賓士域 (BC) 2009 Q4 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2009 fourth 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 Bruce Byots, Vice President, Corporate and Investor Relations.

Good morning and thank you for joining us. On the call this morning is Dustan McCoy, Brunswick's Chairman and CEO, and Peter Hamilton, our CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking comments about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our Web site at Brunswick.com. Also during Dusty's concluding remarks, we will be referring to a chart containing boat pipeline information. If you have not retrieved this chart, please do so by going to the investor relations section of our Web site. I would now like to turn the call over to Dusty.

Thanks, Bruce, and good morning everyone. By now I hope you have had the opportunity to review our fourth quarter earnings release. As a result of the strategic actions we took throughout 2009, combined with modestly improving economic product and money market conditions and easier comparisons, our fourth quarter year-over-year revenue declines as compared with the previous five quarters began to slow.

I'll comment in my remarks about our plans for 2010. We reported a net loss in the quarter of $1.40 per share on a sales decline of 22%. The net loss includes $0.78 per share of restructuring charges and $1.20 per share of benefits from special tax items.

Our quarterly operating loss excluding restructuring, exit and impairment charges was $120 million, a decline of approximately $130 million compared to the prior year. This is a complicated and bit sloppy quarter, so in order to understand our true operating leverage, I should mention two items which have been impacting our numbers. The largest part of the variance is the absence in 2009 of approximately an $80 million accrual reversal that benefited all of our segments in the fourth quarter of 2008. We're taking into account the accruals reported in the fourth quarter of 2009, the total variance is approximately $100 million. These accruals relate to variable compensation and defined contribution retirement funding covering approximately 7,000 employees.

In a cyclical business we strive to make fixed costs variable and this applies to our compensation and benefits as well. Second item is an increase of defined benefit pension expense of approximately $20 million, primarily affecting the engine, bowling & biliards and corporate segments. If you exclude these two items, the decrease in operating earnings from Q4 2008 to Q4 2009 would be approximately $10 million on a sales reduction of $180 million. An excellent illustration of the progress we're making in minimizing the impact of operating deleverage.

2009 evolved in line with our planning assumptions and with the great performance of our employees we made remarkable strides in executing against our key strategic objectives. We exited the year with over $525 million in cash, a stronger dealer network with extremely low levels of inventories, in a leaner Company with a significantly lower cost structure. This is an extremely difficult period for the employees of Brunswick but it's without question a year in which they should be extremely proud of their fundamental accomplishment, keeping the Company financially strong while positioning it for revenue and earnings growth.

With these preliminary comments out of the way let me begin with a review of some fourth quarter marine industry data and this data is preliminary at this point. Fiberglass, turn drive and import boat unit demand fell by 30%, this compares to a decline of 47% in the fourth quarter of 2008, for 2009, units fell by an estimated 32%. Out board fiber glass boat retail demand fell 10% in the fourth quarter. This compares to a decline of 47% in the fourth quarter of 2008. For 2009, units fell by an estimated 32%. Outboard fiberglass boat retail unit demand fell 10% in the fourth quarter. This compared to a decline of 21% in the fourth quarter of 2008. For 2009 units fell by an estimated 27%. Aluminum product demand fell 20% in the quarter. This compares to a decline of 27% in the fourth quarter of 2008. For 2009, units fell by an estimated 25%.

Based on these preliminary Q4 numbers, industry power boat unit demand appears to have declined from 203,000 units in 2008 to somewhere between 140,000 and 150,000 units in 2009 of between 26 and 31%. Throughout 2009 we had as one of our top priorities a pipeline strategy continued to support our dealer network in these difficult markets, to that end we reduced the number of units we sold to dealers by approximately 20% in the fourth quarter versus last year. For the year we reduced the number of you units sold to our dealers by 55%.

The global marine market continues to be heavily influenced by retail discounting, especially on aged and repossessed products. Throughout the industry, boats continue to enter the marketplace via nontraditional avenues, consumer-related repossessions, finance companies exiting the marine space or from OEM's and dealers going out of business. In addition, dealers and OEMs offered significant discounts to help sell boats in their inventories. These conditions combined with our pipeline reduction strategy resulted in higher year-over-year discounts to facilitate retail boat sales. As a result of our reduced wholesale unit levels and the impact of higher discounts boat segment sales declined by 38% in the fourth quarter compared to a decline of 62% in the previous quarter and a decline of 58% in the fourth quarter of 2008.

As for our dealers, the reduction in wholesale unit shipment has allowed them to reduce boat inventory in the field by 13,700 units versus a year ago. This is a 47% reduction, as a result the quarter ended with 26 weeks of product in the pipeline on a trailing 12 month retail basis, compared to 34 weeks at the end of the fourth quarter of 2008. Once again this is great work given the significant retail declines we have been experiencing.

Our dealers also continue to make excellent progress in the health of their floorplan financing metrics. Domestic floorplan loans outstanding declined 55%, compared to the fourth quarter of 2008 levels. We're particularly pleased to see that our focus on helping dealers sell product greater than 12 months old continues to show positive results. Outstanding floorplan loans on domestic inventory aged greater than 12 months were reduced by 38% compared to year-end 2008.

Our boat production rates during the fourth quarter, were once again below our wholesale unit sales and reflected about a 40% decline in units produced versus the fourth quarter of 2008. This compares to our 20% decline in the fourth quarter wholesale shipments that I previously mentioned. For the year, boat production was approximately 65% lower than prior year levels and more importantly in our fiberglass boat business our production levels were about 60% less than our full year retail demand.

In our engine business, overall production for the fourth quarter was up about 1%, a significant decline in production occurred for Q4 of 2008. This follows reductions of 35%, 60%, and 75% in the previous three quarters of 2009. Similar factors that drove lower sales and earnings in our boat segment also affected marine engines, but to a lesser extent because the engine segment, service parts and accessories business as well as its international operations experienced only modest declines in revenues.

In the fourth quarter, Mercury's overall sales declined by 11% versus the same period in 2008. This compares to the decline of 29% in the previous quarter and a decline of 43% in the fourth quarter of 2008.

Sales for our non marine businesses Brunswick bowling and billiards were down 15% and 27% respectively. Same store, retail bowling revenues were down in the mid-single digits. However, our exercise and bowling equipment businesses, which focus on commercial customers that rely on financing to fund purchases declined more significantly. Both life fitness and bowling and billiards continue to generate strong cash flows.

In 2009, the success of our cost reduction program combined with our inventory management strategy enabled us to make outstanding progress in increasing overall liquidity as well as reducing our net debt position. We ended the year with $527 million cash in our balance sheet, compared with $317 million at the end of 2009. Our net debt position at year-end 2009 was $90 million lower than the previous years' end balance. And at year-end overall liquidity which includes available borrowing capacity on our ABL credit facilities approximated $615 million. Reductions of certain current assets and liabilities contributed approximately $400 million for the increase in our cash balances during 2009 which primarily came from reduced inventory levels and lower accounts receivable. Peter will provide more detail on our cash flows including the effect of our recent open market purchases and notes that further reduced our near term debt maturities.

Now I'll turn the call over to Peter for a closer look at our financials, and I'll return to give you a perspective on how we're planning for 2010.

Thanks, Dusty. I'd like to begin with an overview of certain items included in our fourth quarter P&L and also comment on some 2010 data points. Let me start with restructuring, exit and impairment charges which were $68.6 million or $0.78 a share in the fourth quarter. This amount reflects charges for our continuing actions to realign our manufacturing footprint and associated work force reductions. The charge is greater than our previous estimate primarily due to approximately $50 million of noncash charges for impairments of various boat segment under-utilized properties, which reflect our decision in the fourth quarter to no longer use these facilities in our continuing operations and to proceed with these dispositions.

Our view of 2010 restructuring charges is approximately $30 million. These charges are for actions currently implemented or planned, including approximately $10 million reflecting the plant consolidation actions at Mercury. The vast majority of our restructuring charges in 2010 will be cash. Interest expense totaled $26 million in the fourth quarter of 2009, an increase of $7 million versus the same period in 2008. This increase reflects greater debt levels, along with a higher cost of debt resulting from the refinancing activities completed in the third and fourth quarters of 2009. The fourth quarter of 2009 also includes a $13 million loss incurred on the retirement of $85 million of 2013 notes which were retired at a premium versus the recorded book value. For 2010, we expect interest expense to be approximately $24 million per quarter.

Turning now to taxes. In the fourth quarter we recorded $108 million tax benefit which reflects our ability to carry back five years our 2009 domestic tax losses to years in which we paid taxes. In 2010, we expect to generate additional tax losses. We will continue to book valuation allowances against a deferred tax assets generated from these tax losses. This will result in our recording no domestic taxes for our 2010 pretax book losses. Consequently, our pretax and after-tax losses will be essentially the same except for potentially having to provide for foreign and state taxes.

Now let's turn to a review of our 2009 cash flow statement. In addition I'll comment on our expectations for 2010 and our objective to maintain strong liquidity by generating positive free cash flow. Our cash balance at the end of the fourth quarter was $527 million as Dusty has said, and that is $209 million greater than year-end 2008. This increase resulted from approximately $113 million of cash provided by operating activities, net of cash use for investing activities and supplemented with net proceeds received from financing activities of $96 million.

In addition to the extensive cost cuts that helped mitigate our losses, the most significant source of free cash flow in 2009 came from a reduction in certain current assets -- certain current assets and current liabilities of approximately $400 million. A reduction in inventory of about $325 million was a primary driver of reduced working capital. In 2010, our plan is to maintain at least flat year-over-year working capital levels by increasing inventory returns in line with historical levels and reducing day sales outstanding.

Now maintaining flat year-over-year working capital will be challenging in a rising sales environment, but we believe it is well within our reach. Of course given the seasonality of our marine businesses, we would anticipate using cash to fund working capital in the first half of the year and then generate cash in the second half. Also during 2009, we received net tax refunds of approximately $90 million. This primarily related to the filing of our final 2008 federal income tax return, and carrying back the net operating losses, 2006 and 2007. We anticipate receiving approximately a $100 million refund in the first quarter of 2010, which relates to our 2009 federal income tax return and carrying back the net operating losses through the year 2004. Capital expenditures in 2009 were $33 million. We plan to increase this amount to approximately $60 million in 2010 as we develop new products in anticipation of the slowly improving economy, and we fund projects to reduce operating costs.

In addition to the noncash impairment charges that I described earlier, now let's take a look at the items that reduce our earnings but are entirely noncash. Depreciation and amortization was $157 million in 2009, our current view for 2010 is approximately $130 million. Pension expense for our defined benefit pension plans totaled $96 million in 2009 which included $14 million of curtailment and settlement losses primarily related to restructuring and severance activities. Our cash contributions for 2009 totaled $22 million including cash paid to fund our qualified pension plans and to make nonqualified pension benefit payments, our funded position experienced a slight decline from year-end '08 as an impact of a lower discount rate offset the benefit of favorable investment returns.

Now pension expense is expected to total approximately $40 million in 2010. This decline results from the decision to decrease benefits in the Company's two largest plans in 2008 and 2009. A byproduct of these decisions is that longer amortization periods are now being applied to previously incurred, but unrecognized, actuarial losses. The results are lower expense resulting from the elimination of annual benefit accruals. Our minimum cash requirements associated with the pension plans in 2010 are expected to be between $25 million and $30 million. And finally, we recorded provisions for doubtful accounts of approximately $50 million in 2009. In 2010 we do not anticipate these provisions to continue at last year's levels.

Our year-end 2009 cash balance was $97 million less than the previous quarter. The fourth quarter reflected modest negative cash flow of $16 million, and the receipt of $20 million in government incentives in the form of partially forgivable loans pertaining to the consolidation. While these two factors were essentially offsetting, we did retire $85 million of the 2013 notes in Q4 for $97 million, which accounts for the cash balance reduction in the quarter. We did not have cash borrowings under our two ABLs at the end of 2009 and we entered the year with net available borrowing capacity of $88 million under these two facilities, which does take into account the $60 million minimum availability adjustment required by the fix-charge test and the revolving credit facility. When you combine the available borrowing from both facilities with our cash balances, we entered 2010 with approximately $615 million of liquidity.

Now in 2010 we don't anticipate any borrowing activity under either of our ABL facilities. And I would like to point out in 2010 we do expect to receive further state and county incentives of approximately $35 million to support the Mercury plant consolidation, and that should more than offset any incremental cash restructuring charges associated with this move during the year. These incentives will be classified as debt on our balance sheet, and will accrue interest at low-single digit rates.

So in summary, based on the strength of our continued cash generation we believe that we'll end 2010 with extremely solid levels of liquidity and net debt at levels comparable to year-end 2009. Finally, I'd like to supplement Dusty's remarks with an update on some key metrics that we've been sharing with you regarding the health of our dealer network. For the full-year 2009, boats tendered to us for repurchase totaled approximately $22 million, virtually all of which have been replaced with alternative dealers. The actual cost to us during the year in carrying out this repurchase obligation was about $4 million. And we continue to conduct detailed dealer-by-dealer analyses of potential future purchase losses at each quarter. We actually decreased our Boat Group's reserve for this exposure by approximately $3 million in Q4, resulting in a total accrual of about $8 million at year-end 2009.

Our number of boat dealers over the past year has remained remarkably stable, experiencing a net decrease in dealers of less than 1%. But more importantly, we believe that the overall quality and strength of our dealer network has, in fact, improved. A leading marine publication, Boating Industry, recently ranked the top 100 dealers in North America. 82 of the top 100 were sellers of Brunswick boat brands. All this is evidence, we believe, that the strategic actions taken over the past several quarters have maintained and in fact improved the relative health and quality of our dealer network, which is a key differentiator for us in the marine market.

Now I'll turn the call back to Dusty for some concluding comments.

Thanks, Peter. I'll conclude today by reviewing the outlook for 2010. In Peter's comments he addressed restructuring charges, interest and pension expense, our tax provision and various cash flow assumptions and targets for 2010. I am going to focus my remarks on the key earning and revenue drivers that will affect our business in 2010 and beyond.

We still have a limited visibility to both economic and marine market conditions that will affect the demand for our products. However, unemployment continues to be high. Mortgage defaults continue at high rates. Other credit defaults continue to rise, home values have yet to recover, lending remains constrained, although slightly better. And the policies and goals of the administration and Congress remain muddled in the existing political environment. Given this background, we are planning for recreational money markets to be down slightly in 2010 versus 2009.

As a result we expect 2010 will be another year in which we report operating losses, albeit significantly reduced from 2009. We remain committed to the strategic focus that has ensured our financial health and uniquely positioned us compared to most of our competitors in the marine, fitness and bowling and billiard segments. We'll continue to focus on maintaining strong liquidity by keeping net debt consistent with current levels, taking all reasonable actions to strengthen our dealer network and doing the work necessary to come out of this downturn stronger than we began the period.

Although our 2010 plans reflect a modest reduction in retail marine demand, our boat facilities will gradually increase shipments to our dealers throughout the year as production is ramped up and as wholesale falls more in line with retail demand. As indicated in our release, we posted a boat dealer pipeline inventory chart on our Web site. This is a slide that is similar to the one we have been using in our equity conference presentations over the past few quarters. We have updated it to reflect our final 2009 pipeline numbers and have included our current range of 2010 wholesale shipment in retail sale assumptions. For those who are not connected to the Internet right now, let me take a moment to review the data on this sheet.

We're assuming retail sales of our dealers will be down by approximately 10%. And our annual wholesale shipments, which correspond to boat segment revenues, will increase in the range of 50 to 60%. Although first quarter growth will be muted by the start-up considerations, such as the ability of our supply base and our commitment to maintain quality. Given these assumptions our annual pipeline would decline between 1,000 to 3,000 units, with ending 2010 units in the range of 12,000 to 14,000 boats. Therefore, our plan currently reflects that the already low-filled inventory levels will drop even further in 2010. Additionally although over-supply conditions still exist in the overall marine market, we believe that our 2010 sales at retail will be comprised of a greater percentage of current model year boats. And based on the low levels of inventory in our dealer pipeline the amount of discount levels should be far lower in 2010 versus 2009.

The factors affecting the Brunswick boat segment will also lead to improved revenue growth in our engine businesses, but the anticipated growth will be considerably less due to the mix of businesses within the marine engine segment. Our domestic parts and accessories business, which currently represents about a third of the segment's annual revenue, is projected to be flattish for the year. In addition, international market sales, which currently represent about 45% of the segment's annual revenues, are projected to grow at roughly a 10% rate. Taking these factors into consideration, we anticipate our engine segment sales as to grow at mid-teen rates.

In addition, we believe sales improvement will occur in our fitness and bowling and billiard segments as financing slowly becomes available and as of health clubs and bowling centers become concerned that dated equipment is affecting their ability to attract and retain customers. Our current expectations reflect that these segments will experience modest growth in both revenue and operating earnings, while continuing to generate strong cash flows. We expect to report improving margins and the majority of our margin growth will come from significantly higher revenues and production rates, which when combined with our lower cost structure, will produce strong operating leverage. Additionally, we expect to see margin improvement from the consolidation of the U.S. engine casting and machining from Stillwater to Fond du Lac. This transition will take approximately 24 months, and will ultimately when completed result in approximately $40 million of total cost reductions.

I mentioned earlier our performance against our goals to maintain liquidity, protect our dealers and position the Company for the future. Our next performance against these goals in this recession, has positioned us to transition from a focus on liquidity, to a focus on continuous improvement in our financial results and strength relative to the competition and all of our business segments. So while the economy and markets in which our businesses operate may remain challenging for the foreseeable future, this transition requires in 2010 and beyond as the world economies improve, that we remain disciplined to generate positive cash flow, perform better than the market in each of our business segments, and grow earnings faster than we grow sales. Thank you, and now I'd like to turn the call over to the operator for your questions.

(Operator Instructions) Your first question comes from the line of James Hardiman with FTN Equity Capital Markets.

A couple of questions for you, with the Genmar bankruptcy option behind us, could you give us a little bit of your thoughts in terms of the results of that auction, sort of how you think to is going to affect the industry in terms of boats that are on the open market; maybe for some reduction reduced price, can you sort of talk about that and how that went versus expectations and what are the implications there?

It went about like we expected; our view was that the primary players would be financial firms, not strategic firms. And in fact, most of the assets at least initially ended up in the hands of a financial firm. Of course the prior owners, or the prior primary owners, did end up with some of the assets and it appears there has been a subsequent transaction with the financial player to get a couple more of the assets. So as we look at it, the financial firm, which is new to our industry, has got a lot of gearing up to do and a lot of work to go get done. They have got a fair bit of product sitting out there. That is going to have the feed their dealer network until they can get up and running and keep the dealer network healthy. There may be some level of discounting of that product. But when we step back on our -- probably as good a result for the industry as we could have expected. It looks like Platinum, who was the buyer for a significant portion of the assets, is a good operator at least in other things that they've done. And of course, we know Mr. Jacob's operating capabilities. So this will begin to unfold through this year, and it turned out about like we thought it would.

Great, and then in terms of the slide that you guys provided, it is great disclosure and we certainly all appreciate that. You talked about how 2010 inventories are probably going to come down a little bit more in that 1,000 to 3,000 units neighborhood. Is the majority of that going to be first half weighted, and when do you think you will get back to sort of one-to-one in terms of selling versus sell through?

My judgment is that we'll be back on pure one-to-one in 2011, and we think the industry will get cleaned out. One of the things that we looked at, James, is we made the best guess we could from talking to a lot of people about how much age the inventory was sitting out there in the dealer network. And we made some judgment about what additional repossessions should occur and how that is going to come about in the marketplace. Based upon that, we made the decision on how much we should put into the dealer network. Because we don't need to be putting new product in against aged or repossessed product that is going to take discounts in order to move. And of course the other factor that was there, we needed to do some planning about what we thought the overall market conditions would be at retail.

So what you're seeing there are our planning assumptions. They may or may not be right. And we're prepared to adjust. If the market were to get better, we will continue higher levels of production longer into the year in order to satisfy the market. But fundamentally, our judgment is that in 2011 we should have gotten the -- this marine market pretty well cleaned up. And we ought to be able to operate on a one-to-one.

Thanks. And then along those same lines it looks like -- nobody really knows the answer, but you're saying -- you're guessing that your retail sales are going to be down about 10% versus 2009. Obviously, as I think you just touched on you are going to be competing -- you are in much better shape than a lot of your competitors. So you're going to be competing against in a lot of instances, reduced prices against your competitors. What does that say about what your thoughts are about the industry and your market share position is going to be in 2010?

In theory we could suffer a little market share loss in -- with certain of our brands and in certain segments where there may be a lot of boats and a lot of discounting. On the other hand, what we're -- in its early days in boat shows, I want to be very careful. But our dealers are doing fairly well. I should put a stake in the ground. Boat shows are flat to slightly down. They're working in a smaller footprint because a lot of people -- a lot of exhibitors haven't showed up in the shows that showed up in the past. Attendance is flattish, it makes congestion look a lot bigger, smaller footprint, sort of same number people moving around in a smaller area. The congestion looks a lot bigger. But the sales at the shows are flattish to maybe slightly down. But what we're seeing is as the dealers are getting more margin, because they're able to sell current product at a much better margin and do not have to go through the discounting. It will be difficult to grow market share in 2010 in this sort of market, but I'm not really resigned to the fact that we should plan on losing market share. And at the conclusion of my comments you'll notice that I said it is important that all of our businesses begin to think about out-performing the competition in all of our segments. Market share will not be the sole governance in determining as to whether we're outperforming our competition, but it is something that we have to get our head around as we begin to transition this Company from a focus on liquidity, to a company with margins and earnings.

Excellent and just one final question. Can you give us any metrics in terms of contraction of your dealer base over the last couple of years, how many dealers have gone away? What percentage of sales do they represent and where do we think that ultimately gets to?

Peter in his comments, gave a great statistic. Less than 1% of our dealers -- our dealer count is down less than 1% as we walk out of 2009. And a lot of the reason is we have the sort of brands that if a dealer is in trouble in a particular market, we are not having any problem getting our brands placed at another dealership. Again, by definition, James, that dealership is healthier than the dealership we left because it was in trouble. And one of the really great tributes to our dealer network again, Peter mentioned this in his comments, Boating Industry does a lot of work with the dealer network to both improve the dealer network, but also to measure performance. And they just finished up toward the end of the year their award of the top 100 dealers. And 82 of those folks carry one or more of our brands. So we're very comfortable with our dealer network. We think it is becoming a competitive advantage. And I tell you, we really got some great dealers out there right now.

Perfect, thanks guys.

You're welcome.

The next question comes from the line of Ed Aaron with RBC Capital Markets.

Thanks. So Dusty I hoped you could maybe just talk a little bit about how the retail trends track relative to your expectations recently? The reason I ask is that I think maybe six months ago, you were talking about an expectation for 130,000 to maybe 135,000 industry retail unit sales this year or last year. And, itlooks like we came out a bit ahead of that. At the same time, the rate of decline in the fourth quarter for the industry didn't -- perhaps didn't moderate to the extent that I thought it might, just given the fact that we came up against a much easier comparison. So just would love to hear some color from you on how the back half of the year and total from the retail demand perspective, kind of shook out versus your expectation?

It was a bit better than our expectations. I think a couple of things went on that made it a little better than our expectations. First, our pipeline was beginning to get scoured as we went into the fourth quarter as a lot better age product. And while we didn't put a lot of new product into our dealers, I think we had just enough to get some nice sales uplift there. And of course, we were continuing to discount the aged products. So the combination of the two made it slightly better than I thought. I think also the lending institutions have shown up -- in a little better form for consumers. And while it is not where we would like it to be -- or where it should be or consumers want it to be -- it is getting slightly better. And then lastly in conversations with dealers, a lot of folks are now showing up at dealerships and at boat shows right now, Ed, who have the money to be a boat buyer. So it doesn't take -- it doesn't take as much -- the down payment, I'll say it this way. The down payment is not such a constriction on the type of buyer that is beginning to show up. So they're able to live with the financing terms that are available.

And then perhaps the last thing is the aluminum business, if you listen to our statistics, is down a fair bit -- it's rate of decline is much better than the rate of decline in fiberglass. And I think that is probably a reflection that those boats on balance, have an average sales price significantly less than a lot of the bigger fiberglass product. And I think the -- it is the first place consumers are going to start coming back to.

Thanks, and second question from an ASP (average selling price) perspective in the boat segment, how should we be thinking about that for 2010? Because I think you had a couple of quarters there where you were shipping down 16 units and your revenues were down 80% in dollars, which supplied some pretty significant ASP compression so I would think we would get a decent trend back up in 2010 at the same time there's a bit of a question of what the mix to sales is going to look like especially with out board and aluminum declining a little bit less at retail category. So we would love to hear any color on that.

We're thinking that our ASPs ought to be flat or thereabouts in 2010 versus 2009 because the discounting will be over.

And the reason that it wouldn't be up then is because the offset for mix?

I think it is going to be number one, a bit of mix. Yes, it is going to be primarily mix.

Okay. And then Peter, maybe just one for you. You have had the fixed cost reductions kind of rolling through progressively for some period of time. Incrementally in 2010 versus 2009, how much should we assume that on a full-year basis the fixed costs will be down?

Well -- we're certainly going to strive to hold the $420 million of cost reduction that has taken place in the past two years. We will also encounter the obvious, hopefully modest cost inflation in materials and in wages, but that in turn should be offset by improvements in cost reductions as we have move forward. The biggest improvement in terms of fixed-cost reduction will just come from the significantly increased sales particularly in the boat group. And so when you put all of those things together, we'll be moving from a fixed cost as a percentage of our total sales in excess of 30% last year in '09, to something between 25 and 30 in this year, 2010.

Thanks, I have a couple of more, but maybe I'll just back in the cue.

No problem, do whatever you want. We're fine either way.

Your next question comes from the line of Tim Condor with Wells Fargo. Please proceed.

Thank you again, and congratulations on the great execution and the ongoing tough year of '09.

You're very kind, Tim. We appreciate it.

Dusty, back to the pipeline side and maybe to follow on a couple of previous questions. The 12,000 to 14,000 units that you are somewhat targeting in 2010 for the retail unit assuming you're down 10% -- I think previously you had said that you are targeting 14,000 to 15,000 units. So maybe I think you said that you want to be cautious shipping in, given the '10 will be kind of the final year of clearing everybody else's stuff out. Is that it, and then maybe -- I know it is very, very early, but on a more normalized basis, beyond '10 is that 14,000 to 15,000 ending inventory still kind of where you're targeting on a normalized basis?

First, 15,000 is where we would like to be. There are a couple of other factors that I probably should mention. There is a limitation that we need to be very careful about on our ability to come up and get our plants running at full tilt. The supply base, there is a great article in The Wall Street Journal yesterday calling it the bull whip effect. The supply base has really such as we've taken production down. And then as they come back up with us, we want to be very careful to come up in a way that they can perform and keep their quality at great levels and manage their working capital requirements in a way that they have got the ability to afford. Secondly, as we come back up, quality is going to be a really important focus for us. We can turn these plants on and hire a bunch of people and start running the product through and we'll end up with quality problems.

Yes.

And then thirdly--?

And then Peter, get on to you for the warranty expense going up right?

Yes, sir.

More importantly, we don't want to have a Toyota problem.

Exactly, exactly.

The consumers are who we're really focused on here, ultimately. So when you put all that together, Tim, we're coming up, we think, at a very measured pace. Our fiberglass plants are going to have to have production be in excess of 100% of what it was in 2009. And that is really a big come-up. Now -- our call-back list, have us bringing back great and experienced workforce in all of our plants. We have been incredibly happy with the number of people who have come back, who we laid off as we went through the downturn. So I am very confident we have got a great workforce, and we've got a heck of a lot of planning to do this correctly. But we are going to do it carefully.

So as we get then over to 2011, 2011 is going to be a really interesting year around here depending upon what the market does. But even if the market were to stay flat, we have got a lot of boats to make. We're going to have some nice revenue increases, and we ought to begin to see the impact of our cost savings. So we're going to do 2010 right carefully -- protect quality, help our supply base come up; and then, 2011 ought to feel like a very different year for us.

Okay again to summarize the reason, you cited that 12 to 14 would be the target ending inventory in units for '10, but then '11 more back to that -- as far as the normalized basis that 14,000 to 15,000 would be more of a fair normalized rate?

Yes, 15,000 should be more of a fair normalized rate.

Okay, 15,000, and then regarding the industry, Dusty, again you said 140,000 to 150,000 units in 2009, and you're looking for yourself at retail to be down 10% given your position in the market. And you said you may lose a little bit of share, you're saying the overall industry then -- would probably not be down quite that much? As much as 10%?

No. First, I -- we're not predicting the industry. We're planning as to how we're going to run our Company. And maybe I wasn't clear enough in my question and answer with James. In theory, one would say if there is a bunch of discounted boats that have to come through, one could theoretically argue that we could lose some share. I do not think we should, and that is not a goal across any of our businesses. So what we're fundamentally saying, we're planning not only for ourselves to be down, Tim, but we're planning the market to be down '10 also.

Okay, okay. And then -- on some of your, you gave -- and thank you for the additional broad detail outlook by the bowling billiards divisions, engines and boats. Noticeably absent, unless I missed it, was any guidance on Life Fitness?

No, we said Life Fitness would have a modest sales increase and a modest earnings increase.

I apologize.

That's okay. We kind of lumped them together in one sentence, I think.

And then Peter more of a question for you if I may, it was touched on a minute ago, but you mentioned in your preamble regarding savings, the total savings coming out of the manufacturing plants and so forth, kind of outline that timeline for us. Did you get any in 2009? Again, probably not much if any, I would suspect. But then how do you see that time line maybe laying out of those cost savings?

You're correct, Tim, it was very modest in the fourth quarter of 2009. For 2012 -- and it was Dusty I believe who gave the statistic that when the plant consolidation is fully completed, we should experience approximately $40 million of improvement from the totality of the consolidation. But of course that is two years away.

Okay.

So -- with respect to 2010, this year, you can assume that a -- a relatively small, but material percentage of the $40 million should flow.

Okay, and then by the end of '11, beginning of '12 you should basically be at that full $40 million run rate?

Well, it will take all of '10 and all of '11, and we'll commence '12 on the basis of the current planning with a benefit of the full $40 million run rate, yes.

Okay. Okay. Thank you, gentlemen.

You're welcome, Tim.

Your next question comes from the line of Matt Vittorioso with Barclays Capital.

Quick question from me, and maybe I missed it in your remarks. I guess I just -- I wasn't anticipating as big a loss in the marine engine segment. Could you help me just bridge the gap from the third quarter sort of run rate of operating earnings to the fourth quarter, is that seasonality, is it the transition of facilities, what did I miss there?

I'll take that one, Matt. Actually -- in the -- the engine segment, as you noticed, it experienced an earnings reduction of $57 million on a sales decline of $62 million. And by far the major element in Mercury's earning reduction was the seasonal drop in part sales in the fourth quarter compared to the third. People buy parts in the third quarter. They don't -- in the throes of the winter. And the reduction of profitability that comes from lower part sales and in the current weak market for new boats, Mercury's parts business temporarily here plays a much more pronounced role in the quarter-to-quarter comparisons, particularly third quarter to fourth quarter. There are other factors affecting the engine segment's fourth quarter to third quarter comparison. One was some favorable contractual settlements reached in the third quarter, which obviously did not repeat themselves in the fourth, we did have higher bad debt experience in the fourth quarter as -- we were dealing with the problems of certain of our OEM customers, going into bankruptcy. And we had higher R&D expenses in the fourth quarter compared to the third. Those were the basic factors.

Okay, that is helpful. So typically the fourth quarter for that business would be a bit lighter on profitability because of the decline in parts?

Yes, but the decline wouldn't be as pronounced.

Right.

When -- as they are now when the new engine sales are as muted as they are by the market conditions.

Very helpful. And then -- I'll just try this. I'm trying to get a little bit. I know you said that the losses in 2010 overall would be significantly less than they were in 2009. Is there any way you can help us kind of model out how sort of operating margins will kind of -- where they're going to end up in 2010. Is there any way you can be a little more specific on the magnitude of the loss you're expecting, or how margins will kind of steadily improve over the course of the year?

I'll go at it this way? Last night I made the mistake of reading the past couple of transcripts. I am always amazed at how inarticulate I am orally. So putting that aside, we danced around a couple of questions in the second quarter and third quarter. So let me just kind of put a stake in the ground in modeling, and see if this helps us all. I think our profit before tax -- this is what our planning is, how we have been building our cost structure and thinking about this Company. I think our profit before tax break-even point, and let me stop there -- taxes are not going to be an issue with this Company for a while because of the losses we have been accumulating.

So I think in the near to -- what I would call medium term let's just focus on profit before taxes. Our break-even point is a sales level in a range of $3.7 billion. When we're operating in, what we affectionately call here internally, steady state. Steady state for us is wholesale equals retail, discounting has returned to normal levels, our cost savings have taken effect, and our recreational businesses are experiencing just normal growth rates. If the marine markets were to become at steady state what they were in 2009, we think that is a sales level we can achieve. So hopefully that gives you enough to do some model building -- without -- we put some stakes in the ground there.

Sure, that is helpful. And then one last question for me, just broadly, if you're doing your best to be sort of free cash flow neutral for 2010. And I know you gave a lot of good guidance on some of the cash movements here and there. Is there an overall sort of strategy to just continue to sit on that cash, or will you continue to look at your capital structure as far as taking out some additional debt? Any broad sense of what you'll do with that cash?

We have neon signs all across the building about what we're going the do with our capital structure. And we have got to have a laser focus on reducing our debt levels in this Company. If you were to ask us today, $400 million might feel more like where we ought to be. So as we begin to look at our ability to generate cash -- as we do so this is a great cash machine when things are anywhere close to -- if we go back to our steady state. We have got to go to work on reducing debt. Now we're going to balance that -- I think that's what we ought to spend in order to grow and take care of our businesses, and this Company generates cash to take care of both when things are more normal. And that is where we're going to be focused on in our capital structure.

And Matt, another -- over time possible use of our cash will be to supplement our currently under-funded defined benefit pension plan. So as we do generate free cash the -- and as it does build up on the balance sheet the decision will be -- frankly pretty much a financial one. Where do we get our best returns in terms of putting voluntary contributions into the pension plan, and getting the investment returns that come from that and the reductions in P&L expenses associated with that? Or do we do what we did in '09 and retire some debt? And so that will be an ongoing review by Dusty and me and our Treasurer, and it is something that we will address as the cash flow situation materializes, and as we look at the two alternatives.

That is helpful then I guess -- just on that pension is there any -- is there an expectation in 2011 of what your required contribution would be? Does that step up at some point I think from the 25-30 million you said for 2010?

If the discount rate does not change significantly, which is the biggest driver of our liability, and if asset returns do not change significantly from expected levels, yes, we will have a significantly greater cash contribution that we will be required to make starting in 2011. Significantly greater than the $25 million. Could be double that. That is one of the things that we are planning for in our overall scenario, as to how our cash will be used.

Okay, that is very helpful. Thank you.

You're welcome.

You have a follow-up question from the line of Ed Aaron with RBC Capital Markets.

Thanks for taking the follow-ups. Dusty, when you look at the overall market in 2009, maybe like on a seasonally adjusted basis, what mark do you estimate marks the floor in terms of the retail sales?

I don't think we have seen the floor yet, Ed. When we say its going the drift down a little more, we're not quite there yet. Are we on the same page?

Yes, I guess I might have interpreted that the first half if the comparisons are getting easier through the -- the year that the first half might be down more and the second half perhaps could be a little bit better.

You said 2009. Were you meaning 2010?

I meant in 2010 if you're planning for down '10, I would think that there is a possibility since the market is still weakening over the course of 2009, that the declines might be more significant in the first half and then perhaps be flat to up in the second half of the year?

Yes, that is the old on easier comparisons that math works.

Okay.

I -- can I correct something I told you earlier?

Sure.

I sit here with little notes on the end of my nose and on my forehead and on my knees and I'm 60 years old and I don't read as well as I used to. So I gave you a bad number on average selling price. Our average selling price I think will go up in 2010, and it certainly makes a heck of a lot more sense. And I think that is why you were a bit surprised when I told you flattish. It will have to go up if we just think about it, because of what our model mix is, et cetera -- so you know our ASPs could be up 10, 15, 20% depending on the types of boats and models.

Okay that is helpful. Thanks. And then -- Peter you mentioned earlier that you had a $50 million provision for doubtful accounts in 2009. And you said it won't continue at that level, but do you expect there will be another provision there in 2010?

Yes, I expect there will be a provision in '10 -- in the prior year '08 it was approximately $30 million. And then it grew -- it has grown in '09 to $50 million -- it is hard at this point with the turbulence amongst our -- particularly in the marine marketplace. It is hard to define what a normal bad debt number is. And of course that includes both domestic and overseas. But I would certainly assume that the number would reduce to something between the 50 of '09 and the 33 experienced in 2008.

That is helpful. And then one last question if I could, just on the cadence of the production ramp, the -- you obviously are in a pretty seasonal business. And an environment where floorplan financing is difficult and certainly expensive to obtain. And I would think that maybe the shipments would be perhaps more concentrated during or ahead of the selling season than might have been the case years ago before the credit crisis. How should we think about that in terms of how the shipment should ramp progressively through the year?

Second quarter will be the highest level, first quarter will be next. And then third and fourth ought to be about equal with each other. But down from second.

Thank you.

You're welcome.

Your next question comes from the line of Alexander Fedora with Sonica Capital, please proceed.

Hey guys, how are you?

We're well, how about you?

Thanks, just wanted to make sure you could hear me. I'm on one of these head pieces. Thank you for all the detail on the call. Just regarding, and I may have missed some of the color on this question. But regarding the tax benefit, can you just quantify for us how much you're actually getting refunded in the timing?

We said that it would be somewhat more than $100 million, and we expect that during the first quarter of this year, February or March.

Okay, so that will be a check written to you for $100 million?

I think it will be a wire transfer.

Okay. And as far as -- the industry data, so where did the industry end for the year? I'm sorry if you had an assumption on that. Was it down 10% -- what was the total--?

We in my prepared remarks, Alex I'm going to give you the exact number I said we think it is going to be down somewhere between 26% and 30%. The reason we are still giving you a range, the full industry fourth quarter data is not out yet. We just had some preliminary numbers.

Okay, got it. That's roughly -- I'm just trying to update this--?

That would be 140,000 to 150,000 units, down 26% to 31%. Remembering the industry was around 203,000.

That is helpful. And so when you step back with all the details you gave, and I know it is really sort of hard to I guess, I know you guys are planning internally and you really can't have a view on the industry, where do you think there could be an upside surprise?

In terms of what the industry is going to do?

Well, the industry, and I guess Brunswick. Where is it that you think you could be somewhat conservative? Or overly?

We could be being conservative in the second half of 2010.

Okay. And that is based on the easier comparisons or some type of pick-up that you could see materializing?

If we're conservative, I'll say it this way. In our planning, it would be in the -- in 2010 it would be in the second half of 2010. Because if the economy is going to begin to improve, it seems to me Alex, it is going to take to the second half before we'll start to feel it.

Right. And is that typically an improvement in the economy. That should be a pretty strong I guess change for you guys?

I would not call it strong. Because again we're going to be -- we're going to do the right thing in the ramping up of our plants and the manufacturing of our product, and how much we sell at wholesale.

Right.

I would think 2011 could be the year in which a lot of things start to happen for us.

Okay, great, I appreciate the answers. I hope I didn't make you repeat too much. Thank you.

No, not at all. It's not a problem.

Congratulations on the execution, I'm sure you know everybody feels the same as on the call.

Thank you, very much. That is kind, I appreciate it.

And this concludes the Q&A portion of today's call. I'd like to turn the presentation over to Mr. Dusty McCoy for closing remarks.

Thank you very much operator. Thanks everyone for number one, joining the call. And number two following us. Three, all of the great questions. Hopefully we have given all of you enough to get a view of the Company and where we're going and what our potential is.

We're -- we continue to be quite buoyant internally at Brunswick. We had the world play out generally the way we thought it would play out. We performed generally the way we -- against the high standards we set for our performance and we're quite comfortable that we're very well positioned for 2010 and beyond. So we thank you for your time, your attention and your interest. And we have made an offer for a lot of folks to come see us at the Miami boat show. There we'll be doing a bit more detail presentations. But that will also be Web cast. And we'll be up on the Web for those who can't make it down to sunny Miami. So we look forward to talking to you next at that time. Thank you.

This concludes the presentation. You may now disconnect. Good day.