賓士域 (BC) 2010 Q2 法說會逐字稿

Good morning. Welcome to Brunswick Corporation's 2010 second-quarter earnings conference call. All participants will be in a listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President of Corporate and Investor Relations. Please proceed.

Good morning and thank you for joining us. On the call this morning is Dusty 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 statements about future results. Please keep in mind that our actual results could differ materially from these expectations.

For the details on the factors consider, please refer to our recent SEC filing and today's press release. All of these documents are available on our website at Brunswick.com. Also, during our call we will be referring to a chart containing dealer pipeline information. If you have not yet retrieved the chart, you may do so by going to the Investor Relations section of our website. I would now like to turn the call over to Dusty.

Thanks Bruce and good morning everyone. By now I hope you've had the opportunity to review our second-quarter earnings release. Our strong results for the past two quarters continue to reflect the hard work of our employees, dealers and suppliers which has allowed us to take advantage of our historically low and well-managed inventories as well as the significant fixed cost reductions achieved during the past 2.5 years.

We reported net earnings in the quarter of $0.15 per share on a sales increase of 41%. This represents our first positive quarterly net earnings since the first quarter of 2008. The quarterly EPS includes $0.26 per share of restructuring charges and $0.02 per share of charges from special items; that would be tax items.

Our quarterly operating earnings excluding restructuring, exit and impairment charges were $80 million, an improvement of about $190 million as compared to the loss experienced in the prior year. Our operating margin ex charges was slightly less than 8% in the quarter. This represents our highest consolidated operating margin since the second quarter of 2006.

Significant increases in our wholesale units in both our engine and boat segments were the primary drivers of our overall 41% topline growth, which generated a significant improvement in fixed cost absorption in our Marine businesses. Further contributing to the strong operating leverage demonstrated in these businesses were lower discounts of approximately $38 million required to facilitate retail boat sales and about $20 million of reduced bad debt provisions primarily in the engine segment.

Lower pension expense of approximately $10 million also had a favorable effect on the Engine and Bowling & Billiards segments as well as on corporate expenses. A portion of the pension expense reduction and the lower bad debt expense were the primary factors that reduced our second quarter's SG&A by 14%.

Our cash increased by $93 million from year-end and net debt decreased by $120 million.

Peter will comment in his remarks on the key factors affecting the quarter's improved cash position as well as provide you with an update on cash flow targets for the remainder of the year that will support our objective of generating positive cash flow in 2010.

Although encouraged by our first half financial results, driven primarily by return to a more normal relationship between wholesale and retail sales, overall Marine retail demand continued to increase during the first six months and remained at historically low levels.

Let's review the preliminary second-quarter US Marine industry data. Fiberglass turn drive and inboard load unit retail demand fell by 29%. This compares to declines of 23% in the first quarter of 2010 and 33% in the second quarter of 2009. Outboard fiberglass boat retail unit demand fell 16% in the second quarter. This compares to declines of 22% in the first quarter of 2010 and 29% in the second quarter of 2009.

Aluminum product demand increased by 4% in the quarter. This compares to declines of 15% in the first quarter of 2010 and 26% in the second quarter of 2009.

After taking into account the different unit volumes represented in each of these segments, preliminary total industry unit demand declined approximately 9% in the second quarter. This compares to a 20% decline in the first quarter.

For the first six months of 2010 total industry demand declined by 13%. The 13% first-half decline is slightly greater than our full-year 2010 planning assumption of down 10%.

Although the lower priced aluminum boats have begun to show signs of stability, which could be a leading indicator of future demand for the overall boat market, the higher-priced fiberglass boats have yet to experience any significant improvements. As comp percentage declines are only modestly less than the declines experienced in 2008 and 2009, the consumer remains very reluctant to spend in this category.

Retail demand has not only been mixed by category but also by geographic region. One area of note is the multistate region that has been hit by the Gulf oil spill beginning in late April. The incident has more significantly affected our saltwater fishing brands. However, today's announcement regarding the sale of our Triton brand, our exposure in the region has been reduced.

Our recreational brands have been effective to a lesser degree. Although the future ramifications upon our businesses remain unknown, we're encouraged by the recent news regarding the containment of the oil leak and the decline in surface oil. Our engine segment sales outside the US increased by 28% for the quarter compared to the second quarter of 2009 and our boat sales outside of the US increase by 64%.

While these increases are less than those we experienced in the US, our non-US markets have not experienced the overall level of decline which we have seen in the US. We're pleased with our growth in Marine markets outside of the United States.

Marine demand at retail in Australia and South America remains healthy. Demand in Europe varies by region. Demand in Scandinavia and those countries most affected by the debt crisis in Europe remains under stress while in demand in Central Europe remains stable. Demand in the CIS has been improving.

Back in the US, the retail boat finance market continues to improve. The loan portfolios of lenders are getting healthier as credit metrics are moving in the right direction and the quality of new loans is improving as a result of more stringent underwriting and down payment requirements. It bodes well for lending capacity which has been adequate for current demand. Interest rates on boat loans have experienced sharp declines especially for high quality customers and this reflects the very low interest rate environment.

Let's turn to our dealer pipeline, an area we have been carefully managing. As previously stated we have been on a dealer by dealer basis identifying minimum stocking levels. As you can see on the supplemental chart that we've been providing with our quarterly earnings releases, we're targeting end of year levels to be in the range of 13,000 to 15,000 units.

This analysis has now been adjusted to reflect the announced sale of our Triton fiberglass boat business.

Compared to last year, our second-quarter pipeline reflected approximately 4300 fewer units or a 23% reduction. As a result the quarter ended with 27 weeks of product in the pipeline on a trailing 12 month retail basis compared to 28 weeks at the second quarter of 2009.

In order to meet our dealers' required stocking levels, throughout the first half we began to increase both production and wholesale shipments. We increased our second quarter boat production by more than 2.5 times 2009 levels and [increased] shipments of boats to our dealers by nearly 75% versus last year.

Throughout the industry the level of aged product is being reduced but remains at higher than desired levels. Therefore, the market continues to be influenced by retail discounting. We believe that the rebalancing will be essentially completed by the end of this year.

However, as a result of the reduction in aged product experienced in 2009 as Brunswick dealers our level of discounts required to facilitate retail boat sales in 2010 have been and should continue to be at much lower levels than we incurred in 2009.

Boat segment sales more than doubled in the quarter, primarily reflecting the increased wholesale unit levels in the impact of lower discounts. This amount was partially offset by lower average selling prices resulting from a higher mix of less expensive products.

Our dealers continue to make excellent progress in improving the health of the floor plan financing metrics. However, domestic floor plan loans outstanding declined 19% as compared to year-end 2009 levels. Also outstanding floor plan loans on domestic inventory aged greater than 12 months were reduced by 54% as compared to year-end 2009.

The mix of aged product in the second quarter continued to move in a favorable direction and we expect this trend to continue, leading to a return of a normal ratio by the end of the model year.

In our engine business, production in the quarter was more than 60% higher than year ago levels with the growth in sterndrive engines occurring at a higher level than outboard units. All of Mercury's operations experienced strong increases in sales. A review of the mix of businesses within Mercury will give you more detailed view of the engine segment's 39% growth in second-quarter revenues.

Our domestic parts and accessories business, which in the quarter represented about 28% of the segment's revenues, was up approximately 13%. The growth experienced in this business continues to demonstrate the strength of overall boat participation.

International markets, which currently represent about 41% of the segment's revenues, increased by 28%. This increase once again exceeded our expectations as Latin America, Europe and Canada experienced strong sales in the quarter. When you combine these two sub segments, which account for more than two-thirds of the overall Engine segment, revenues increased by about 21%. Our engine operations accounted for the remaining revenue increase.

Mercury's strong topline growth which is weighted more heavily toward the sterndrive engine business combined with lower bad debt expense, fixed cost reductions, improved operating efficiencies, lower restructuring and pension expenses helped drive the even stronger growth in operating earnings.

Let's turn our attention to our two recreational businesses.

Sales in our Life Fitness segment were up 17% as compared to last year's second quarter. International sales were the primary contributor to the strong quarterly growth. We experienced year-over-year growth in revenues of 39% throughout our non-US customer base.

Segment operating earnings grew by about $9 million. In addition to the benefits of increased unit volumes a more favorable product mix, lower material costs and operating efficiencies contributed to the higher level of profits.

Sales in Bowling & Billiards were basically flat in the quarter as a solid increase in bowling products, primarily international markets, was offset by a decline in revenues at our retail bowling centers. Same-store retail bowling revenues were down in the mid-single digits. Operating earnings, excluding restructuring charges, were also flat in the quarter.

Now, I will turn the call over to Peter for a closer look at our financials. Then I will come back to give you an update on our perspective on how we are planning for the remainder of 2010.

Thanks Dusty. I'd like to begin with an overview of certain items included in our second-quarter P&L and I will also comment on some full-year 2010 data points.

Let's start with restructuring accident impairment charges which were $24.2 million and $0.26 a share in the quarter. This amount primarily reflects charges at our Marine operations.

On July 20 we announced plans to consolidate production of our Cabo Yacht brand into our existing Hatteras manufacturing facility in North Carolina. [And later] today as Dusty said, we announced the sale of our fiberglass fishing brand, Triton, to Platinum Equity. Both of these actions demonstrate our ongoing efforts to further reduce fixed costs and refine our product portfolio and manufacturing footprint.

When you combine the benefits from both actions, we anticipate they will improve our operating performance by approximately $10 million on a run rate basis.

Also included in the second quarter are charges pertain to the plant consolidation actions at Mercury. Our revised estimate of total 2010 restructuring charges is now in the range of $55 million to $60 million, with about $20 million to $25 million of that amount being non-cash.

Interest expense was $24 million in the quarter, an increase of $6 million versus the same period in 2009. This increase reflects greater debt levels along with a higher cost of debt resulting from the refinancing activities completed in the second half 2009. Also during the second quarter of 2010 we recorded a $4.1 million loss incurred on retirement of approximately $25 million of 11.75% 2013 notes, which were retired at a premium versus their book value.

For the second half of 2010, absent any additional retirement of debt, we expect interest expense to be approximately $23 million per quarter.

I would like to provide some additional perspective on Dusty's comments on the growth of our international operations and the foreign currency considerations that are associated with this growth. In many of our businesses, we export US manufactured product into international markets, so a strengthening dollar can have a negative impact on our results. This is particularly the case versus the euro, which is the company's largest foreign currency exposure, although the net exposure to the euro is less than 5% of our consolidated sales.

During the quarter, foreign currency, which reflected a mix of favorable and unfavorable exchange rate movements, had a very modest unfavorable effect on operating earnings on a year-over-year comparison basis. This does conclude the impact of our hedging activity which helps to moderate the impact that currency exchange rate fluctuations have on year-over-year earnings comparisons. Changes in foreign currency also had a negligible unfavorable effect on our sales growth in the quarter.

In the second quarter we recorded a tax provision of $15 million, which relates primarily to earnings from our foreign operations and includes a $1 million charge for special tax items. In the second half we approximate our provision to be in the range of $3 million to $5 million per quarter. Now, let's turn to a review of our cash flow statement, which supports our 2010 objective of maintaining strong liquidity by generating positive free cash flow.

Beginning with cash from operations, cash flows from operating activities were $110 million in the second quarter and $28 million in the first quarter, totaling $138 million for the six month period. The first quarter benefited from $109 million federal tax refund.

Some of the other key items in this section of the cash flow statement include adjustments to earnings for non-cash charges, such as depreciation and amortization which was $68 million in the first half. Our current D&A estimate for 2010 is still approximately $130 million.

Pension expense, resulting from our defined benefit pension plans, totaled approximately $10 million in the second quarter compared to $21 million in the prior-year. For the first six months of 2010 pension expense was $20 million.

Our pension expense is expected to total approximately $40 million in the full-year 2010 versus $96 million in 2009. This decline primarily results from the decisions to freeze benefits in the Company's two largest plans in 2008 and 2009.

In the second quarter the Company made cash contributions to the pension fund of approximately $8 million. Our minimum cash contributions associated with the pension plans for the remainder of the year is expected to be between $15 million and $20 million.

As expected, working capital was a use of cash in the first half and totaled approximately $74 million. Accounts and notes receivable increased by $115 million. Net inventories decreased by $9 million. Accounts Payable increased by $52 million and accrued expenses declined by $21 million.

Now, our initial plan reflected that we would maintain at least flat working capital in 2010. And given the seasonality of our Marine businesses, we anticipated that we would use cash to fund working capital in the first half of the year and then generate cash in the second half. Our current plan continues to reflect this seasonal cash flow pattern.

Capital expenditures in the first half were $19 million. Our full-year plan is unchanged at $60 million.

So in summary, in the first half we generated about $129 million in free cash flow. This amount does not include the approximately $9 million in net investments made in one of our existing Marine Engine joint ventures during the second quarter.

In addition to our free cash flow in the first half, we received approximately $10 million in government incentives in the form of partially forgivable loans pertaining to the Mercury consolidation. This amount was received in the first quarter. These incentives are recorded as debt on our balance sheet and accrue interest at low single-digit rates.

We anticipate receiving about $15 million of additional incentives in the remaining two quarters of 2010, approximately $10 million of which will be classified as debt. So, excluding the Mercury incentives, net cash used for other financing activities in the first half was $37 million, primarily reflecting payments to retire debt.

When you factor in all of these items our cash balance increased by $93 million from year-end 2009 with a balance of $620 million at the end of the second quarter. This is almost $160 million higher than the second quarter of 2009, and supplementing our cash balance is a net available borrowing capacity our two [ADL] facilities of approximately $132 million, which when combined with our cash puts us with total available liquidity of $752 million which is $137 million higher than at year-end, and over $200 million greater than the second quarter of 2009.

Finally, I would like to supplement Dusty's remarks with an update on some key metrics we've been sharing with you regarding the health of our dealer network. For the second quarter boats tendered to us for repurchase totaled approximately $100,000 and the actual cost to us in carrying out this repurchase obligation was less than $20,000. As you can see, we've made remarkable progress in this area.

We continue to believe the strategic actions taken over the past several quarters have maintained and actually improved the relative health and quality of our dealer network, which remains a key differentiator for us in this Marine market. And now I will turn the call back to Dusty for some concluding remarks.

Thanks Peter. I would like to conclude the call today by updating you on some of our business assumptions for the remainder of 2010 and beyond.

We entered the year with a plan that reflected a challenging global economy, including a Marine market that was continuing to decline. With a little over half of the calendar year and a good portion of the prime selling season behind us, our planning assumption and overall US retail Marine market demand in 2010 [would be] down about 10%, has proven to be slightly optimistic as the market through the second quarter is down about 13%.

However, as we described earlier, the variability in retail market demand trends by product is significant. As we look at the remainder of 2010 we're planning for this variability to continue and for the market to experienced declines similar to those experienced in the first half of the year.

Our plan continues to reflect full year wholesale boat shipment growth in the 50% to 60% range, with the most likely outcome being the lower end of that range given the slightly greater level of retail decline.

We refer you again to our pipeline chart that depicts two illustrations, one with retail down 10% and the other down 20% which we can now refer to as a downside scenario. This illustrative analysis should allow you to better understand the potential effect of what changing retail demand may be on our wholesale shipments and in the pipeline levels.

Discounts used to facilitate retail boat sales should continue to decline in subsequent quarters when compared to the prior year.

The Marine Engine and Fitness segments have thus far exceeded our initial expectations, as international revenue growth in both of these businesses has been greater than anticipated. However, our current plan reflects only modest growth in our Engine segment in the third and fourth quarters and therefore we anticipate that our second half consolidated revenue growth rate will be less than what we achieved in the first half.

Successfully executing against our strategic objectives in the first half has allowed us to achieve our objectives of generating positive cash flow and to demonstrate outstanding operating leverage. Peter has elaborated on our cash flow products for the year.

Regarding our incremental operating leverage, which was very strong in the first half, we continue to target incremental leverage excluding benefits from lower discounts, pension and bad debt expense on a consolidated basis in the 35% to 40% range for the duration of the year.

Although we reported a slight profit in the first six months of 2010, we anticipate that we will report a net loss for the full-year due to seasonal factors affecting the second half, especially the fourth quarter. For the remainder of the year we will continue to closely manage our overall cost structure. In addition we plan to keep our production and [OSO] levels closely matched with retail demand, which will ensure the continuing health of our dealer pipeline.

As we began to look forward [especially to] the state of the global economy and the health of the Marine markets, we're maintaining our objective to be profitable beginning in 2011. We continued to reduce our pretax earnings breakeven point and our objective is to be breakeven in US retail market down to 135,000 units.

Our ability to reduce our breakeven point is primarily a result of numerous actions we've taken to significantly reduce our cost structure and enhance our overall future earnings profile. For example, including the announcements made this month; by the end of 2010 we'll have reduced our boat manufacturing footprint from 28 facilities at the end of 2007 down to 11. These actions have translated into our ability to demonstrate outstanding operating leverage thus far in 2010 and should enable us to achieve or exceed our previously stated profitability targets in future years at various higher levels of end market (inaudible) demand.

And with that, we would be pleased to take your questions today.

(Operator Instructions) Ed Aaron, RBC Capital Markets.

Thanks. Good morning everybody and nice to see you back to profitability.

Nice to be here, Ed.

So my first question, when I look at the quarter obviously there's a big seasonal lift in sales. But if I kind of annualize the sales and earnings for the quarter, it shakes out to something north of $4 billion on an EPS basis obviously without -- excluding the restructuring and assuming no taxes of about $1.70.

Dusty isn't that $4 billion number kind of consistent with a retail market that is in the roughly 170,000 unit range? And then if that is the case, is that earnings rate kind of indicative of what you would expect to earn based on your current cost structure if the retail market ultimately returned to that level?

You're saying $4 billion -- how much?

I'm just saying so -- a little over -- call it $4 billion and if you annualize the current, ex items, earning rate from the quarter it is about $1.70 a share.

That is starting to be in the range.

Thanks. On the mix side, I'm a little bit nervous about the discussion around the unit percent changes just given the mix shift toward aluminum versus fiberglass and how that would translate into dollar sales performance as opposed to unit production increases.

If we assume that the market is going to be down, call it mid-teens in unit terms, when you factor in the negative mix shift would it -- and if I'm thinking about your boat segment on a gross dollar growth basis, would it be fair to assume the gross sales growth would be a little bit more consistent with the minus 20? Or let me say that in a different way; that the 30% to 40% increase that you talk about in a minus 20 scenario?

I have to apologize to you. I have just gotten lost in the question. Can you try me one more time?

Sure. So in your minus 20 retail scenario, you have production or shipment growth up 30 to 40%. And if I'm thinking about your Boat Group on a gross dollar sales growth basis, before accounting for the gross to net promotion adjustments, do you think that gross dollar sales growth if -- would be in the 30% to 40% range given the negative mix shift, assuming that the market comes in more like down mid-teens from a retail standpoint?

I see what you're saying. The one thing you have to take into account here are fewer discounts. So, I think if it were down in mid-teens, the dollar will not be equal to what we were when -- if you are thinking it would be in the down 20 scenario. It will be something closer to, say, in between the two. It will fairly well match, as we see it right now, the unit increase.

I'm trying to do some quick math in my head, so I'm answering very slowly here. But it will not equate -- revenue side will not look like we are down 20. Nor will it look like only down 10. It will be something in between those two. I know that is a broad range. But it's really hard to continue to depict mix here as we look forward.

I understand. Sorry for the confusing question.

It's okay. I got it. I just wasn't listening.

Just one more if I could, and I think I might have asked this last quarter but we're through a few important months between then and now. When you think about the big fiberglass boats, that's where there's still a lot of weakness. It seems like some of that is a function of migration of demand from new to used.

I'm just curious to get an update on where you think you stand with the absorption of recent model year used inventory that has been sold for pretty low prices out there over the last 12 months or so.

A great question; let's see if we can step back and talk about this a bit. And you and some of the other folks on the phone are talking and even writing about this.

If we look over a 10-year span, the real boat sales market -- and these are going to be very broad numbers -- which is the combination of new and used boats that change hands, so those are buyers out there buying one or the other, have not declined in the 55% range that we've seen new boat sales decline. It's more like 20%. And that is because the ratio of new to used has changed, especially here in the last couple of years. And it has gone from more like 75%/25% to something more like 85%/15%, especially in the last couple of years.

If you begin to put math to that, then, and this is an important point to think about in the new market, if the ratio begins to come back in line with 75%/25% rather than 85%/15% , we add say 8,000 new units for each one point decline in that ratio -- or said differently, one point increase in the new sales ratio. Therefore, taking a look at what the used boat inventory is like and what we think is going to happen in the used boat inventory going forward, the really important question not only for us but the industry, it's clear that our dealer network and frankly dealers throughout the industry have done a magnificent job handling brokerage and used boats. They've done quite well.

It has been an important factor in the health of the industry and the overall dealer network. So with all of that set up, what we're hearing -- I'll just tell you we don't have hard data but we're after it -- is that the quality used boats that consumers have been looking for are on the decline. That -- even advertising for used boats doesn't always turn them up the way many dealers would like.

The price of them has begun to increase and that begins to speak to the overall supply and demand situation. The margin dealers have been able to make on them has begun to decrease.

So, as we sit back and look at it, this could be a really important factor for the industry in the coming months and perhaps even years. And you are onto something with the question as well as others who have written about it, and that's something we're all going to have to watch and begin to develop some more data around. Is that

It is. Thank you.

Carla Casella, JPMorgan.

This is Felicia in here for Carla. What are your targets for debt reduction and what do you intend to do with your large cash balance?

This is Peter. As we have said in the past, our use of cash, particularly in the next shorter-term period, the next couple of quarters we'll be focused on debt reduction. We don't have specific targets. We are dealing with it opportunistically.

You see the reductions we've done in the first half of the year which in total amount to about $37 million. And we will continue to look at opportunities to reduce debt at good prices throughout the remainder of this year.

How much cash do you think you need to keep on the books for operations?

We have typically said conservatively $0.5 billion. In these uncertain times, we may be temporarily somewhat more conservative than that. But those are the basic metrics.

Thank you.

James Hardiman, Longbow Research.

Thanks for taking my call. Let me ask the mix question in a slightly different way. Looking at your two different assumptions for wholesale shipments, 50 to 60 or 30 to 40, either way, does that equate to a comparable increase in boat segment dollar growth? In other words, what is the effect on pricing that you have sort of built-in to your assumptions? And has that -- have those assumptions changed given the skew of mix towards the lower end boats?

Well first, average selling price has declined somewhat this year and that is because consumers are going to less-expensive boats in any segment. So, it's not only that our aluminum is up, but even [after] we look in fiberglass segments, consumers tend to be going to the less expensive boat in any particular segment.

But with that, we anticipate boat revenues will be more than the wholesale unit growth on a percentage basis at any point on the chart.

Okay, that's helpful.

And the reason is because of the discounts, the lack of discounts.

Right, okay, and then I just wanted to get a little bit of color, Dusty, on your last comment in the prepared remarks. I think I heard you say that you're breakeven which previously was, I think, somewhere north of 150,000 units for the industry is now closer to 130,000 units. So it sounds like you guys have exceeded -- well, you clearly exceeded I think most Street expectations. But it sounds like you exceeded your own internal expectations from a cost perspective.

Can you give us a little bit more color around that? Can you maybe quantify fixed versus variable costs and how those have changed and/or sort of what, on the margin line, has improved versus your prior assumptions that allows you to say that?

First I want to be careful with the number. In my prepared remarks I had said 135,000.

Okay.

And frankly that is 'ranging' it. The most straight-up answer I can give you as we move from 115,000 to 135,000 is we just continue to do a lot of hard work looking at cost, number one. Number two, we continue to be more productive in all of our facilities than even our best planning said that we could be.

And we've added to the plant consolidation list. We continue to take plants off-line and/or exit brands that were not good contributors from an earnings perspective. When you add all of that up, we continue to pull it down to the point that we believe in a market down to 135,000 units we could be breakeven or better.

That's helpful. I guess my question is, is that improvement going to be comparable as we ratchet up our industry assumptions? In other words --

Is it going to get better at the levels we have been talking about?

Exactly. Is it -- were you trading fixed for variable, in which case you're breakeven would go down but your leverage would also go down? So you won't realize as much of a benefit as you go up? Or is it really that you took cost entirely out of the system here and we should see comparable increases as we work our way up?

We had always been talking with numbers 150,000, 170,000, 200,000 and giving some targets around those. With this new breakeven point, those unit levels industry unit levels should decline somewhat in order to stay at the -- and have us stay at the same targets.

Okay. So when you talk about -- I forget what the number was that you would need to get to to have sort of record earnings, I think, is one of the industry targets you said. I want to say it was maybe in the 100 and --

It was actually 200,000. We said at 200,000, our margin dollars would be equal to or better that we had obtained when the industry was at 300,000.

Is that lower or is that about the same?

Probably a little lower.

Tim Conder, Wells Fargo Securities.

Thank you. I just wanted to continue on that last question. I think in the last conference call you guys had thrown out around a 170,000 number if I recall correctly, and again maybe there's a nuance here, as in a clarification is what I'm asking for. Are you saying that your dollars corporatewide or dollars in Marine would be equivalent at that 170,000 or whatever the number is industry level to where it was at 300,000? Is it Marine margins, Marine dollars, or corporate margins, corporate dollars? And I guess just clarification on the unit level.

Of course. What we said, Brunswick operating margin dollars, margin percentage at 170,000 would equal what we were obtaining when we were at 300,000 (multiple speakers). [Margin] dollars were 200,000 compared to 300,000.

Okay that's where the confusion is. On a corporatewide basis.

If I misspoke earlier, I want to make sure. The first number is margin percentage. The second number is margin dollars.

And again on a corporatewide, not just a Marine basis.

That's correct. It's a Brunswick number.

Thank you for that clarification.

I probably caused the confusion.

No, no. Thank you very much. Any color that you gentlemen can give on July retail? The question was asked on MarineMax's color and just wanted to hear your opinion on it. And then also --

What did they say?

They said that July was a little bit better than June, which historically is not the case, but that is what they were seeing.

Our view is that nationwide throughout the entire dealer network July trends look like what we've been seeing all year.

And hence then your guidance for down 13 first half of the year, similar for the back half of the year?

Correct. Yes.

Okay. A couple of other items here. The discounts I believe you gentlemen have talked about before were probably the most severe a year ago in the second quarter.

Can you kind of give us what the how that is looking in the back half of the year or what that actual number was on both the discounting? I think you had thrown out some bad debt number earlier for engines, but maybe a little bit more color on discounts, what they were in the second quarter on both and in the back half of the year comparable?

Let me help you a little bit -- or see if I can help a little bit. Bad debt was in the quarter less $16 million on a -- I'm getting a look that says I'm getting ready to give you a bad number. Hold on a second. Let me find -- the retail discounts were worth $38 million, and bad debt was $20 million.

For boats.

In the quarter.

For boats or Marine overall?

The $38 million is boats. The $20 million is Brunswick.

Okay.

Which was primarily Engine.

Okay. Great, that helps.

Then Peter, on pension expense you gave some color on the cash side of it in the quarter. What is that for the full-year? Do you anticipate that being lower as far as cash? Maybe another way to ask it, what do you anticipate for full-year from a cash perspective on pension and then the difference year-over-year?

It would be about $25 million in cash for this full-year 2010, which is a little bit more than about the $22 million in 2009.

Great. Lastly gentlemen, from a purchase standpoint is there anything afoot within the industry? Or do you see any trends changing to whereby there may be a development, or are people looking to develop more of a sort of timeshare type of situation, especially as you move into larger boats? Are you seeing anything from that perspective?

We know of a lot of people who are working on it. In terms of it being an industry trend, no.

Okay. I did have two other questions on the Triton and Trophy. If I read the press release on Triton correctly, it appears you do have some type of engine supply agreement. Any color on the length of that? And then in your evaluation of Trophy, if that were to be sold would that be a condition of the sale?

I probably ought not to disclose our engine supply agreement; probably ought to ask Platinum if they want to disclose. In terms of Trophy, Trophy is a brand that has always carried Mercury products and my belief is that going forward that would continue to be the case.

Thank you, sir, appreciate it.

Ed Aaron, RBC Capital Markets.

Thanks, just had a follow-up on the outlook for pension. Peter when you look out to 2011, do you think that number might go back up? We've seen some off-calendar-year companies talk about higher pension just because of changes in the discount rate assumption and I'm wondering if that might have an impact with you as well.

Yes. It will definitely go up in 2011. Now, are you talking about the cash contribution or the P&L expense?

P&L.

The P&L will definitely go up. The numbers I gave previously were contributions. The pension expense full-year, this year 2010, will be about $40 million, and it will probably go up $4 million, $5 million or maybe even at the most top level $10 million next year in 2011.

On the bad debt for the back half, how much of an improvement are you forecasting year-over-year just in the back half?

For the year as a whole, we are forecasting very minimal bad debt expense and so there will be very minimal -- our estimate is very minimal bad debt expense in the second half of the year.

I apologize; I don't recall that number for the second half of last year, but if I'm just thinking about what that translates into year-over-year improvement do you happen to have offhand?

Well the year-over-year improvement, if our forward looks come to be, would be in the $40 million range.

Joe Hovorka, Raymond James.

Question on your weeks' inventory at the end of the second quarter. I know seasonally you always have a decline from the first quarter and this year it was -- I guess it was two weeks, [29 to 27]. Historically it's been a lot higher than that -- five, six, seven, and eight weeks' decline from 1Q to 2Q. And I know we're at low absolute level of boat, so maybe this is skewing it a little bit. But is there -- how are you viewing that? Is that less of a decline than you would have liked to have seen? Is it about where it is?

It's exactly where we would like it to be. Here's where we're beginning to hit a point now where we need to think about minimum display or minimum stocking levels for our dealer network. And we've talked about this in the past, Joe.

One of the things we have been doing is working with the dealer network to understand how many boats they need in order to conduct an effective business. And then the [entire] obligation is we make this a real [pool] system to get boats to the dealer network as they need them to either replenish those minimum stocking levels or to provide boats that are not stocked under those arrangements.

So, we're -- our year-end level that is on the chart of around 15,000 -- in between 13,000 to 15,000 units is going to start to be in my judgment a pretty standard level of pipeline boats in order to keep the dealer network appropriately lubricated so they can work well.

So you would not expect to be -- I guess maybe as retail sales actually start to improve is when we would start to see that number decline back to that (multiple speakers) 20 weeks we used to see in 2001 through 2005.

Exactly. This is all now becoming a bit of calculation issue retail versus the pipeline. And frankly at the end of the year, if retail continues to be down and we hold the pipeline in this range, the weeks on hand will actually go up.

Right. And is that -- I guess you are okay with that at that point, right?

Yes, because if the dealers don't have enough to be in business we're not in business. But you picked up on something that is going to be a factor as we move forward.

Okay, that's it. Thanks guys.

Richard Wenning, Broadview Advisors.

Dusty, you and Peter have done and Herculean job of rescaling, retooling the Marine Division to be nicely profitable in a much smaller overall retail boat market. We have talked in a couple of different terms. You have talked about margin percentages and margin dollars in a market that was at a $200,000 industry level versus sort of past peak of -- I'm sorry; 200,000 units versus a past peak of say 300,000 unit.

And yet at the same time, you have taken your manufacturing footprint from 28 plants to 11 facilities. So, on the one hand you have a 60% reduction in plant capacity or facility capacity. And you're shooting at a market that, at potential new maturity, might be 30%, 33% smaller than past peak.

So I guess what I'm looking for is a little bit of interpolation between the two. And even in your smaller, new newer, retooled footprint what sort of unit volume do you think you could do? Could you have the capacity to service a 200,000 industry number?

Yes. First, thanks for your statements to begin. They're much appreciated. We think, in the footprint that we have, we can service a market 220,000, 225,000 units.

We kept a plant or two mothballed, not permanently closed in case we need them. Then the question becomes, well, why do we think we can do that? And we've talked about this in the past and the profoundness of this can never be underestimated.

Our plants used to be grand plants making multiple models. Our plants today are model plants making multiple brands. The efficiency that our folks in the boat business are achieving in this manufacturing model is actually outstanding. That's one of the reasons we think we have pulled our breakeven down some.

I can't congratulate our folks enough on their innovativeness in the plants and the way they are thinking about manufacturing capacity going forward.

The other thing that is a factor here, unless you use Triton as an example, (inaudible) an entire segment like our decision with Triton to exit the freshwater bass segment does not impact -- and that is a plant that is down. It speaks to overall capacity but it doesn't speak to capacity for the segments we made the decision to remain in. So, it's a combination of both of those, Richard, which leave us quite comfortable that we can service a market over 200,000.

Dan Mendoza, Prospect Capital Advisors.

Could you give the discount number for 2009 please?

What we said was that the discounts in 2009 were about 23%, 24% of boat sales and the goal for 2010 is for those to be in the 11% to 12% range. When the market is settled out, we'd like it to be something slightly under 10%.

Okay. So when you guys talk about ASPs being down across segments, are you doing that -- is that number kind of before the change in discount?

Yes. It's before discount.

Okay, that's helpful. Did you say shipments to dealers were up 75%?

In the second quarter, wholesale shipments, yes. They were up 75%.

Do you happen to have that number year to date?

I do. 60%.

I'm sorry, 50?

60%.

60%. So does that mean the second half will be -- for you to get kind of down to 50% will be whatever the number needs to be?

Yes. You can reverse the math.

Okay, got you. I guess just to follow up from -- in the MarineMax conference call there was some discussion of industry sources talking about there being additional dealer closures as we move into the winter. Is that something that you think might be applicable to your dealer base? Or do you think that is going to the mostly outside of you guys?

I think that is outside of us. We have talked about this before. Our dealer count has remained generally flat, but we clearly have had some dealers who either decided not to stay in the business, failed or we made a joint decision that they wouldn't continue to carry our brands. But in every case we've been fortunate enough to find another great dealer in the network in a market. So fundamentally we believe our network, while the numbers are the same, is actually stronger now than it was when we went into this.

That's helpful. I guess on my question kind of circling back to the earlier point. Why -- were you maybe anticipating a slightly stronger second quarter? I'm just trying to sort of get an understanding for why you wouldn't have maybe smoothed out the wholesale shipments a little bit more evenly across the year?

If you look at the timing of retail sales, the second quarter is a very high sales quarter. And in a model that says we're having the dealers pull boats, we need to wholesale a lot more in the second quarter in order to meet retail demand. Because the business is seasonal, you will see the -- on an absolute -- on a sequential basis the volume of wholesale just naturally decreases in the third and fourth quarters.

Okay, that makes sense. Thanks.

James Hardiman, Longbow Research.

Thanks for taken my follow-up. I figure with us a question to you guys that I keep getting and I haven't come up with a very good answer for. But obviously aluminum boats, lower end boats sound like they are leading the recovery. That is a little bit -- that is basically the opposite of what you would expect, right.

Lower end boats are driven by unemployment. Unemployment hasn't really improved much year over year. Higher end boats are driven by the stock market, among other things, which is much better than it was last year. Why do you think you're seeing the strength in the areas of the market that you are and not at the high-end boats?

This is our view of how the market goes down and comes back. The customer who buys aluminum products for the most part they are either -- most people who buy those type boats, more what I call work for a living, work for someone else, and in periods of instability especially as instability starts, they like most of us become concerned about their jobs and make the decision not to buy an aspirational product.

As economic unrest continues and economic dislocation continues, there comes a point in which that type of customer begins to become comfortable about his or her situation, and because on the fishing site they use their boat for what is a very strongly felt and emotional attached avocation, they're the people who come back first.

The people who buy fiberglass products, especially what I will say mid-20s on up, are -- either earn more money or they own their own businesses. And we have many, many of our boat owners from that set, from that size on up on the fiberglass side are small to large business owners. They get there on their own. They run their own business and their customers are the people who buy the aluminum boats.

So, that we see the aluminum boats go first going in and that is exactly what we saw here. Beginning back in 2005 we began to see aluminum go down. Then as the dislocation takes hold and the aluminum boat buyers' concerns are translated into their ability to do business with our bigger fiberglass buyer, the fiberglass buyers then begin suffer a bit.

And then it reverses itself as the aluminum buyer begins to feel good. Their business relationships with the fiberglass buyer improve and ultimately the fiberglass buyer comes back. All of that is going on here. But we cannot discount and we attempt to be very apolitical as we talk about things.

But we do need to understand there is real concern in the United States about the economy and what the government will do to small business owners, and to the people who buy our larger products to their tax rates and the overall impact of government activity on their lifestyle, etc. Until the economy settles out, employment returns and people understand where their government's role in their life is going to be, the larger buyer is going to continue to be an issue for us.

We have structured the Company with the anticipation that that would be occurring. And we will be happy when it ends, because we'll do very well, but there's not a lot we can do about it right now.

So, just so I understand correctly, the lower end customers going south first and then also recovering first is the also the historical pattern?

And I guess a quick follow-up, where -- is it just an easier comp with the aluminum boats? And where, versus historical level at a peak or during good times, are aluminum boat sales ahead of or closer to that point than the fiberglass or is it easier comps?

First, the first part of your question is -- this is the historical norm. First goes down, first to come back. Actually it's not that the comps are easier. The comps are actually a bit more difficult in aluminum because they've never declined for the rate that fiberglass has. But the aluminum market is not back to 2004 levels (inaudible).

Great, thanks guys.

There are no further questions. This concludes the question and answer portion of the call. I would now like to turn the call back over to Dusty McCoy for closing remarks.

Thank you. As always, we appreciate everybody joining us on the call, the quality of the questions and we do our best to answer as best we can what the questions are. We look forward to getting to talk in the third and fourth quarter about what the industry is doing and what we are doing to deal with the issues that are before us. But all in all we are quite happy with the way our Company's operating and the way our employees are both performing and thinking about their jobs in the industries in which we operate.

We look forward to talking to you next quarter. Thank you very much.

Ladies and gentlemen this concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.