賓士域 (BC) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Brunswick Corporation's 2010 third-quarter earnings conference call. All participants will be in listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at any 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 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 to consider, please refer to our recent SEC filings and today's press release. All these documents are available on our website at Brunswick.com.

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 third-quarter earnings release. Our strong results for the past three quarters continue to reflect the hard work of our employees, customers and suppliers, which has allowed us to take advantage of our historically-low and well-managed marine inventories, as well as the significant fixed cost reductions achieved during the past two plus years.

We reported a net loss in the quarter of $0.08 per share on a sales increase of 22%. The quarterly EPS includes $0.14 per share of restructuring charges. Our quarterly operating earnings, excluding restructuring, exit and impairment charges, were $37 million, an improvement of $118 million as compared to the loss experienced in the prior-year period.

Our operating margin, excluding -- or ex restructuring charges, was slightly less than 5% in the quarter, representing our highest third-quarter consolidated operating margin since 2006.

Significant increases in wholesale units in both our Marine Engine and Boat segments were the primary drivers of our 22% top-line 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 approximately $30 million of lower discounts required to facilitate retail boat sales and about $6 million of reduced bad debt provisions, primarily in the Engine segment.

Lower pension expense of approximately $17 million also had a favorable effect on the Marine Engine and Bowling & Billiards segments, as well as on corporate expense. A portion of the reduction in pension expense, lower bad debt expense and a reduction of variable compensation were the primary factors that reduced our third-quarter SG&A by 10%. Partially offsetting these positive factors were gains from favorable settlements reached during the prior-year third quarter.

Our cash increased by nearly $150 million from year-end and net debt decreased by $167 million. Peter will comment in his remarks on the key factors affecting our 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 free cash flow in 2010.

Although we are very encouraged by our year-to-date financial results, driven primarily by a return to a more normal balance between wholesale sales, retail sales and production, overall Marine demand continued to decrease during the first nine months and remained at historically low levels. And the gap between fiberglass and aluminum demand trends continues to be quite pronounced.

Let's review the preliminary third-quarter US Marine industry data. Fiberglass, stern-drive and inboard boat unit demand fell by 37%. This compares to declines of 31% in the second quarter of 2010 and 22% in the third quarter of 2009.

Outboard fiberglass boat retail unit demand fell 22% in the third quarter. This compares to declines of 15% in the second quarter of 2010 and 15% in the third quarter of 2009.

Aluminum product demand decreased by 2% in the quarter. This compares to an increase of 1% in the second quarter of 2010 and a 20% decline in the third quarter of 2009.

After taking into account the different unit volumes represented in each of these segments, preliminary total industry unit data -- demand declined approximately 17% in the third quarter. This compares to a 10% decline in the second quarter.

For the first nine months of 2010, total industry demand declined by 14%. That decline is greater than our full-year 2010 planning assumption of down 10%. Aluminum boats, which generally have an average selling price below that of fiberglass boats, have begun to show signs of stability. This development could be a leading indicator of future demand for the overall boat market.

The higher-priced fiberglass boats, however, have yet to experience any significant improvement. It appears that the consumer remains very reluctant to spend in the large fiberglass categories.

Our Engine segment sales outside the US increased by 5% for the quarter compared to the third quarter of 2009. And our boat sales outside the US increased by 39% during the same period. Many marine engine markets outside the US are commercial and government segments, and have not experienced the overall level of decline that we have seen in the US.

Additionally, we scaled back third-quarter shipments to international engine dealers to help them sell through the season's inventory and prepare for the 2011 season.

We are pleased with our growth in marine markets outside the US, as demand in the Asia-Pacific and South American regions continues to improve, with demand in China and Brazil particularly healthy. Demand in Europe varies by region. For example, demand in the Nordic countries has improved as the 2010 season has progressed, and we believe demand in this region is poised for further improvement in 2011.

Southern Europe and those countries most affected by the debt crisis remained under stress, while demand in Central Europe remained stable. Demand in Russia has improved dramatically from 2009, but demand across the remaining CIS region is still weak.

The US retail boat finance market continues to show signs of improvement. The loan portfolios of marine lenders continue to show year-over-year improvements. Underwriting standards continue to loosen modestly, but lenders are still requiring down payments that are more stringent than pre-recession periods. Although the book buyer appears to be more accepting of these current market standards, it still remains unclear how this factor is influencing new boat sales, especially for customers trading up in the larger fiberglass categories.

We also saw some positive signs in the third quarter in terms of lending capacity, with certain lenders re-entering the marine lending space or expanding their geographic reach into new areas. Interest rates are at historic lows, particularly for the high-quality customer.

Let's turn to our dealer pipeline, an area we have been carefully managing. Compared to the last year, our third-quarter ending pipeline reflected approximately 700 fewer units, or a 5% reduction. Because this reduction is less than the decrease in the retail market, the quarter ended with 25 weeks of product in the pipeline on a trailing 12 months retail sales basis, compared to 22 weeks at the end of the third quarter of 2009.

We've increased weeks of product on hand in order to meet our dealers' required stocking levels. To maintain appropriate levels, we increased our third-quarter boat production by about 90% versus the very low 2009 production levels, and increased shipments of boats to our dealers by about 57% versus last year.

For the first nine months, we almost doubled our boat production compared to 2009, and increased shipments of boats to our dealers by nearly 60% versus last year.

Throughout the industry, the level of aged product is being reduced and is now starting to reflect more normal levels. The market throughout 2010 has continued to be influenced by retail discounting. However, we believe that the rebalancing is almost complete, which should improve the market environment going forward.

As a result of our focus to reduce aged product in 2009 at Brunswick dealers, our level of discounts required to facilitate retail boat sales in 2010 has been and should continue to be at much lower levels than we incurred in 2009. The combined effect of the increased wholesale unit levels and lower discounts in the third quarter led to a boat segment sales increase of 77%.

Our dealers continue to make excellent progress in improving the health of their floorplan financing metrics. Total domestic floorplan loans outstanding declined 29% as compared to year-end 2009 levels. Also, outstanding floorplan loans on domestic inventory aged greater than 12 months were reduced by 66% as compared to year-end 2009.

The improvement in dealer health is also evidenced by an 85% decline in year-to-date domestic boat dealer repurchases compared to the same period in 2009.

The mix of aged versus new product in the third quarter continued to move in a favorable direction, and, as we expected, has returned to more normal levels.

In our Engine business, global production in the quarter was more than 30 -- I'm sorry -- was more than 40% higher than year-ago levels, with the growth in stern-drive engines occurring at a higher level than outboard units. Mercury's main operations all experienced strong increases in sales.

A review of the mix of businesses within Mercury should give you a more detailed view of what drove the Marine Engine segment's 18% growth in third-quarter revenues.

Our domestic parts and accessories businesses, which in the quarter represented about 32% of the segment's revenues, were up approximately 9%. The growth experienced in this business continues to demonstrate the strength of overall boating participation.

International market sales, which currently represent about 38% of the segment's revenues, increased by 5%. When you combine these two sub-segments, which account for more than two thirds of the overall Engine segment, revenues increased by about 7%. Our US engine operations accounted for the remaining revenue increase.

Mercury's strong top-line growth, which is weighted more heavily toward the stern-drive engine business, combined with lower restructuring and pension expense, fixed cost reductions, lower bad debt expense and improved operating efficiencies, helped drive even stronger growth in operating earnings. Partially offsetting these positive factors were gains from favorable settlements reached during the prior-year third quarter.

The entire Mercury organization has done an outstanding job of growing earnings in this difficult marine environment. They have accomplished this while at the same time introducing new products in the marketplace and continuing to implement the consolidation of their domestic engine facilities.

Now let's turn our attention to our two recreational businesses. Also performing exceptionally well is our Life Fitness segment. Sales were up 9% as compared to last year's third quarter. International sales were once again the primary contributor to the strong quarterly growth, as we experienced year-over-year growth in revenues of 10% throughout our non-US customer base.

Segment operating earnings grew by about $4.5 million, or 36%. In addition to benefits from increased unit volumes, lower material costs and increased fixed cost absorption contributed to the higher level of profits.

Sales in Bowling & Billiards declined 4% in the quarter, as both domestic and international bowling center operators remain cautious about making investments, either to build new or upgrade existing centers. Same-store retail bowling revenues were down in low single digits. The segment's operating earnings were at breakeven levels for the quarter, an improvement of approximately $4 million compared to last year.

Now I will turn the call over to Peter for a closer look at our financials, and then I will come back to give you an update on our perspective on how we are planning for the next few quarters.

Thanks very much, Dusty. I'd like to begin with an overview of certain items included in our third-quarter P&L, and will also comment on certain forward-looking data points.

Let me start with restructuring, exit and impairment charges, which were the $12.2 million, or $0.14 a share, in the quarter. This amount primarily reflects our charges at our green operations, including actions relating to the consolidation of our production of our Cabo Yacht brand into our existing Hatteras manufacturing facility, and the plant consolidation actions at Mercury. These actions demonstrate our ongoing efforts to further reduce fixed costs and manufacturing footprint.

Our estimate of restructuring charges for the fourth quarter is in the range of $16 million to $18 million. Since the restructuring activities at Hatteras and Mercury will continue beyond the 2010 calendar year, we will continue to incur charges in 2011, with our current annual estimate of $10 million.

Interest expense was $23 million in the quarter, a decrease of $1 million versus the same period in 2009. Also during the third quarter of 2010, we recorded a $1.1 million loss incurred on the retirement of approximately $7 million of 11 3/4% 2013 notes, which were retired at a premium versus their book value.

As we look forward, absent any additional retirement of debt, we expect interest expense to be approximately $22 million per quarter.

During the quarter, foreign currency had a very modest unfavorable effect on operating earnings as compared to the prior year, which reflected a mix of favorable and unfavorable exchange rate movements. This includes the impact of hedging activity, which helps to moderate the impact 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 third quarter, we recorded a tax provision of $5.3 million, which primarily relates to earnings from our foreign operations. In the fourth quarter, we estimate our provision to once again be in the range of $3 million to $5 million.

As you may recall from previous earnings call and our SEC filings, due to the Company's three years of cumulative book losses in various taxing jurisdictions, GAAP requires that the realization of the related deferred tax assets be considered uncertain. Consequently, we continue to adjust our deferred tax valuation allowance, resulting in effectively no recorded federal tax benefit or provision associated with our losses for income.

Given the significant losses incurred in 2008 and 2009, the Company will still effectively be recording no federal tax benefit or provision in 2011. And therefore, our 2011 tax expense will continue to be comprised primarily of foreign and state income taxes. Because we anticipate modestly increased earnings from our foreign operations next year, the overall 2011 tax provision should be somewhat higher than in 2010.

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 $55 million in the third quarter, and when added to the first-half amount of $138 million, totaled $193 million for the nine-month period. As a reminder, the first quarter did benefit from $109 million federal tax refund.

Some of the other key areas in this section of the cash flow statement include adjustments to earnings for non-cash charges, such as depreciation and amortization, which was $99 million in the nine-month period.

Our current estimate for D&A in 2010 is still approximately $130 million.

Pension expense, resulting from our defined benefit plans, totaled approximately $10 million in the third quarter compared to $27 million in the prior year. For the nine months of 2010, pension expense was $29 million. Our pension expense is expected to total approximately $40 million in 2010 versus $96 million in 2009. This decline primarily stems from the decisions in 2008 and 2009 to freeze benefits in the Company's two largest plans.

In the third quarter, the Company made cash contributions to its defined benefit pension plans of approximately $8 million, breaking the year-to-date total to $17 million. Our cash contributions associated with the defined benefit plans for the full year are expected to be between $35 million and $40 million. The increase in total contributions above our previous estimate is due to our decision to meet all of our funding requirements for 2010 this year versus deferring a portion to 2011.

We ended 2009 with an underfunded position of $462 million. At current discount rates and returns on planned assets continued through year-end, this underfunding will be higher at year-end, which is when the Company is required to record adjustments relating to the re-measurement of its pension liabilities and changes in plan assets. In addition to its potential impact on the balance sheet, this increase in the underfunded position could also increase our 2011 expense by about $10 million, based on our estimates as of September 30.

Working capital was a use of cash in the first nine months and totaled approximately $71 million. Accounts and notes receivable increased by $36 million. Net inventories increased by $40 million, primarily in the Marine Engine segment, and accrued expenses declined by $14 million. Partially offsetting these negative factors were increases in Accounts Payable, along with decreases in prepaid expenses totaling $19 million.

With lower sales and marine production anticipated in the fourth quarter, we expect reverse working capital cash outflow experience in the first nine months, and our goal is to end the year with working capital changes at approximately breakeven levels.

Capital expenditures in the first nine months were $31 million. Our full-year plan is unchanged at $50 million to $60 million.

So in summary, during the first nine months, we generated about $176 million in free cash flow. This amount does not include the approximately $9 million in net investments contributed to our existing marine joint ventures during the second quarter.

We do expect a free cash outflow in the fourth quarter as a result of anticipated net losses, higher capital expenditures and increased pension contributions.

Now, in addition to our free cash flow, in the first nine months we received approximately $30 million in government incentives, in the form of partially forgivable loans pertaining to the Mercury plant consolidation; $10 million in the first quarter and $20 million in the third quarter. We've now received the full amount of funds to be distributed under this partially forgivable loan program. These incentives are recorded as debt on our balance sheet, and accrue interest at low single-digit rates.

Excluding the receipt of Mercury incentives, net cash used for other financing activities in the first nine months was $47 million, primarily reflecting the retirement of debt, including payments of premium on early extinguishment of a portion of our 2013 notes.

So when you factor in all of these items, our cash position increased by approximately $150 million from year-end 2009, with a balance of $677 million at the end of the third quarter. This is about $52 million higher than the third quarter of 2009.

Supplementing our cash balance is a net available borrowing capacity from our two ABL facilities of approximately $103 million, which, when combined with our cash, provides us with total available liquidity of $780 million. And this is $165 million higher than at the end of last year.

I will now turn the call back to Dusty for some concluding comments.

Thanks, Peter. I will conclude the call today by updating you on some of our business assumptions for the remainder of 2010 and some view beyond 2010.

There is limited visibility regarding retail demand for our Marine segment as we enter the off-season and transition to the new model year. We note several factors relating to the US new boat retail demand. The apparent stability of the aluminum boat market, specifically the pontoon segment. The continuing solid growth in our P&A business. The strong market for pre-owned boats. The early-stage tightening of the supply of used boats. And the growing confidence the economy is not heading into a double dip.

The timing and shape of any rebound in marine segment retail demand will be strongly influenced by the strength of changes in the real GDP in the US and elsewhere, consumer confidence and unemployment statistics. Therefore, as we've continually demonstrated, we will continue to manage our pipeline, costs and overall liquidity in a very consistent, disciplined and prudent manner.

Let me share with you some of our areas of focus that have been and will continue to be front and center for our organization, areas that you've heard us discuss countless times.

It is imperative that we continue to take actions that ensure the health of our dealer network. 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 are now targeting end-of-year levels to be closer to 15,000 units.

This assessment is inherently a dynamic process, and we continue to refine this number as we gain greater insight into the appropriate minimum stocking requirements for our dealers. In certain cases, we've increased inventory levels, especially in the smaller boat categories, while other categories have been reduced. We currently believe that the net result of these actions will be a reduction in our boat segment sales growth in the fourth quarter versus the 2009 fourth quarter.

We now estimate the fourth quarter 2010 growth rate will be in the high teen to low 20% range.

During the fourth quarter, in order to more closely match production and wholesale shipments with our dealers' retail demand and minimum stocking levels, we have responded with production actions that were announced to our operations in late September.

In summary, we are going to take in the range of four to six weeks of additional downtime in some of our fiberglass plants beyond our normal holiday shutdown. Because of the reduced fixed cost absorption resulting from these production cuts, the boat segment's operating leverage will be less than experienced in the previous three quarters.

We have not made any changes to our aluminum boat or our Marine Engine production schedules, and in both of these businesses, plant consolidations continue to improve productivity and remove fixed costs. These actions should enable us to achieve our targeted pipeline inventory levels, with 2010 year-end results compared to 2009 year-end units.

However, as a result of the declining retail demand, primarily in our fiberglass segment, weeks on hand, which is based on trailing 12-month retail sales, will increase to levels higher than those experienced at the end of 2009.

We believe our distribution system is by far the strongest in the industry. As such, in addition to prudent management of production and pipeline inventory levels, we continue to work closely with dealers to make sure they have products that excite boaters and meet their diverse purchase requirements. Further, we also need to continue to assist our dealers with the tools and services that allow them to more effectively operate and grow their business.

We also must continue to focus on our cost structure and operating efficiencies, while concurrently generating positive cash flow. Our businesses have thus far been extremely successful in executing against our strategic objectives, which has allowed us throughout this period to demonstrate outstanding operating leverage.

Although we reported a profit for the first nine months of 2010, absent special items, we still anticipate we will report a net loss for the full year, ex items, due to seasonal factors affecting the fourth quarter, as well as the unfavorable fixed cost absorption resulting from the fourth quarter's reduced production schedule.

As we begin to look forward, subject to the state of the global economy and to health in marine markets, we are maintaining our objective to be profitable beginning in 2011.

With that, Jennifer, I would ask you to open up the call for questions, please.

(Operator Instructions) Ed Aaron, RBC Capital Markets.

Thank you. Good morning, everybody. Dusty, could you maybe just start by giving us some updated thoughts on the pricing environment? There seems to be certainly quite a bit of firming of used boat pricing, but it hasn't yet translated into better new boat demand. As you think out to next year, how do you think about that relationship in terms of your ability to sell boats at what you might consider normal pricing?

Sure. Well, first, it's clear that used boat pricing -- well, first, the cost of used boats for folks buying them in order to sell them is increasing fairly significantly, based upon our conversation with the dealer network who is out doing that. And therefore, the price of those boats to the consumer is, of course, increasing.

And we understand from dealers they are beginning to feel a little margin declination in their sale of used boats.

The new boat market overall has been experiencing some discounting, Ed, as we've had other manufacturers, other than ourselves, who have had a little more inventory to get rid of. If I could give you a percentage on the spread, I would. But my sense is it is closing and perhaps closing quickly.

I think many of us are planning in 2011 to keep price increases to a minimum. And I suspect with the increasing cost of used boats, therefore, the sales price of used boats and that all of us working hard to control price increases in 2011 are going to begin to see that gap narrow.

But I think bottom line, Ed, none of us in the industry know the true elasticity breakpoint here. So we are all just going to have to continue to work to do the best we can. And as I said, I think the new boat market is going to be driven more by change in GDP, unemployment and consumer confidence than any other factors.

Do you have a sense directionally of where the -- the price spread between new and used currently stands versus historical norms?

You know, I don't, Ed. I'm sorry, I don't. I can give you my thoughts, but I don't have any statistical evidence around it.

I think they were wider than normal late 2008/2009, early 2010. My sense -- and that's even with all the discounting that was going on at retail. And the reason I think that, Ed, is as we've looked at the used boats that were being traded, boats older than 10 years being traded have actually gone up, while boats less than 10 years of age have gone down.

So we -- even though there was discounting in newer boats, we saw the boats actually getting bought and sold being more of the older product. And that is all reflective of a price-sensitive consumer.

I think now, as the supply of those boats begins to tighten, we will begin to see it come back into more normal range. That is my thinking, not supported by great statistical evidence.

Fair enough. And then one follow-up, and then I'll pass it on. I'm just trying to get a better handle on what your quarterly SG&A rate is going to look like in dollars going forward. It was quite a little bit lower than we had it this quarter. I think a portion of that was variable comp, but I don't know quite the extent of that, so just in terms of (multiple speakers).

We're happy to give it to you. It is $14 million.

$14 million lower year-over-year?

Yes.

Okay, thank you.

You're welcome.

Tim Conder, Wells Fargo.

James Hardiman, Longbow Research.

Good morning. Thanks for taking my call, and I think we all certainly appreciate all the color you give us around an industry that is really difficult to characterize.

Along those lines, can you talk a little bit -- you've been giving sort of a breakeven point for 2011. Is it safe to say that you are still in that? I believe what you had talked about last time, 135,000 boat range.

And then beyond that, when I start to think about mix and the fact that the aluminum boats are the ones that have bounced back, the fiberglass boats have not done as well, and the fact that you guys are overexposed to the fiberglass boats, do I need to get beyond just sort of the overall industry number? Do I need to start thinking about things in terms of which portions of the boat market have done what next year, to actually have any idea what you guys are going to do from a profitability standpoint?

Well, first, we are not moving off our prior guidance that we can be profitable at 135,000 units. And when we've made that call, James, we've done the best we can to factor in change in mix. So I think as you look at 2011, we will not move off that guidance, with even the big spread we are seeing between the decline in fiberglass and the decline in aluminum. We will be comfortable with that guidance going into 2011.

So does that assume to a certain degree that the gap between the fiberglass and aluminum does narrow as we get into 2011?

Don't know. We've not made any assumptions. We are not calling the market at all right now.

But -- when I say we make no assumption, obviously, when we say 135,000 units we can be profitable, we've assumed that when we say that there remains a significant gap. But we are not calling what we think is going to happen yet in 2011.

Okay. Fair enough. And then I think you may have touched on this a bit, but I was hoping you could summarize or codify one more time why the weeks on hand at retail are going up. Obviously, you worked a long time to get those numbers to finally go down.

But it seems like they've gone up this quarter and you expect them to be up at the end of the year. I guess what is the right number for that? What is the number that you feel comfortable and that you would like to get to?

First, let's explain why the weeks on hand are going up. First, we have to start with the absolute number of boats. They continue to be down. And third quarter this year versus third quarter last year, they are down -- the absolute number's down 5%.

And we've been working very hard, James, and you've followed us a long time, and this has been a dream of ours for a long time, that we have a pure pull system from the dealer network out of our plants. So now, what we've been aiming to do is get to a point where production and wholesale are very closely aligned with retail.

Now we've gotten the total number of boats so low, we've begun for the past year to talk about one other concept, and that is the minimum stocking level in dealerships. Because for a dealer to be successful, he or she needs a certain number of boats of a certain type, and that varies by state, region in the United States and around the world.

So what we've done now is we've begun to focus with our dealer network, what are the minimum stocking levels you need. And it will be different, depending upon the time of year. But our view is that the minimum stocking level walking out of 2010 is 15,000 units.

Now, 15,000 units is a really low number compared to anything we've ever had. But because of the very low retail demand now, it does make the arithmetic say the weeks on hand will increase. But we are very comfortable with the 15,000 units as a minimum stocking level, in order to ensure that our dealers remain competitive going forward.

Now what happened to us -- and we've talked about this some -- is we've been fairly open as we went to this model we probably wouldn't get it right for the first couple of years. I think the learning we had in 2010 is we didn't have enough small boats positioned in dealerships as the selling season began to (inaudible).

So what you are seeing is -- what we are doing -- you're not seeing -- I'll help you see here, as we are ending 2010 and as we go into 2011, we are putting more smaller boats into the system, so that the consumer who walks into the dealer and says, I want a boat, and I want to buy it now -- and this is generally a small boat buyer -- that the dealers have them as they get into the selling season.

And I think that is one we just made a mistake on as we went into 2010. So that is a correction we're making as we go into 2011. Is that helpful?

That's very helpful. And just to follow up a little bit, how should I think about that 15,000 unit level, given the fact that it is flat, and I'm assuming your dealer base is down year-over-year. Correct me if I'm wrong on that point. But (multiple speakers).

Our dealer base is actually flat.

Okay, flat, so that is a fairly -- basically the per-dealer ending expected inventory is about the same coming out of 2010, you would expect, as it was coming out of 2009.

Yes. Mix will be a little different, yes, but the total count will be the same.

Great. Excellent. Very helpful. Thanks, guys.

Joe Hovorka, Raymond James.

Thanks, guys. Couple questions. One, just housekeeping. You said you had 22 weeks of inventory last year and I think last year you reported 21 weeks. Is that just an adjustment for the brands that are no longer there or is there something else going on?

Yes, that would be it. Pushed it up a little bit. We are almost in the rounding now. Actually, we are at 21.5, so we've called it 22.

Okay. And in the third quarter, did you ship in more or less than was sold at retail? That is, I guess, was the second quarter ending inventory in the dealers, was it down 700 units or more or less?

We actually wholesaled less than we retailed.

So you pulled down inventory in the third quarter?

Yes.

Okay, and then you built it by about 1000 units, if my math is right, through the fourth quarter?

That's correct.

Okay, and then have you wrapped up all your dealer meetings now?

Well, Joe, we are not having the classic dealer meeting anymore. We are having dealer forums, which we do regionally. We are generally done. We've got a few more. I'm going to anticipate where you are going, so let me jump into this.

We are not into the classic anymore go-to-the-dealer meeting. You probably heard me joke about this before where we and a dealer get in a room and we want them to take X-number of votes, and they want to take X-minus votes, and then we agree with something. Those days are over.

We've now gotten inventories right down to the bare minimum. So now what the real discussion is, do we have the minimum stocking level met? If we do, now the discussion is, what do we think retail could be in your particular market and how do we need to think about gearing up for next year as we build our production plans?

And as you can imagine, those discussions are really difficult right now because it is hard for the dealers as well as us to begin to talk about what we think retail will be next year. So we are all agreeing to be flexible, hold hands, have great communication and be prepared to move.

So your last order date would've been -- I think it is the first of September; is that how it works? Would they have given indications?

Well, I'm not going to go there because I know where you are trying to take us, but we are not at all dissatisfied with what dealers think they may want.

Then maybe just one question, too, regarding the 135,000 units next year for breakeven. That would imply we do need to see retail growth in the industry, correct, to get to that number given the pace that we are currently on?

I guess what I'm saying is we will finish 2010 below the 135,000 unit level at retail?

Yes, we were at 153 something, if you assume the industry is going to be down around 15 and to do that arithmetic.

You're at like 130ish (multiple speakers).

A little over 130. I wasn't going to get into it on this call, but let me just go ahead and say it. Actually, we think if the market next year is flat with this year, we could be slightly profitable.

So the breakeven would be less than 135, is what you are saying?

I hate to keep pulling that breakeven down, but our folks are really doing some great work in operations, and if we can get this market to flatten out, we will be okay.

Very good. Thanks, guys.

Tim Conder, Wells Fargo.

Thank you, and apologize gentlemen. We got disconnected somehow there. But a couple follow-ons to that. So Dusty, you had mentioned, I think, in other earlier conversations that you were looking to potentially bring that breakeven down. Now you are saying roughly the 130,000 units.

Can we revisit the other piece of that, where you would equal your 2005 corporate operating margins, at what level does that come down also roughly 5000 units?

Tim, we've not done that math yet. We are just -- we are first working real hard on meeting our goal to be profitable next year, even if the market would be flat. But I think it would be fair to assume, yes, the number would drift down.

Okay. And then, again, just more clarification here, Dusty. But it sounds like from the fourth quarter on -- or maybe at minimum the first quarter -- broadly, you are looking to match retail takeaway to wholesale shipments?

Sure, yes.

Okay. So fourth quarter probably, it sounds like more realistically, if I interpret your comments correctly.

Fourth quarter, we are doing a little build to get folks ready for the selling season.

Okay, so you will be -- okay. By about that 1000 units then?

Yes.

Okay. And then in the engine commentary, you mentioned that stern-drives were going very well. Were outboards flat to down a little bit?

And then at this point, what would you think about next year? You have talked about potentially taking on some competitors in geographic markets where you previously haven't. If you can, give us a little bit of an update there on outboard engines in particular?

First, we did not mean to imply that outboards were down. In fact, all we were implying, Tim, was that the rate of increase in stern-drives was higher than that in outboards.

Okay.

It is becoming more global and finding areas around the world where we can do better, our engine folks are being -- and global teams are being very successful. We are taking share in every region, actually. And a good bit of it is government business and commercial business that we have not been well focused on before. And we are also making penetration in a few recreation markets. So we are quite pleased with what our guys are doing outside the US.

Okay, that's good. Okay. And then, Peter, just a couple of clarifications also here. You said the FX effect on sales was minimal. And also, I think in some of your other commentary, you said that there were some hedging losses. Can you give a little bit more color there, and then maybe FX impact overall on EPS in the quarter?

First, what we've said about the hedging is it mitigates what would otherwise be the currency effect in the quarter. Probably the biggest currency effect is because we make boats here and sell them in Europe. The third quarter of last year, the euro rate was about -- you may recall about $1.43, and the average rate in this year was about $1.28. So that dynamic was negative for us.

But that negative dynamic was offset by positive changes in the Canadian and Australian dollar currencies. So that, if you will, natural offset, combined with our hedging activities, which mitigates the effect of all this, resulted in our commentary that the currency impact in the quarter, both on sales and on earnings, was really very, very small.

And the only reason we raised it was to allay any concerns that, given our rather considerable increases in the percentage of sales overseas, as a result of where our costs are and as a result of where our sales are and as a result of the dynamic of the many currencies in which we operate and as a result of our hedging activities, the net effect of that increase in overseas sales has not had a significantly detrimental effect on us in terms of currency fluctuation.

Okay. And then, gentlemen, just a couple others here. Can you just give us a general update on the Mercury restructuring in Wisconsin and the combination there? Is that ahead of plan, on plan? Just a little color there. And then Peter, anything you can give us on D&A and CapEx expectations at this point for 2011.

The Mercury consolidation activity is highly complex, but we are pleased to say it is very much on plan. And the financial results of that, which we have said in the past, that the overall effect over time would be approximately $40 million, still holds.

We got -- we are receiving the benefit of some of that in this year, offset by some of the restructuring costs in order to gain it. And we will get the remainder of the benefits in the next two years. So that is all very, very much on plan.

And then D&A, CapEx, any thoughts for '10 and '11?

Well, for 2010, the D&A will be, I think we said, 130. CapEx we said -- we have been quoting 60. Given that the year is drawing to a close and we are not spending at the rates we expected, we've changed that range to 50 to 60. So that is the update on that.

And then anything for 2011?

I think as Dusty said, we are going to really put our heads together here in the next couple weeks and months and really figure out our 2011, so that we can achieve our objective of being profitable in what might be a flat market, and being cash flow positive in what might be a flat market. And those objectives will influence the puts and takes of our capital for next year.

The D&A, of course, will go down from 130 to something less than that. The capital expenditures may well go up, because as we find ways to generate more cash from operations, we are going to start applying that more and more to our capital spending, so that over time it returns more to its historic levels of between 3% and 3.5%, as opposed to where it is now at about 1.7%, 2%.

Okay. And I apologize. Just one more clarification. You said that SG&A in the fourth quarter, the P&L SG&A that we would see would be down roughly $14 million year-over-year. Correct?

No, that $14 million is the amount that is the comparison of the third quarter of last year compared to the third quarter of this year. And it resulted from taking our expectations of our variable comp plans and moving the expectations of the yield from those plans down by $14 million, but nevertheless, keeping them or maintaining down them ultimately at about targeted levels, and at about the levels that we paid out in 2009.

So net-net, on a full-year basis 2010 to a full-year basis 2009, there won't be any significant differential in variable comp, assuming that our Board of Directors, which has the last word on this, comes to that conclusion when they and the comp committee in particular, render these judgments at year-end. Our accounting, however, is anticipating those judgments by releasing some of the variable comp reserved in the third quarter of this year. Now, is that clear, because that is an important set of data?

Okay, so there was some of that reserve released in the third quarter this year, is what you're saying. And for the fourth quarter, you are saying not much from that perspective should be different year-over-year, in the fourth quarter.

Yes.

That's correct.

Okay. Thank you.

The bottom line on that one, we had been accruing about target. And as we looked at the year and began to look at our cash position, our view was that we ought to be accruing at target, and that was the change we've made.

And our expectation is for our employees that incentive compensation for 2010 will equal what we had paid in 2009.

Tim, can I -- I want to make sure that I've been clear on one thing, which is this whole pipeline and wholesale versus retail discussion. For the quarter and for the year, we have been wholesaling under retail. But if you look at the chart that we've attached to our earnings release, wholesale equals retail.

So that necessarily implies that in the fourth quarter, we will be wholesaling more than we've retailed. Again, that is what I explained earlier, so that our dealers will be positioned as the selling season starts, which is primarily with smaller boats, in order to be able to hit the market as it evolves. And that is in the range of adding a couple of thousand boats to our pipeline. And again, that is led by smaller boats.

Okay, thank you, Dusty. That was -- we'd come to that, but thank you very much on that.

I'd certainly been less than clear, as I've listened to myself.

Carla Casella, JPMorgan.

Thanks for taking all the industry questions. I'm actually going to ask one more on the cap structure. You mentioned that you'd bought back bonds. Which bonds did you buy in the quarter?

Primarily our 2013s.

Okay. And with our market being so strong in high yield, are you -- would you consider doing a broader re-fi of your whole structure, or are you pretty pleased with your debt structure at this point?

We do not currently plan a refinancing of our debt structure this year. We may opportunistically buy back some more bonds, primarily the 2013s, but not necessarily. And as the next year or two unfold, and we get closer to our 2013 time period and our 2016 time period, we would do something more fundamental. But we don't plan to do that this year.

Okay, great. I think that's all I had. Thank you.

Carla, I will use this as an opportunity to jump in here. You know, the Brunswick story is not only having the ability to dramatically increase earnings with any top-line increase. By the way, our top-line increase has got to be doing better than the market all around the world, and not just sitting around waiting on the market.

But the second part of our story that will be evolving -- and we keep talking about it, but it's really important, as one looks at this company -- is we have some significant balance sheet work that we want to get done, ergo, our focus on cash and the ability to generate cash flow. And we want to be an investment-grade company. We need to go get that work done. And we need to take care of this overhanging pension spread between obligations and assets.

Our pension plans have fundamentally been frozen. We know what the obligations are; they are not increasing. Now we need to get the investments in that plan, on a going-forward basis, equal to obligations, so we can forget about it, know that our employees and former employees will be taken care of in retirement, and take all of that out of the fluctuation it provides in our earnings and our cash position, and make that just a forgotten part of our balance sheet and where we need to go.

And then if we think we are investment-grade and we've gotten debt right, we have the opportunity then to do a lot more things in Brunswick. We've got several ideas, none of which are important to discuss now. But the point is a bigger part is our story will be the increase in earnings will also be the balance sheet work that we want to go get done. And you will see that unfold as we move forward.

Great. Thank you.

Ed Aaron, RBC Capital.

Thanks for taking the follow-up. Obviously, the rate of decline in fiberglass accelerated in Q3 versus Q2. But the industry lapped the period last year where there was some pretty significant discounting and what you might even call fire sale activity. So when you take that into consideration, in your judgment, Dusty, did the industry actually get worse Q3 versus Q2, or did it just optically look that way because -- with the comparisons involved in the prior year?

I think it is a lot of optics.

Okay. And then one other question for you on -- just from a market share perspective year-to-date, what do your numbers show?

That we're down. And we think we are down primarily because we've not had to finish out discounting and fire saling like some other folks have. We took care of that last year.

And Ed, our view was all along -- you probably heard me talk about it -- that we anticipated that in 2010. But we don't anticipate that continuing in 2011, and that is going to be built on the back of the strong dealer network that we've maintained and where we've positioned our brands and dealer network count.

Thank you.

You're welcome.

There are no questions at this time, and we will turn the call back over to Dusty McCoy, CEO, for closing remarks.

Thanks, Jennifer. We appreciate everyone joining the call. We always appreciate the quality of the questions. We know what we have to do, and we are just going to keep doing it as we go forward. And again, thanks, everyone, for their interest. And if we don't talk to you before, we will talk to you around year-end.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.