賓士域 (BC) 2008 Q3 法說會逐字稿

Good morning, and welcome to Brunswick Corporation's 2008 third quarter earnings conference call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Kathryn Chieger, Vice President - Corporate and Investor Relations.

Good morning and thank you for joining us. With me today are Dusty McCoy, Brunswick's Chairman and CEO, and Peter Hamilton, our CFO. It also gives me great pleasure to introduce Bruce Byots. Bruce is taking over my role as I move on to retirement. So in that regard, I will turn the call over to Bruce.

Thanks, Kathryn. I feel very fortunate to be able to take over a function that has been extremely well-managed over the last 12 years, and I look forward to working with everyone and will do my best to give you the type of quality service that Kathryn has given you over the years.

Before we begin with our prepared remarks, I would like to 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 these expectations. For the details on the factors to consider, please refer to our 10-K, latest 10-Q, and today's press release. All these documents are available on our Web site at brunswick.com.

We appreciate you taking time to be with us this morning. Given that we are in the busy earnings season, we will try to keep our remarks brief and wrap up the call in about 45 minutes. I would now like to turn the call over to Dusty.

Thanks, Kathryn, and welcome aboard, Bruce. Glad to have you here.

Good morning, everyone. As you saw in the press release we issued earlier this morning, the third quarter was a difficult one. We reported a loss of $6.70 per share in the quarter, $6.37 of which resulted from restructuring, impairment and other special charges driven by our response to the difficult economic environment. Our loss from continuing operations adjusted for these items was $0.33 per share, compared to earnings of $0.19 per share before special items in the third quarter of 2007.

Given the tough environment, I want to recognize the contribution of our Brunswick employees worldwide, who are performing admirably every day in delivering on our cost reduction goals and implementing our restructuring initiatives. This is very hard work being done under difficult circumstances, and I thank them for their efforts on behalf of our shareholders.

Getting back to the $6.37 per share of charges, this total consists of $0.28 per share for restructuring activities, goodwill impairments of $3.37, trade-name impairments of $0.94, and $1.78 charge for special tax items. Peter will review these charges and impairments in a few moments.

These results begin from weakness in the top line. Our sales for the quarter were down 22%, with the decline spread raggedly across most of our businesses. Our boat sales were down 36% and engine sales were down 21%, leaving our total marine sales down 28%. You will recall that our fiberglass boat plants did not operate in the month of July, and this, of course, affected sales.

Before I go into more detail on the state of our marine businesses, let me take a few minutes to talk about our other segments. During the quarter, Life Fitness sales were ahead by 8%. Commercial sales, which account for almost 90% of Life Fitness's sales, were the key driver behind this growth. There's a number of new products, such as the elevation series of cardio products that include treadmills and feature iPod compatibility, as well as the signature series of strength equipment, have proven popular with health club managers.

We also continue to make further inroads with educational institutions and the hospitality industry.

At the same time, Life Fitness has been making steady progress at reducing costs and, indeed, like other portions of Brunswick, has been attacking not only operating costs, which were down single digits in the quarter, but also other fixed costs. The cost reduction efforts helped to blunt the effects of both higher material prices, particularly those of steel, as well as increased freight costs due to fuel surcharges.

Meanwhile, Bowling and Billiards sales during the quarter were off slightly. This is partly due to our closing six older centers in the second quarter when their leases expired. The absence of this revenue was mitigated to some extent by the performance of our growing number of Brunswick Zone XL locations.

Bowling and Billiards continues to benefit from operating earnings of Zone XL that opened in the last year. We will be opening another Zone XL in the Twin Cities suburb of Lakeville early next month. While even a historically recession-resistant segment such as retail bowling is reacting to current economic pressures, we believe our business model and family atmosphere continue to resonate with consumers.

Bowling products, particularly capital equipment sales, show good gains in the quarter, benefiting from new center and modernization activity, both within and outside the United States.

Now let's turn to our marine businesses. As the economic downturn, financial market disruptions, and tight credit availability intensified in the September quarter, we saw a significant downturn in U.S. Marine industry retail demand. Preliminary U.S. market data for the third quarter shows industry fiberglass sterndrive and inboard product retail unit demand was down over 40%. And outboard fiberglass retail unit demand was down about 35%. Industry retail demand for aluminum product was down about 20% in the quarter.

At the same time, we also began to feel a slowing in the international marine markets. As we have mentioned for many quarters, in declining markets, it is important that we produce and sell fewer wholesale units than are selling at retail, and we continued to follow that strategy in the third quarter. The total number of boats, both fiberglass and aluminum, in the pipeline decreased in absolute numbers by about 1,600 boats versus this time last year.

But with the dramatic declines in retail demand, our weeks on hand measured against trailing 12-months retail units grew to 31 weeks. By comparison, at this time last year, we had 26 weeks of supply in the channel.

The issue is with our fiberglass brands. We reduced the absolute number of fiberglass boats by about 1,400 units versus the year-ago, and weeks on hand grew from 27 weeks to 36 weeks. We do not have a significant issue with our aluminum brands, as retail is not as weak as what we have seen in fiberglass, so their pipeline inventories are more in line with seasonal norms.

The fourth calendar quarter is typically a slow quarter for retail sales in our marine businesses, and we see nothing on the horizon to indicate that the extremely sluggish demand we experienced in the third quarter won't continue unabated.

As a result, to continue a meaningful reduction in the number of boats in our pipelines, we announced two weeks ago that we were closing four fiberglass plants and furloughing three fiberglass plants beginning October 27 through the end of the year. And, as we said previously, given the plant closures and furloughs, which will result in significantly lower sales in the fourth quarter, and the resulting lower fixed cost absorption, we are no longer confident of achieving our goal of posting positive earnings for the full year, excluding charges.

In these unprecedented market conditions, our focus is on maintaining a strong balance sheet and financial flexibility, primarily by generating and protecting cash. With our top line under pressure, our focus then is on cost reductions. With all the noise in our numbers, it is difficult to glean the real measure of our cost reductions which we have achieved in 2008. As an example, setting aside restructuring and other special charges, we have reduced operating expenses by $30 million in the third quarter compared to the same quarter in 2007. At year-end, we will have reduced operating expenses by more than $80 million.

As we exit 2008, our run rate for fixed cost reductions will be approximately $125 million, and with the actions we have underway, our fixed costs entering 2010 will be more than $300 million lower than they were as we ended 2007.

As you know, in 2007 and 2008, we announced the closure of 12 boat plants, which represents 40% of our boat facilities. Further, in 2008 alone, we have reduced our salaried and hourly work force in our marine operations and corporate by about 35%. When completed, this level of fixed cost reduction positions us to be break-even and cash flow positive down to a sales level as low as $4.5 billion, and to be very profitable as markets stabilize and then grow as economic conditions improve.

However, we are facing market conditions that will further pressure sales, and therefore, we will reduce costs beyond these targets.

We exited the third quarter with cash on hand of $343 million, which meant that we consumed $50 million of cash in the quarter. Peter will discuss third- and fourth-quarter cash flow in a moment.

We are in compliance with the debt covenants in our revolving credit agreement. While we did not borrow under the facility in the third quarter and do not plan to borrow in the fourth quarter, there is a reasonable likelihood that we will not be in compliance with the covenants in the revolving credit agreement as we exit the fourth quarter. As a result, we are in discussions with our banks to amend the agreement.

Our goal is to have the amendment in place by year-end.

So that's the state of play for 2008. We think it is highly unlikely that the marine markets will materially improve in early 2009, and our goal must be to adjust our costs as needed in 2009 to be free cash flow positive for the year, or at least cash flow neutral. We are typically a borrower on an intermonth basis in the first quarter, and we expect to be so in the first quarter of 2009.

Beyond these general views, I don't plan at this point to further discuss 2009, as we need to let the economy and marine markets reach their equilibrium so that we have better visibility.

I will now turn the call over to Peter, and then come back with a couple of comments to end the call.

Thanks very much, Dusty. Turning to cash flow, we ended the quarter with a cash balance, as Dusty said, of $343 million, and that was down approximately $50 million from the end of Q2, but up $15 million from last year's third-quarter cash balance. The third quarter's $50 million cash outflow included $25 million required to continue our restructuring activities. The majority of our restructuring was related to either severance or product line exits. Excluding restructuring cash, we consumed $25 million in the quarter.

The $25 million outflow of cash for non-restructuring activities was essentially used to fund working capital. As we curtail production and limit our capital spending, cash is immediately consumed as we reduce our accounts payable. However, in this weak marine retail environment, turning our inventory into cash does take more time. Until our dealer network is able to absorb and sell additional marine products as finished goods, inventory will remain on our books. We expect that we will be able to generate positive cash flow from changes in working capital in the fourth quarter as the inventory works its way into our dealer network.

We continue to aggressively review and curtail our capital spending. Capital was limited to $27 million in the quarter. Although spending across all segments has been reduced, the most material reductions largely come from our marine businesses. On a full-year basis, we are projecting capital spending of approximately $105 million to $110 million, which is well below the $140 million we discussed on our second-quarter conference call.

Depreciation and amortization expense for 2008 is forecast at $180 million.

Looking now to the fourth-quarter cash dynamics, there are a number of moving parts that are, frankly, very difficult to forecast with precision at this time. Compared to the third quarter, the unfavorable factors are likely to be increased cash restructuring costs for initiatives already in progress -- and that is approximately $35 million in the fourth quarter versus $25 million in Q3.

And then the second unfavorable factor is likely increased operating losses.

Working in our favor will be working capital cash generation, reduced capital expenditures, and the proceeds from continuing efforts to divest or to prudently monetize our assets.

During the third quarter, we recorded $39 million of restructuring charges, bringing our year-to-date total to about $128 million. Of that total, about half was cash. Restructuring charges in the fourth quarter will be about $45 million, and as I mentioned, about $35 million of that will be cash.

Now for those of you who missed our call two weeks ago, I will give a very brief rundown on what triggered the write-down of goodwill in trade names in the quarter. Under FAS 142, accounting guidance that addresses goodwill and other intangibles, we recognized an impairment of goodwill, primarily in the Boat segment, of approximately $374 million pretax. In addition, we recorded a charge of approximately $121 million pretax in the quarter to write down the value of certain trade names, again, primarily in our Boat segment.

These two non-cash charges are equivalent to approximately $381 million after-tax, or $4.31 per diluted share. Now although the specific accounting for goodwill and trade name impairments is somewhat different, the fundamental driver for each is essentially the same. Extremely weak marine market conditions have reduced, at this point in time, the projected valuation models of assets on our balance sheet below their book value. This leads to the write-down of intangible assets. These accounting actions do not result in cash charges and they do not affect compliance with our loan covenants.

Turning now to the income tax line on the P&L for the third quarter, we reported a tax expense of $15.7 million despite a large loss before tax. The reason for this is the application of FAS 109 to our current business situation. Cumulative pretax losses over the prior three-year period, which we now have reported as a result of the restructuring and impairment charges, trigger a FAS 109 review of whether $347 million of deferred tax assets on our balance sheet are either likely to be realized in full or whether a valuation allowance should be applied to that number.

In evaluating whether deferred tax assets can be fully realized, if the Company has reported three years of cumulative losses, FAS 109 does not permit the Company to assume it will generate future pretax earnings that will utilize the assets, even though the assets have a life of approximately 20 years. Instead, the value of the asset must be supported by, first, the ability to carry it back to reduce taxes paid in the previous two years; and second, tax planning strategies that are available to the Company today that would generate income to utilize the asset.

As a result of this analysis, we recorded a valuation allowance in the quarter of $155 million. We believe that we have taken the proper accounting approach, and that as we return to profitability, we will be able to reverse these charges back into income in future years.

Moving now from accounting to cash, the unprecedented weakness in the marine markets has obviously raised questions about the Company's liquidity. I would like to clarify a few points about this.

First, the recent downgrade by Moody's results in an increase of the interest rate for our recently issued $250 million of notes by 50 basis points and takes it to 10.75%. It has no other effect on our outstanding debt.

Turning to our revolving credit facility, one of our top priorities as we move into the fourth quarter is to amend the agreement to ensure that we will have the ability to borrow going forward into the first quarter of next year. We've already initiated conversations with our banks and are targeting to have an announcement completed before the end of the fourth quarter.

As you are probably aware, our financial covenants are tied to EBITDA and period-end cash balances. These metrics continue to be under stress as a result of the significant production cuts and restructuring initiatives that we are implementing. As we are unable to predict where marine market demand is going to settle, we feel it is prudent to pursue a facility and covenant structure less dependent on these metrics.

As part of the amendment, we may need to move to a secured facility. This is a function of the difficult credit environment and economic conditions, along with our reduced credit ratings.

Our existing credit agreements do not restrict us from pledging assets that are commonly used to secure revolving credit facilities, assets like receivables, inventory, machinery, and equipment. There should be sufficient collateral to support an adequate line of credit, which would be used to fund interim working capital needs.

Restrictions on secured debt included in our bond indentures relate solely to certain physical locations owned by the parent or select domestic subsidiaries, as well as the stock of select subsidiaries. These restrictions do not relate to working capital and they also do not relate to bowling centers which are eligible for secured borrowings, including sale-leasebacks.

Thanks very much for your attention and I will now turn the call back to Dusty to wrap up.

Thanks, Peter. These are tough times, but we must view them in a larger context. When this economic downturn ends -- and it will -- and the marine markets stabilize and improve -- and they will -- Brunswick will be in a cost position never before achieved. Our footprint adjustments, reductions in operational and functional cost structures, continued global presence, and leading brands will serve us very well when we come out of the other side of this downturn.

In the meantime, our focus in the near term is to maintain and generate cash and keep our distribution as healthy as possible. We are now ready for your questions.

(Operator Instructions) Ed Aaron, RBC Capital Markets.

Thank you. Good morning, guys. So a couple questions. First, I was hoping you could elaborate on a comment you made in your prepared remarks about generating some cash in the fourth quarter from efforts to divest and monetize assets.

Yes, Ed, it's Peter. We are currently working on bowling center sale-leasebacks. The timing of that transaction is still unclear, because we are involved in what I hope to be the final phases of the due diligence. And of course, it always takes two people to agree to a transaction. So that is one aspect.

We also continue to work to divest non-core assets, and you've seen in prior quarters evidence of that. We continue to work on other aspects of that. And of course, as I alluded to in my comments, we are considering an asset-backed arrangement for our revolving credit line agreement.

Okay, thanks for that clarity. Also, as far as the working capital goes, with your receivables and your inventory, could you help us understand any risk of write-downs in either of those areas?

Well, I think that question goes to really the health of the dealer network. And so we are talking about -- your question refers perhaps to the quality of our receivables and the quality of our inventory. Although it is true that our inventory is aging to some extent, and although it is true that the dealer network feels the same pressures that we do as manufacturers in the boating business, we have not seen any -- nor have our accountants have any significance increases in the reserves in either of those two accounts.

Okay, last question before I open it up. Any concerns about the health of your suppliers? Just by way of discussion, I think you source engine blocks from GM, and apparently there's now talk of solvency risk with them. When you kind of think about your supply chain, how much risk do you see in that respect?

I think the risk in our supply chain is not going to be materially different than is any other manufacturing company as it looks around its entire supply chain. Of course, our MerCruiser business is important to us and GM is the block supplier. They also supply the primary competitor in the marketplace, Volvo. And therefore, we are both -- we both would be under the same risk if GM were not to make it.

Okay. Thanks, everybody.

Tim Conder, Wachovia.

Thank you. Could you give us -- Peter or Dusty -- a little color on the international boat sales and engine sales in the quarter? Then how should we -- you said that in the fourth quarter things should be down materially, and how should we think about the fourth quarter, the mix maybe between the U.S. and international? And in particular, with the international focus on Europe.

First, if we just step back and look in the third quarter, in our boat business, every international region was down some. And in our engine business, most were down; a couple were flat.

It's interesting. With the decline in U.S. sales in our engine business, more than half now of our sales in our engine business come from outside the United States. That's also, by the way, true for Life Fitness, but that's more from international growth than it is a declining U.S. market, because they are up.

As we go forward, we believe the same ails that are here in the U.S. are going to evidence themselves outside the U.S., perhaps not to the same extent. And therefore, our anticipation is that we should expect some level of decline as we are going to 2009. Is that helpful to you, Tim?

Yes. So again, probably the trajectory, Dusty, would be fourth-quarter international still not down as much as we should anticipate in the U.S., and then similarly for at least the first half of 2009?

That's the way we see it now, Tim, yes.

Okay. Then I guess, could you give us a little more color on the inventory specifically in the U.S. channel, maybe kind of break it down to what is over 12 months old and then even what's over 18 months old? Because I guess, back to kind of an ongoing question here, your recourse in essence -- recourse back to you as the manufacturer -- ends after 18 months. Is that correct?

That's correct. And it declines in the period from 12 to 18 months. And we are seeing -- and it's not to be unexpected with the sort of retail declines and aging of the inventory, but I will tell you, at least from my perspective, is it's not out of line with the level of retail decline.

And the key for us is we shut off the supply going in. We are taking some rather dramatic and drastic action here of shutting all these plants and putting the plants on furlough. And that, as we go then into the selling season early next year, Tim, is going to be very important, because that's the only way we are going to let the dealers be able to clear some of this out.

Okay. Any specific numbers, Dusty, on what -- either from an industry perspective or from Brunswick in particular -- sort of the aging percent of the inventory in the channel?

Tim, I wouldn't like to start getting into that, because we will end up turning that into a tracking mechanism, I suspect, over time. But I will tell you, it is up, but it is not up either alarmingly or materially right now.

And would you say that your aged inventory relative to the industry better, same, or worse?

About the same.

Okay. And finally on -- from a foreign exchange perspective, Peter, can you just kind of give us any color there on what assumptions you have in place now or looking into next year, and any hedging that you've done from that perspective?

As you know, Tim, over the course of year-to-date, the dollar has been weaker, although it's strengthened in the third quarter. And the weaker dollar does help us because we tend to be long euros. It's really our major currency exposure.

We do hedge to mitigate that exposure, and those hedges have been successful in doing that.

In terms of looking into the crystal ball as to what hedge rates we're going to use going forward for '09 and what budget rates, with all the volatility in the market place, we have not locked in on that yet.

Okay. And then if I may, just a housekeeping item. Expectations, Dusty alluded to -- or Peter, I'm sorry -- you mentioned lower CapEx. Just kind of give us an update on CapEx and D&A expectations this year, in '09.

Well, as I said, we will end this year -- or perhaps I didn't say -- in the $105 million to $110 million range. We were down considerably in the third quarter compared to last year, $27 million in the third quarter compared to $73 million last year. So you can see the kind of interdiction of capital that's gone on in this Company.

And as we look forward to '09, again, the '09 plans have not been locked down, but there's no question that the capital number will be materially below the $105 million to $110 million which we will put up this year in '08.

Okay. Then anything, Peter, on D&A again for the year next year, given the write-off and things?

For this year, Tim, we are forecasting, as I said in my remarks, about $180 million in D&A. That compares to about the same number, $177 million for the previous year. In terms of '09, maybe it will be down somewhat, $175 million, but not a significant drop.

Great. Thank you, gentlemen.

Tim, I want to come back and say one thing, because it's important to recognize some of our people. When I go through the international sales or global sales, we continue to see very strong growth in Latin and South America, and I want to make sure I highlight that. I think that's a real tribute to a bunch of people we have working very hard in those regions.

And to scope the size a little bit more of capital spending next year, it will clearly be under $100 million. And we will make decisions as we see what our cash position is further into this quarter as to what we want the size next year to be. But no matter what, it's going to be under $100 million.

Okay, great. Thank you again.

Chris Hussey, Goldman Sachs.

Thanks very much. Good morning, guys. Can you just comment a little bit on how the business has gone since we last talked a couple of weeks ago? Has it gotten measurably worse? What have you noticed?

I would not say that it has gotten measurably worse since last we spoke. I think what we saw in the third quarter, Chris, is there was an accelerating decline. If you look back at all the events that occurred in the third quarter, that feels about right, in September. And then as we've gone into October, we feel it under the same pressure we felt a couple weeks ago.

Probably not enough time has elapsed, Chris, for us to give you a real view as to what the marine industry especially is going to be doing for its fourth quarter or early first quarter. But it is clearly under lots of stress, and we see nothing that is going to change that stress medium-term.

Any incremental dealer problems crop up recently?

A few little ones, but nothing material or significant.

And the boat financing, are you finding that the end customer can still get access to boat financing?

Financing is still out there, but you've got to have a darn good credit score in order to get it, and you've got to put a lot more down in order to get credit. And I think that's true in any financing activity in this country right now.

And then on the revolver securitization, it sounds like, Peter, that you feel fairly confident that you've got enough assets to securitize the revolver at some level. Should we expect the revolver to be smaller going forward, though, if you do securitize?

Yes. And we are not unduly concerned about that, Chris, because the $0.5 billion level is frankly considerably in excess of our short-term working capital needs. So yes, I think it will be smaller. I think it will be more expensive. And, as we said, we will have to put up security. But I think it will be functional for our needs.

How would you characterize your sort of short-term working capital needs. How much do you feel you need through the first half of '09, sort of your free cash flow negative period, to get through this?

It's really, Chris, a function of a number of parts that are moving so quickly that it just wouldn't be responsible for Dusty or I to try and put a number on it. We are heavy into work to re-evaluate what has to be done in light of the declining marine markets, and that work is going to anticipate a conservative top line and that is going to lead to further actions, as Dusty referred to in his comments.

Those actions, in turn, will have an influence on working capital. And they will basically have a good influence on working capital because we will be buying less stuff and we will be liquidating inventories that we have. So the changes that we will have to make as a company in response to the weak market conditions are those that will minimize our working capital needs over time.

It was sort of interesting to me that with all that was going on in the third quarter, all the puts-and-takes and all the enormous amounts of money involved, really the working capital change was a very, very modest number, something in the neighborhood of $25 million.

Okay, last question. Would you sell one of the businesses, like Fitness, or Bowling/Billiards?

I will never say never and I won't say we are out looking.

All right. So you're not looking to do so, but wouldn't rule it out in the event of a requirement?

A 165-year-old company; it is going to be a 300-year-old company some day, and we're going to do what we have to do to get through this.

Terrific. Thank you, guys.

Joe Hovorka, Raymond James.

Thank you. Actually, just a couple clarifications. I think when you said that your funding for your notes that you recently issued went up 25 basis points at 10.75%?

Well, there have been a number of credit moves over the past month. It was the most recent Moody's move that moved it up 50 basis points.

So was there a move also on the S&P downgrade (multiple speakers)?

That had happened prior to that. These are notes that started as -- and I still refer to them as the 9.25s, 9.75s; but now they are 10.75%.

Got it, okay. And then there was a comment about at $4.5 million in revenues, you would be break-even and cash flow positive. I'm assuming that was a 2010 revenue number?

Yes.

And that's based on the $300 million run rate that you're talking about for cost savings?

Yes.

And you also commented that you could go beyond that still, right?

The cost savings?

Yes.

Yes.

Okay. But no target on how much more than that $300 million?

Not one we are prepared to talk about, Joe, on this call.

Okay. Then you did mention you were anticipating using this revolver in the first quarter of '09 to fund your working capital. If I recall, on the call a couple weeks ago on the 9th, at that point there was an anticipation you would not need the revolver at all in the first half of '09 and not for the full year of '09. What's changed in those two weeks, three weeks, whatever it has been?

Joe, I think it was we did not anticipate needing it this year, but would need it in the first quarter of next year.

And we also said, Joe, it remains our objective to be cash flow neutral or cash flow positive for '09. But that does not mean that in any particular peak period of need we would not have to have temporary access to short-term credit. I think that's the distinction here.

Okay. Then last two questions. One is, can you talk a bit about the dividend again? I know it's an annual dividend. It would be coming up soon. I'm assuming that's -- can you comment if it's going to be declared?

We will be meeting with our Board next week to review the dividend. The dividend will be reviewed, Joe, in the context of our open and strongly-stated desire to preserve and generate cash, and it will be in that context that we will look at the dividends.

Fair enough. Final question is your incremental margin on the boat business actually improved quite a bit from the sense that the loss of revenues that you had in the third quarter versus this time last year, I think your operating margin on that revenue was something like 11%, 11.5%. Can you talk about what was driving that? I would've expected a much higher incremental margin, I guess, is what I'm saying, on that kind of revenue decline. What helped you perform so well in that type of environment?

One of the things we keep talking about is fixed costs coming out in our, quote, operating expense numbers. There's also costs coming out above the gross margin line. There are a few mix issues in that, better control of inflation. Joe, it's all the 100 things that you do in order to make the business run a little better.

Is that the kind of incremental margin we could look at going forward, or is that kind of a -- I guess, do we get a lot of cost savings in the third quarter that may not be replicated?

No, I do. But there's a lot of cost savings also to come in the fourth quarter. And I don't know, Joe. I wouldn't want to predict right now.

Okay, fair enough. Thank you, guys.

Hayley Wolff, Rochdale Securities.

A couple questions. First, when you talk about the sort of working capital needs fourth quarter and beyond, is that in the context of the type of drop in marine sales that we've seen in September, October and to date?

Yes.

Okay. And then can you give us the quantitative sort of U.S. versus international in the quarter, the way you typically break it out?

You mean the 39% international?

Right. And were international sales up X% or down X%?

International sales across the entire business -- marine, fitness and billiards -- was down slightly, less than 5%. And as a percentage of our total sales in this quarter, international sales were 39%.

And the decline was all in the marine business.

All in the marine. We had significant growth in the Fitness business, for instance.

What was the marine U.S. versus international boats and engines?

Help me -- I'm not understanding what --

Marine sales in the quarter in the U.S. versus international, boats and engines.

Okay. Boat sales in U.S. were around $300 million. International sales were $100 million. In engines, around $200 million and $200 million. Is that helpful?

U.S. boat sales in the quarter were down how much? What percent?

U.S. boat sales. I'm digging that number out.

Between -- it was about 40%.

Yes, around 40%.

And international?

Down about 20%.

About 20%.

Okay. Then on the Life Fitness side, is there any concern about some of the health club spending starting to pull back in the outlook?

Well, a concern? Yes. Outlook, we are not really changing our outlook. It's just going to be a day-by-day activity with the health clubs. What drives them is the availability of capital to keep expanding and putting in new equipment. It may be under some level of stress, Hayley, and we will just have to let it play out.

And then on the accounts receivable side, within the accounts receivable, on the $515 million, how much of that is in the Marine business? And can you talk in a little more detail about what's going on vis-a-vis your repurchase agreements and then how the international receivables are doing on the marine side as well?

I'll do the repurchase agreements quickly and then turn all of the hard part of the question over to Peter. In our repurchase agreements, nothing has changed materially, as I said earlier. The dealer network, however, is clearly under stress. And as we go into the winter season, they will be under more stress. We continue to believe, Haley, this is something we can handle.

Again, not building boats and putting them into the pipeline is an elixir for a lot of issues, including the need to buy back boats and then place them elsewhere, as well as falling retail demand.

But our dealer network is holding up quite well. And what we are seeing with our dealers, they have done a great job of controlling costs and doing what they have to do in order to get through this, just like we are doing what we have to do.

Is there a risk that they get to this 18-month period and then decide that they want to put the boats back? I mean is there a waiting game that they play?

No, or certainly not one that we've ever experienced.

Okay.

Hayley, in response to your other question, the marine receivables of the $518 million that appear on the balance sheet are about 50%, $275 million.

Okay, thanks a lot.

Steven Rees, JPMorgan.

Thanks. I just had a question on the engine segment. Because if you look at it excluding charges, I think the profit performance is better than I would have thought, given the sales decline. So maybe you can just talk about if there was anything specific to the quarter that allowed them to better align their cost structure, and if you do expect continued relative outperformance in engines versus boats from a sales and profits perspective in '09.

A couple things going on there. First, the decline they experienced in the international markets was significantly less than, for instance, had gone on in our boat business. And secondly, our engine guys have done one heck of a great job at cost control, in getting a lot of costs out and managing downtime in a very efficient way. They are operating very well.

Okay. And so do you expect continued relative outperformance in engines versus boats in '09? Do you think it's going to be a little bit better than what the boats are?

I wouldn't say that, based upon what we are seeing right now.

Okay. Then just finally for Pete, is there anything on the debt side that's coming due in 2009? I think you refinanced the $250 million, if I remember correctly.

No, there isn't. The next big one is 2011.

Okay, perfect. Thank you very much.

James Hardiman, FTN Midwest Securities.

Good morning. A couple brief questions here. You gave us some good numbers. From an industry standpoint, I think you said fiberglass was down somewhere around 40% and aluminum down more like 20%. What is the mix of what you sell today and how does that compare to a year or two ago, and where do you expect that to go? Then do you have a number for total powerboat sales in the quarter, if you aggregate all of that stuff from a retail perspective?

Well, I'm trying to do a little math in my head. Our boat sales in the quarter, I think, were about $1.7 billion, in our boat segment, which we've got some P&A sales in there, and that's a range of $250 to $260 million. So you back that out. And then our outboard aluminum businesses were slightly over $400 million, so the rest is fiberglass. Does that give you enough math?

No, that's perfect. And do you know what the total number would have been for the industry? The industry is similarly skewed to you guys? Is that how I should look at that? Or do you have a total sort of powerboat number for the industry?

I think that if you look at the industry statistics, James, that you would find that our mix is probably weighted a little bit more towards fiberglass than the industry overall.

Okay. And then in terms of some of the issues affecting you guys in the third quarter, obviously, everything that's going on with the economy, nobody really knows when that's going to get any better. But specific to the boat industry and specific to you guys, the hurricanes in the quarter seem like they were material, you would think, and also the Olympic closure. Can you comment on those two items and how this affected you? I'm assuming those issues are for the most part behind you. I don't know if there is any leftover sort of overhang from the hurricanes. But can you talk about those two issues and how they affected you?

Sure. It's going to be a little difficult for me, James, to put real numbers around it, but let me give you the impact, if I may, in words. Doing the hurricanes first, we had hurricanes or very -- I won't say destructive -- but a lot of rain events of lows and tropical storms going up through Florida. And our dealer network there had to put stuff away, weather it, get material back out, get the store ready to be opened, and then another one would come. And they incurred a lot of costs in Florida during that time.

And of course with all that, they're incurring costs, losing sales. And our desire to keep them as healthy as possible meant that our sales through some dealers in Florida were down very dramatically, in the range of 80% to 90%.

The hurricane that went over into Texas way had a bit larger impact in the following since Texas has been economically a better market and there's been a lot of other markets in the U.S.. And boating and our dealers just got shut down over there for a -- pick a time -- 10 days to a week -- getting ready, going through it and then getting back up. And that did hurt us.

Olympic is, frankly, a bit more painful. Olympic was a big part of our Bayliner/Maxum sales, had enormous market share out in the Northwest. And it was going through the bankruptcy. Fundamentally, it didn't sell anything for a fairly lengthy period going up to the auction. And we have -- in market share -- we did have market share in the range of 50% out there.

So when you're losing in a market where you have 50% market share, a lot of high-volume product, it has a big impact. We've now been repositioning the product. We've got great new dealers. But it takes them a while to get up and running and get themselves positioned. So I think we will have some overflow or residual impact on our sales out there -- up until some point next year, would be my guess.

Okay, that's perfect. Then just sort of piggybacking off of that little bit, with those two issues behind you, what can you say geographically about the demand that you are seeing out there? Is Florida still basically the epicenter of the weakness, or are we maybe annualizing some of the weakness in Florida? And it sounds like Texas might be getting off its feet as well. But what is sort of the outlook for California? What can you tell us, just anecdotally, about the different parts of the country as we move forward here, if anything?

Yes, as we look at the preliminary SSI numbers, California, Florida, some of the top five markets, are actually down worse than they had been before. And again, that's to be expected in the economic conditions that we've seen. Texas has been down more -- actually, it has been up slightly in a lot of the months. It was down some, and I think that was likely hurricane-driven. But the pain is deeper in places like California and Florida, but I don't want to diminish the difficulty around the entire United States.

Okay, fair enough. Thanks, guys.

Ed Aaron, RBC Capital Markets.

I think -- just want to ask a follow-up on product development. I'm just curious to get some updated thoughts in terms of your willingness to spend on R&D, and also your thoughts on whether -- how you are thinking about innovation in terms of customers being able or willing to pay for more content, even though it might be innovative?

Ed, I'll give the numbers, then over to Dusty for the color. But our R&D spend year-to-date is essentially equivalent to last year's, about $97 million, versus $100 million last year. So as we do significant reductions across the Company, one area which has not been significantly reduced is R&D.

And we are going to have to ask ourselves, Ed, as we go into 2009 the real ability of the consumers to show up. And frankly, we're going to have to be a bit more choosy about where we will be investing in new product. But we think it's important to continue to invest in new product during a time like this.

In times of weather, consumers will pay for innovation. We are seeing in twin -- just to give you an example -- in twin sterndrives that 75% of the sales now have our Axius drive system on it. Now, whether that's -- whether we've got no sales with or without Axius, I suspect some percentage of that 75% we would not have gotten without the Axius innovation on it. So we believe consumers are showing up and looking for the innovation, and in fact, it's likely driving sales right now.

Maybe I could ask a similar question in a slightly different way. Let's say there's a part of your business where you felt like there was a major opportunity to spend and innovate, but in the capital constraints that we have, it would require selling off or divesting a business that had less potential for innovation. Would you consider doing that?

In other words, would you consider divesting some businesses, not because -- for reasons other than just having to conserve capital for liquidity -- in other words, divesting businesses in order to better invest in other businesses for future innovation and growth.

Certainly, and I think our shutting down in four brands earlier, Ed, is evidence of the fact that we are looking through the portfolio and saying, these are areas that are not likely to be growth opportunities for us or generate EBITDA levels that will satisfy us. So we are getting out so we can to redirect funds. So yes, that's something we're looking at constantly.

Thank you.

You're quite welcome. With that, we have well gone over our time by 20 minutes. Thank you, as always, for a bunch of great questions. Thank you for listening to us during this busy time and spending time with us today, and with that we are gone. Stay in contact with us as we work our way through this marketplace. Thank you.

That does conclude today's conference. Thank you all for joining. You may disconnect your lines at this time.