November of 2006, we announced a number of restructuring actions, including elimination of hourly and salary positions and closure of two boat plants and a realignment of bowling products distribution in select international markets. Both actions led to a total of $19 million, or $0.14 per share, in restructuring charges in the fourth-quarter of 2006.

Throughout 2007, we took additional steps, including the closure of two more boat plants and the transfer of some Bayliner and Maxum cruiser production to a newly-purchased facility in Navassa, North Carolina. That plant also gives us East Coast capacity to produce Meridian models 50 feet and larger.

We incurred additional restructuring charges of $22 million during 2007. Of this full-year amount, $9 million, or $0.07 per share, hit in the fourth-quarter. Though restructuring charges by themselves were lower in the quarter-over-quarter comparison by about $0.07 per share.

The net benefit of our restructuring activities was a $32 million reduction in expenses during 2007. The overall benefit was not readily apparent because the U.S. marine market downturn was so pronounced.

Last week we announced that Hatteras will mothball the Swansboro plant and transfer production to our New Bern facility. Both plants are in North Carolina. This action was not driven by an anticipating sales drop at Hatteras. In fact, we expect Hatteras sales to increase during 2008. Instead the New Bern plant has made some great strides in productivity in the recent past. And as a result, we can reduce overhead cost without limiting sales. We will have Swansboro's capacity available for larger yacht production as we launch new models in the years ahead. Since we have a solid manufacturing presence in North Carolina, we have tried to maintain some flexibility by transferring production workers to both New Bern and Navassa wherever possible so we can restart Swansboro when we are ready.

Given continuing declines in the U.S. market, you can expect that the pace of restructuring should pick up as we move through 2008. Additional restructuring charges are likely and further asset impairments are also possible.

Let me offer a quick overview on the fourth-quarter results. Our sales group by 5% to $1.4 billion, led by 11% growth at Life Fitness, 7% at Mercury, and 3% at Bowling & Billiards. Sales at our Boat Group were down by 3%. The Company's sale increase came almost entirely from our international operations, although we did post mid single and low-single-digit growth in the United States at Fitness and Bowling & Billiards, respectively.

The disconnect in fourth-quarter sales growth at Mercury compared with the decline at our Boat Group is almost entirely due to the mix of U.S. versus international sales. In the fourth-quarter, 45% of Mercury's sales came from outside the U.S., compared with 24% for Boats. Both our Boat and Marine Engine segments posted near identical low-single-digit declines in their U.S. operation.

Our consolidated operating margin in the quarter came in at 1%, a decline of 120 basis points versus the prior year, while order restructuring costs improved margins by about 60 basis points, but the effect was more than offset by the impact of several factors. First, we reduced production line rates across our Marine operations in the quarter as compared to the prior year and took extended shutdowns around the Thanksgiving and New Year holidays to help in our effort to reduce dealer pipeline and our own backyard inventory. Production at some of our key fiberglass boat brands was down by 26% versus the fourth-quarter of 2006.

Next, we continued to offer higher discounts, most notably at Sea Ray, to move noncurrent product at retail and help dealers reduce their pipeline inventories. While our margins were adversely affected, the efforts have been successful.

The remaining margin decline comes from the effect of replacing Sealine's largest dealer, who went bankrupt, as we have noted over the last two conference calls, along with warranty issues at one of our smaller boat brands. I should note that the operating margin decline came entirely from gross margins. Operating expenses for the quarter were up slightly with the usual number of puts and takes. Lower restructuring costs and bonus accruals were offset by higher spending at Fitness for new product development and marketing costs and a translation effect of the weaker dollar on international expenses.

Let me quickly offer a few comments on how these factors affected operating margins at each of our segments during the fourth-quarter. The Boat Group posted a 4.6% operating margin loss, a drop of 600 basis points from the 1.4% operating margin reported in the fourth-quarter of 2006. Lower sales, reduced fix cost absorption from lower production, higher discounts, higher restructuring expenses, and the effect from Sealine and warranty expenses drove the decline. At the Marine Engine segment, operating margins improved by 320 basis points to 3.9%, led by the absence of $9.5 million of restructuring costs seen in 2006. International sales growth and the benefit from cost reductions in outboard engine manufacturing offsetting lower fixed cost absorption were also at work.

Life Fitness' operating margins in the quarter were 15.1%, up slightly from the 15% seen in 2006, as the benefit from impressive sales growth, largely on the commercial equipment side of the business, was partially offset by the higher expenses for the development and launch of new products I just mentioned. Finally, at Bowling & Billiards, fourth-quarter operating margins came in at 9%, up 430 basis points. Cost reductions, improved performance from our two manufacturing plants in Mexico for bowling balls and coin-operated pool tables, along with contributions from our new Brunswick Zone XLs were the biggest drivers.

Before turning to the balance sheet, let me point out that our consolidated equity earnings were favorable in the quarter by 4.7 million versus 2006. Once again stronger performance from CMD, the 50-50 joint venture between the Cummins and MerCruiser for diesel engines was a contributor. In addition, the absence of restructuring activity, which occurred last year at our Japanese bowling joint venture, impacted the quarter-over-quarter results.

Turning to the balance sheet, we ended the year with $331 million in cash, up slightly from the $328 million we held at the end of September, even after our $53 million dividend payments during the fourth-quarter. Free cash flow from continuing operations, which we defined as cash from operating and investing activities before spending on acquisitions and equity investments, totaled $172 million during 2007. That is up from the $153 million in 2006.

The significant drop in earnings was offset by favorable working capital requirements among some other items. During 2006, we built working capital by $93 million, compared with a $4 million reduction in 2007. The biggest contributor to the working capital decline in 2007 was reduced bonus payouts.

Our inventory balance, which stood at $1.007 billion at the end of September, fell to $907 million at year end. The significant production cuts kicked in at the Boat Group, which account for almost two-thirds of the $100 million inventory decline. Mercury accounts for most of the remainder.

Looking forward, we will continue to maintain reduced production levels so we achieve lower inventory for both Brunswick and for our dealers. Keep in mind, however, that we are now building inventories in advance of the marine season. As a result, you will see inventories increase, not fall, in the first quarter, but inventories will grow at a slower pace than in 2007.

Accounts receivable of $572 million at year end were up 16% compared with a year ago. This may seem out of line as sales for the full year were basically flat, but the growth is all attributable to strong international sales at Mercury, which carry longer payment terms, and the revenue increases seen at Life Fitness, particularly in the fourth-quarter.

On the capital expenditure front, 2007 spending came in at $208 million, below the $220 million we had expected. We cut back on our spending plans as part of her effort to further build cash balances due to the high level of uncertainty in the U.S. economy. Of the $208 million, $42 million, or 20%, was invested in our bowling retail business. We opened three new Brunswick Zones XLs in 2007 and have plans for at least four more already finalized at this early point in the year. So this component of her capital spending may actually increase during 2008 to $50 million or so. We do expect, however, to fund 20 to $40 million of the spending through sales or leasebacks or other financing options during the year. We own all but two of our eight current Zone XLs, the remainder of our bowling centers are half-owned, half-leased and we want to move toward a higher ratio for the XLs as well.

We intend to reduce the remaining $166 million of 2007 capital spending from our Marine and Fitness businesses to about $125 million in 2008. We are not cutting back on bringing new and innovative products to the market, but we are marked more focused on prioritizing our spend across the product portfolio. So total capital spending in 2008 is currently targeted at $175 million, although, again, 20 to $40 million of that will be funded from external sources. Depreciation and amortization expense is forecast to run about $190 million this year.

On the tax front, I want to point out that our effective tax rate could be higher as we enter 2008. Our effective rate stood at 30% for 2007, excluding the special tax benefits throughout the year. As you are likely aware, Congress did not extend the research and development tax credit before the year ended and it has not been included in the economic stimulus package now before the Senate. So until Congress extends this important credit, we will likely see higher tax rates in 2008, maybe into the mid 30% range. The R&D tax credit extension was also delayed in 2006, but eventually came through in the fourth-quarter.

During the fourth-quarter, we bought 500,000 shares of stock, bringing the full-year total to 4.1 million shares. When coupled with the $53 million dividend paid in December, we returned a total of $178 million to shareholders during the year.

In our mid-December investor meeting, I indicated that our highest priority is the need to maintain our strong balance sheet and liquidity. That remains the case today, particularly with the heightened volatility seen in financial markets since the year began. Since we use significant cash in the first quarter for the seasonal build in working capital, you should not expect to us to repurchase any stock through the end of March. We will wait on the sidelines until we see how the 2008 marine season unfolds and move forward only if we have maintained a healthy cash cushion.

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

Thanks, Pete. As we said at our December investor meeting, we are not giving earnings guidance for 2008. As we enter the year, it's difficult to get any meaningful read on the U.S. marine market. Consumer uneasiness, the housing market, tightening credit availability, regional economic variances in many of the key boating markets such as the Northeast, Florida, and California, excessive talk of a recession and the like are all cause for concern and indicate case potential continued decline in marine markets.

On the other hand, however, the impact of an economic stimulus package, lower interest rates and several other factors could enable marine markets to stabilize. However, for our planning purposes, we are not counting on that as we have planned for 2008. We are still several weeks away from the beginning of the boating season and under these circumstances, it would be imprudent for me to offer a prediction on the U.S. economy, its impact on the marine industry, and the flow through to our results.

I can tell you, though, what we are going to do to responsibly run our business in these times. In our planning for 2008, we have developed production schedules at levels below those of 2007. However, the number of boats and engines we ultimately produce is going to be governed by developing retail demand over the coming months. The key for us is to remain nimble and be prepared to vary our production schedules as required to meet market needs. We will continue to take actions to reduce costs across the broad range of activities. Over the past several years, we have lowered cost by tens of millions of dollars through plant consolidations and efficiencies, sourcing savings, quality improvements, headcount reductions, product rationalization, Lean Six Sigma projects, and countless other activities. Unfortunately these savings have been masked by the volume reductions we've undergone.

To put the magnitude in importance of the improvement in our cost position in context, in 2007 we sold 30% fewer of our high-margin cruisers, sport yachts, and yachts than in 2001. We manufactured 35% fewer outboards in 2007 versus 2001. And since 2001, our transition to four-stroke outboard product and entry into outboard boat businesses has significantly lowered our overall margin potential.

Yet even with these headwinds, we generated earnings of $1.23 per share this year. Reducing our cost and improving our productivity continued to be a necessity in this week marine market. We expect that as we take action to lower our cost in 2008, we will incur charges from time to time. These actions, however, will position well when the industry comes back.

We did a great job of generating cash in 2007 and good working capital management and cash generation are important focuses in 2008. This is hard work in markets such as these and our businesses will continue to stay focused on aggressive working capital targets. While we're planning for less capital spending in 2008 than 2007, we've not materially lowered our spending for new product and innovation. Our dealers and consumers will continue to be impressed with the volume of new products and dazzling innovations in them. In fact, we have a very ambitious product plan for 2008 and 2009, one designed to ensure we build upon our industry-leading installed base, build into larger boats, and use new technology to bring people into boating. We'll talk you about all of this down at the Miami boat show in a couple of weeks.

We're also going to continue to work on the important strategic initiatives we've discussed many times. Systems engineering, platform and development, design and manufacture, dealer certification, Brunswick Dealer Advantage, more large boat offerings and access to water are examples of strategic activities we continue to advance as they are going to serve us well in the future.

When we wrap on all this, we see 2008 as another tough year, but it's a year with containing opportunities for us at our dealers to improve. Our experience tells us that when economic fundamentals improve, the corresponding marine market turnaround produces dramatic upside for us. However, we cannot just wait for economic fair weather and we will continue to improve our operating cadence and potential in 2008.

Thank you for your time and now we will take your questions.

Can we have the questions queued up, please?

(OPERATOR INSTRUCTIONS) Michael Savner, Banc of America Securities.

Thanks, good morning. A couple of questions. First, can you give us a little bit more color on your comment about further potential impairment charges going forward, because obviously that is somewhat of a -- it's almost like a black hole there, because you've made so many acquisitions over the last few years, there is so much goodwill on the balance sheet that has the potential to be a material event. And as we try to think about trying to assess what current that book value is, whether you are seeing something that is imminent but small or imminent and large really has an important role. Can you give us any more color on how you are thinking about evaluating that?

Sure, you know I would say, Michael, that in terms of the potential for it -- and it is the potential only -- it is going to be very dependent on how the year unfolds and we are sitting here in January and, quite honestly, it's not until we're into the second quarter I think that we will have a better sense of it. But it would likely be associated with our outboard boat operation more than anything else. I mean, if you look at the book value of those in total, it's around $300 million and I wouldn't say at this point that we would expect anything to be large, but it's going to depend on how the year unfolds.

Thanks, that is helpful. And then maybe just one other big macro question. As we look back and I look at our model and we look back 2001 when you generated I think it was around $0.95, $0.96 sense of earnings and operating margin were down mid to low single digits. Your '07 kind of has now eclipsed that in terms of a low watermark on margin, but the business has changed, right, you've got it much bigger fixed infrastructure, you've got the marine -- the Mercury business, which has gone through some changes, so the margins will never be as high as they were before. Kind of a long-winded way of asking how do we think about the bottom and your ability to kind of cut costs? Can operating margins dip negative here before we see a move out of the trough -- on an annual basis?

-- have at it and then Pete can add to it. There obviously is a level at which the marine markets could go where our marine business could potentially get into negative operating margins. I actually believe, though, it would be a reduced level in the U.S. market -- I'll use this word -- of biblical proportions for us to get into negative operating margins across our marine businesses. And I don't see that coming.

While 2008 is not going to be a piece of cake, we've been doing a lot of planning and attempting to structure our company so that we can go through these sorts of times and we've been very hard at work on getting cost out. We have plans, discussions, books full of other things we can do on a continuing basis as we watch this market to work on cost and to improve our position. So we are attempting -- and the picture I probably didn't do a very good job of painting in my discussion -- is that were going to be nimble, were going to do what we have to do, and the one thing, though, we cannot do is lose our competitive positioning in and around product and having places to go, great plants with great people with good product coming in the pipeline, because this is going to turn at some point. And I want us to accelerate out of this much better than we've ever done.

So that is all the work that we do, Michael, every day here. And if I had a real clear view of the market, my planning would be a heck of a lot easier in this Company. But with the market in the flux it is, our goal and key here is to be nimble and be prepared what we have to go do when we have to go do it.

I think just to add to that, for the Boat Group, where actually we did lose money in 2007 on a full-year basis, is up roughly $15 million when you pull out the impairment charge from the third quarter. One of the real reasons and the single biggest reason for the margin decline, even year-over-year, has been the very high level of discounts that we put in place.

It's been a very tough market, we honestly had too much inventory out there that was non-current and that by itself has probably reduced margins for the group overall by near 200 -- two full percentage points, or 200 basis points. And moving forward, we would obviously hope that would be diminished. We also had a number of issues, as mentioned, at Sealine here now for a couple of quarters. You can't dismiss that. We said that was $0.09 a share in earnings impact versus the prior year for the second half alone. But once we get beyond those operational issues should also help and I think on Mercury, it's a bit tougher to see that in a loss position, to be honest, because even though the margins are down and down probably significantly versus 2001 and earlier times, we still have a very sound business with P&A and also with the sterndrive business. And international, as well, too, it's a bigger piece of their overall business as I mentioned. So, it would be pretty, pretty challenging and probably worse than biblical proportions as Dusty said for that business.

Thank you very much.

Ed Aaron, RBC Capital Markets.

Thanks, good morning, guys. Kathryn, are you going to do a left-handed Zeus demo in Miami?

Absolutely. I hope you are there for it.

Looking forward to it. I wanted to actually focus my questions mainly on the engine business. Did you give an engine pipeline inventory number on the call that I missed?

We didn't and the engine pipeline was at 26 weeks ended at the end of December this year, compared to 23 weeks a year ago. So it was up three weeks.

Okay.

A little bit better trend than what we saw in the third quarter, where it was up five.

Right and did you see -- in the third quarter, you mentioned some kind of buying forward in California ahead the new emission requirements, did you see any more of that in the fourth quarter?

Yes, there is probably some impact there and I think when you look at how much MerCruiser is down year-over-year compared to our sterndrive boat brand, it didn't see the same level of decline and that was one factor that probably drove it. So there was a little bit of that in the fourth quarter.

Okay, thank you. And then just on the international business, I guess this applies to the Company as a whole, but I guess more than anything to the engine business because of the percentage of revenue that is derived from international markets, clearly you've had a lot of momentum there. But I am trying to think about the impact of some of the -- or potential impact of some of the comparisons that you are up against. If you were too sort of -- presumably there is basically three reasons why your international business is very strong right now. One is currency, two is that the internationally economies are generally better than the U.S., and then three is that you've got your own business development initiatives that are helping there. I mean, how much weight would you give to each of those three factors in sort of thinking about the momentum in that business right now?

Well, when we sit back and look at our international sales growth, particularly in Mercury business, but this is actually a company number, but we reported growth for the full year of 12% internationally and we estimate roughly one-third of that is driven by translation impact, so 4% or so. And the rest would be volume mix sorts of the factors going on. So I think the translation impact, you would expect that to fall off unless there's just significant further weakening of the dollar on a full-year basis 2008 versus 2007.

Ed, I think the real driver, once you get past the translation impact, actually is the focus of the organization. We are much better structured outside the United States to go attack business. We have spent a lot of time supplementing the great talent we already had outside the U.S. with new talent. And what we are beginning to see our new dealers coming on board in many countries and I think at the December analyst meeting, we gave you an example of what is going on down in Mexico, as one example.

So once you get past the translation impact, from my perspective, the biggest driver is focus, having a real plan, and having everybody and the business out there trying to move it forward. And our guys have been doing an absolutely fabulous job.

At the industry level internationally are you seeing any slowing of demand just for economy reasons?

No, no. Again, the best indicator we have -- boy, it's not a good one, I want to be very clear -- are things like boat shows. And we've actually done quite well outside the United States in boat shows so far this year in certain of our brands. I'm quite pleased and comfortable.

And like the U.S., though, it's little off-season at this point in the year, so it is hard to draw conclusions right now, Ed, on that.

Understandable, thanks, guys.

Hey, Ed, can I just make one other comment? As we look at engine pipelines, we need to keep talking about our Tohatsu joint venture had some operating issues in 2006 that have been cured and we had an enormous backlog of order for small engines, which the Mercury folks had done a great job of filling and taking care of and that has had and is the driver of any uptick in the outboard pipeline.

Thank you.

Steven Rees, JPMorgan.

Thank you. So cost reductions initiatives continue to be a major focus of the Company. And I think you said you reduced expenses by about $32 million this year -- yes, in '07 -- obviously masked by the softer revenue environment, but I was just wondering, as you look into 2008, do you think you have opportunity to reduce expenses to at least those sort of levels or at this point, do you see greater opportunity to cut cost?

Greater.

And then as you look out into 2008 and the promotional environment, do you expect discounting to be sort of in line with '07, greater than '07, or do you potentially see it lessening given better inventory pipelines?

Less.

Okay. Great, thank you.

Well, Steve, that is a great way to ask questions (multiple speakers) -- give one answer.

Joe Hovorka, Raymond James.

Thanks. A couple quick questions, looking at your full-year engine business, your domestic sterndrive was down 5%, domestic outboard down two. You said that it looks like the overall boat industry is down may be low single -- or low double digits for the year. How do you reconcile the two differences there? Why would engines be declining that much slower than the boat business?

Sales outside the U.S.

I know, but I am just looking at the domestic ones. Your domestic --

The point there is, first of all, those are dollar --

Right.

-- when we talked about the industry being down, those are generally units and there is a difference there. Part of it, too, a big part of it (technical difficulty) you see outboard down that 2% that you mention, Joe, the reason is that their pipeline was in very, very good shape by the end of 2006, so we did not have to take as drastic a cut in production in order to meet the market.

Would also point out that for both of these, for our engine businesses, it really is driven by the production schedules of our customers and our visibility maybe into what is going on for them at retail could be a bit more difficult, but it is based on orders from them. There is an extra step in the value chain between the end consumer and Mercury.

You are saying the OEM customers are giving you -- is that what you are referring to? Right? Hello, are you there?

Yes.

I'm sorry, I thought I lost your signal. How much of the domestic business is OEM as opposed to replacement demand?

Probably about 85% of Mercury's business today is OEM, 15% is dealer no replacement.

Right, okay. Your marine eliminations number was actually down pretty big in the fourth-quarter, much more so than it was in the first three quarters as a percentage of the overall marine business. What is driving that and why would that be the case?

We reduced our inventory. We were not shipping as much to our sister companies as we -- you know, there was a smaller mix of the overall sales and so you had a lot fewer intercompany sales to get our own backyard inventory in line. What that line represents, that elimination, is sales of engine largely to our sister boat companies --

Right, right.

And so we wanted to reduce our own backyard inventory of boats and engines. We took more production cuts in the fourth-quarter, we shipped less, but we shipped a lot less to the sister companies.

Okay, I understand that part, but what I guess is kind of confusing to me is your boat sales are down, what, 3% in the fourth-quarter and your eliminations were down 19. And then if I go back and look at, let's say, the third quarter, you were down 10% on boat sales, but down 6% on eliminations. What -- you're just saying it's an inventory issue?

Yes.

Okay, so inventory, your factory inventory, that would show up on your balance sheet?

Yes. And it did.

Okay, great. All right, thank you.

Tim Conder, Wachovia.

Thank you. A few questions here, Pete, could you give us the international sales in total for the Company both in the fourth-quarter and in 2007?

Sure. In the fourth-quarter, international sales were -- for 2007 were $536 million and for the Company on a full-year basis were $2 billion.

Okay. And then looking at P&A, I know you broke it out somewhat a little bit in the press release, but just maybe looking at P&A collective globally for boats and for engines in '07, if you would have those numbers?

We do not give a global number for Mercury, that is domestic P&A and for the -- so we don't disclose that. And for our domestic boat P&A business, the total sales in 2007 for the full-year were $340 million.

Okay. Then maybe to follow up on a previous question, so basically what you are saying in engines is we may see a little bit of a fall-off here because the Tohatsu joint venture, the catch-up you did there on outboards, and then the California emissions, so that potentially, at least in the early going year of '08, that may hurt a little bit? Is that fair to say?

It could, it could have some impact. It's difficult to say how much of the -- to be honest, it's difficult to say how much of the engine sales to an OEM are specifically driven by that factor, but it could have some impact. We don't think it's very large, if you will. I think actually the biggest issue for that business, it really erupts with MerCruiser, which has much higher margins than the outboard side, is getting that pipeline in good shape.

Okay. And then I apologize if I missed this -- heading into that then on engine inventories, you gave the pipeline number of 26 versus 23 weeks. And then you gave a little bit I thought I heard regarding outboard versus inboard sterndrive and you said that was may be skewed a little towards the outboard or the outboard accounted for all of the increase year-over-year?

No, what I said is that we entered 2007, Tim, with lower pipeline for the outboard engine business than we did for MerCruiser. So you didn't see as much of a wholesale shipment declined for that business as you would with the rest of our marine business.

When you look at the numbers that I gave, the 26 weeks of pipeline inventory for engines in total at the end of this year versus the 23 weeks that we had at the end of 2006, it is skewed. That three-week increase is actually larger for MerCruiser than it is for outboard. Outboard is down a little.

Okay. And then just a couple more clarifications. You said that the Cummins JV profit was up year-over-year and fourth-quarter and for the year?

Yes.

Great. And then discounts, Pete, you said for the full year was around 200 basis points?

Yes, for the Boat Group.

For the Boat Group, okay.

200 basis points of the margin degradation.

Okay, okay. And then ForEx, collectively, for the Company benefit to sales, EBIT, however you want to say it for the quarter and the year?

The translation effects from foreign exchange for the quarter were up $0.04 a share and for the full year, we estimate it was about $0.11. But that is for translation impact.

One more housekeeping. Shares outstanding at 12/31 and then, Dusty, kind of just a follow-up on a question I asked last quarter, do you feel the issues regarding the change with the bowling down to Mexico and all that, all those start-up issues are now resolved?

They are 85% resolved and in my judgment we will finish the last 15% here in the first six months of this year, Tim.

Okay, great.

In terms of the number of shares outstanding as of 12/31, if you look at the press release on average for the fourth-quarter, it was 88.6 fully diluted. At the end of the year, it was 88.3 million shares fully diluted, pay shares were 88.2 million.

Okay, okay. Thank you gentlemen and, Kathryn, take care of the arm.

Thanks, Tim.

Hakan Ipekci, Merrill Lynch.

Thank you. And the first question is you mentioned decelerating sales in the fourth quarter and your key dealer, MarineMax, came out and indicated softening conditions. I understand you don't want you to make comments for '08 at this point, but in the near-term, is there anything that could reverse this trend?

I had a bit of trouble understanding the question. Could you try one more time, Hakan?

Sure, absolutely. You mentioned some decelerating retail trends in the fourth-quarter, plus your key retailer, MarineMax, indicated softening conditions as well. I understand you don't want to talk about too much about '08, but is there anything in the near-term that could reverse this trend?

We alone are not going to reverse the trend for the industry I can tell you, though, that internally we have several new products, marketing plans, and activities at a dealer level all around the United States that we believe will continue to keep us at above-market levels. Now, we're a big part of the market, so we help the market when we do that.

In terms of the market itself, it's too early to call and, as Dusty said, it's difficult to extrapolate off a quarter when the retail volume in the fourth-quarter only counts for 7% or 8% of the full year. So we really won't know, Hakan, in terms of anything reversing until we get into probably April.

Okay. The other question on the modeling, when I look at the sales numbers for the year it was up slightly, yet there was a substantial drop in operating income. Assuming that most of the promotions would be reflected in the sales numbers, I'm still having a little hard time understanding why the margins are so much lower. Is it because the international margins are lower than the U.S. or can you help me understand it a little better?

Are you talking about the boat business?

I mean, boat business saw some revenue decline, but overall for the Company, we saw some revenue increase actually in the year despite all the cuts and everything and I would assume that all the promotional activity would be reflected there. So, my other -- the only thing I can think is the international sales, which are growing, probably have lower margins than the overall Company. Is that fair?

I would say that's probably not fair, they are slightly higher. They are slightly higher for the marine side of the business. And really what you are seeing, the sales numbers basically reflect dollars, don't give you a good picture of what is going on with the units, which in the domestic market are down significantly in the high single digits for the full year, and the fixed cost absorption hit that comes with that is extremely noticeable. After the discounts, that is the next biggest factor for the Company.

We did have, as I said, some hopefully unique challenges, particularly at Sealine, with the dealer going bankrupt, our key dealer, and having to replace them. A couple issues like that that actually came through to the year as well that impacted it.

I see. Well, one final question, can you quantify the amount of -- the importance of California in engine sales? Can you provide us a percentage?

I would say for the -- out of the sterndrives sold in the United States, roughly 10% is for California, it goes into the California market.

Okay, great. Thank you.

Laura Richardson, BB&T.

Thanks, just wanted to dig into a couple numbers that you guys mentioned. And one was the industry sales, Dusty, you quoted earlier in the call, down 14% in the quarter, but your boat sales were down only 3%. And I wanted to make sure I understand the factors behind that and magnitude as much as you can tell each. So international was one, market share had to be one.

Well, first of all, the down 14% is units.

Okay.

What you are looking at, then, at the top-line are dollars.

Okay.

So the 3% down is the dollars for our business.

Okay and what was the 14% in units, what would that have translated to?

That was for the industry.

Right, right.

And it is units only, and its retail activity at the fourth-quarter. The 3% is dollars and wholesale shipments.

Okay.

And when we give you the 14%, again, we are looking at the domestic market.

Right.

When you look at our sales for the quarter, it includes domestic and international.

International --

Right, okay. So offsetting factors are units, international --?

P&A.

But your pipeline is in better shape, so you are not going -- you don't need to cut as much as retail is down?

No, we are actually cutting more than what is going on at retail right now to get that pipeline down. Dollars are down 3% for us because of -- there is mix issues that obviously go through there, but it is also international, which we said was up for our business, boat business and engine, by double digits for the year. We have the impact of P&A and that is roughly 340 or $350 million business for both boats and engines that has an impact and you also had the impact of price increases coming through, as well, before the list price increases that we have for our products.

Okay. And then just to follow-up on that a second. For your boat sales to be down 10%, that might be the armageddon that Dusty was mentioning.

We have not given a number for how much our boat sales are --

No, I realize that, but I'm trying to back into what it could be. You are saying it's down, but it sounds like it would be hard for it to be down 10%. So into probably it's going to be in the neighborhood of what it has been in Q4 or Q3, less than 10%.

Again, we're mixing units and dollars.

Right, right, right.

I just am not going to get in -- I really am not -- to try to predict what is going to happen in 2008.

No, that is fair. And okay -- and let me just ask about SG&A, too, because is -- with the 32 million you cut as a run rate, I guess, in '07, is it -- can we assume that your SG&A dollars, we take the '07 number minus 32 million or some fraction of that and that is what your SG&A dollars should be for '08?

We have 30 -- reflected in our 2007 spending is $32 million of savings. In 2008, you will get the full run rate benefit, so it might be closer to $40 million overall and not all of that number is in SG&A, keep that in mind. A good portion of that was efficiency improvements that came out of the actions that we took on the production floor, particularly for outboard engines.

So it is hard. We would expect the overall savings dollars to be higher in 2008 than that 32. Year-over-year, it's not going to be very significant and a good portion of that would show up in cost of sales, not in SG&A.

Okay, is it fair to assume, then, with all that puts -- like SG&A dollars could be kind of flat in '08 to '07?

We are not giving guidance on that --

Yes, okay. Darn.

And I will point out, too, one of the drivers here we are not paying any significant bonuses again this year. We'll see how 2008 comes out. That could be a factor.

Yes I'm sure you are all hoping it will be even better than that.

-- we've got more room for additional savings coming.

Okay, thank you.

Hayley Wolff, Rochdale Securities.

Hi, guys. I have a couple of questions. First, on international, can you just discuss the corrections you may in the Sealine distribution? And also international, can you delve a little bit deeper into where you are seeing success, you know, whether it is by brand, product, or region? And then I have a couple of other questions.

I will take the Sealine dealer issue. What we fundamentally had was a large dealer who acted as not only a dealer, but a distributor to subdealers, primarily in the UK and Spain. Upon the failure of that dealer, we then -- we first replaced the dealer activity of that bankrupt dealer with a new dealer who's doing quite well. And then we were able to go in and maintain that dealer's subdealers as direct dealers for us.

We are incredibly happy with the entire replacement set of dealers that we now have in place and they really began to show us how successful they can be at the recently-completed London boat show. So we are quite pleased with that.

In terms of brands and places in the globe, our US Marine activity and our Sea Ray activity and Boston Whaler are all doing very well globally. If we go look into certain regions, for instance the Mexico area, where bass fishing and smaller boats can play a big role in activity, we are seen a nice pickup there. So it is a bit regional. For instance, as we look at the Mideast, that clearly is larger boats, not smaller boats, in view of the boating activity there. A deal of that actually happens in each region, Hayley.

Okay. And then you talked about cost savings, the 32 million -- I think it was $32 million -- can I add that -- when I think about sort of an ongoing theoretical margin, does that get added to the $26 million that you took out in '06 in terms of thinking about long-term margin?

I think, Hayley, when we mentioned the $26 million, that was what we expected to see from all the restructuring actions taken at the end of last year and that was going to be the benefit seen in calendar year 2007, okay? So that is really part of the 32 that we delivered.

Okay, thanks for clarifying that. Next question, you talked in the past a little bit about brand rationalizations, any update on that?

Still working on it.

Okay. And then the comment about goodwill and impairment charges in terms of thinking about the magnitude, can we just look at recent acquisitions from the '04/'06 period in trying to ascertain a number or do we need to go back further on that?

No, multiple would have -- have been in that period.

Okay and then one last question, I promise. Joe Hovorka asked some questions about the dislocation between engines and boat sales and the drop in intercompany sales. Explain why shouldn't that be -- why can't that be interpreted as perhaps the independent boat builders seeing some better trends in their business right now?

Just go look at the SSI market share numbers.

All right. And you are comfortable that those numbers are accurate?

It's all we've got to work on, right?

We're actually over time. You got to be careful interpreting them a quarter-by-quarter, but over kind of the year, you'll get yearly trends.

Because it can easily be interpreted as market share erosion, so that is what I wanted to know.

We don't believe that is the case, not year-over-year.

That is it.

Justin Boisseau, Gates Capital Management.

My questions have been answered, thanks.

I see we've got no more questions in the queue. We'd like to thank all of you for participating in our call and hope that some of you will be able to find an excuse to make it down to Miami in the next couple of weeks and attend our investor event there.

Thank you, everyone.

Take care.