賓士域 (BC) 2011 Q2 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2011 second-quarter earnings conference call. (Operator Instructions). I would now like to introduce Bruce Byots, Vice President 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 the 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.

At this point I would like to turn the call over to Dusty.

Thanks, Bruce, and good morning, everyone. By now I'm sure you have had the opportunity to review our second-quarter earnings release. Our strong performance in the second quarter reflected higher Marine wholesale shipments compared to the prior year. Our Boat and Engine segments continued to perform well across most of their product offerings.

In addition, Life Fitness experienced strong revenue and earnings growth, and consistent with the previous five quarters, our consolidated results continued to demonstrate strong operating leverage.

Our results in the quarter reflect revenue growth of 8% and net earnings of $0.75 per share, including a $0.02 per share benefit from special tax items. This compares to net earnings of $0.15 per share in the prior year, which included $0.26 per share of restructuring charges and a $0.02 per share of expense from special tax items.

Operating earnings, excluding restructuring asset impairment charges, were $108 million in the quarter, an improvement of $28 million as compared to the prior year period. Our GAAP operating margin was just under 10%. So this represents our highest second-quarter consolidated operating margin since 2005.

In addition to higher sales levels, our earnings benefited from increased fixed cost absorption, improved operating efficiencies, lower restructuring charges and Companywide cost reductions. Partially offsetting these items were higher material costs and variable compensation expense.

SG&A remained relatively consistent, benefiting in the quarter from lower bad debt expenses. SG&A decreased as a percentage of net sales. Our cash and marketable securities totaled $677 million, and net debt at quarter-end was $110 million. Peter will comment in his remarks on the key drivers of our strong cash flow during the first half, as well as provide you with a perspective on our 2011 targets, supporting our objective of generating substantial free cash flow for the remainder of the year.

Let's review the preliminary second quarter U.S. marine industry data. The second-quarter data is based on 89% of April's, 78% of May's, and 66% of June's market reporting. Fiberglass, stern drive and inboard unit demand fell by 8%. This compares to declines of 18% in the first quarter of 2011 and 29% in the second quarter of 2010. For the first six months of 2011, unit demand fell by 12%.

Outboard fiberglass boat retail unit demand increased 3% in the second quarter. This compares to declines of 3% in the first quarter of 2011 and 13% in the second quarter of 2010. If this preliminary number remains positive, it would be the first increase in this category since the fourth quarter of 2006. For the first six months of 2011, unit demand increased by 1%.

Aluminum product demand increased by 7% in the quarter. This compares to an increase of 6% in the first quarter of 2011 and a 5% increase in the second quarter of 2010. For the first six months of 2011, unit demand increased by 7%.

After taking into account the different changes in unit volumes, preliminary total industry unit demand was up 1% in the second quarter. This compares to a 3% decline in the first quarter of 2011 and a 7% decline in the second quarter of 2010. For the six months ended June 30, 2011, total industry unit demand is down less than 1% over the same period last year. The total industry demand includes the categories noted above, as well as certain lengths and categories included in the NMMA definition of the total powerboat industry, but it does exclude jet boats.

Thus far in 2011, the overall US Marine market has been somewhat choppy as demonstrated by the variability of month-to-month demand trends, as well as state-by-state relative strengths and weaknesses. However, as you can see from the data, the year thus far appears to be consistent with our plan for a flat 2011 retail market.

On the international front, our Engine segment sales outside the U.S. increased by 6% for the quarter compared to the second quarter of 2010. Our boat sales outside the U.S. increased by 14% during the same period.

Looking at our growth in emerging Marine markets outside the U.S., Latin America continues to show strength versus prior year across both the Engine and Boat segments. Growth is particularly strong in Brazil with Mexico also starting to show signs of improving demand, although from a very depressed level. We expect the growth trend to continue in Brazil as we accelerate development of our distribution structure and address Brazil's fast-growing market.

Market conditions across Asia also continue to be robust, particularly in China with healthy commercial and government segment strength, as well as acceleration of recreational Marine market development.

Growth in developed Marine markets is varied with sales volume continuing to improve in France, Germany and the Netherlands. On the opposite side, Nordic markets are proving slower to recover due to higher interest rates and overall low consumer confidence in the region. The UK and Italy are subdued but stable in spite of overall poor macroeconomic fundamentals. Markets in the Southern countries of Spain, Greece and Portugal remain depressed.

Canada, our second largest non-U.S. marine market, experienced the strongest growth rate of any of our developed Marine markets, particularly in the Boat segment. Markets in Australia and New Zealand have only recovered slightly from the catastrophic natural disasters in the first quarter.

In summary, similar to the U.S. market, regional strengths and weaknesses have been demonstrated throughout the global marketplace, but the Brunswick Marine business is driving growth via share gains and by market growth in those countries that are experiencing improving conditions.

During the first half, Marine Brunswick's retail boat sales growth was greater than that experienced in the overall market. This reflects our stated objective of improving our market share in the various categories in which we compete. Our recreational fiberglass brands achieved market share gains in most categories. Our aluminum brands also gained share, although at lower percentages than on the fiberglass side. As a result of increasing retail demand at our dealers, we made the appropriate increases to our wholesale unit shipment levels. Higher shipments combined with slightly lower discounts, partially offset by the effect of a higher mix of smaller boats led to a Boat Segment sales increase of 10% in the second quarter and 13% for the first half. Let's take a minute and look at our dealer pipeline, which we believe are at ideal levels for current market conditions.

In addition, the amount of aged product in our pipeline remains at healthy levels. We are maintaining our pipeline at minimum stocking levels appropriate for the market. Our pipeline is up 2% versus the second quarter of 2010 when the pipeline was too low as we ramped up production in the first half of 2010.

Our pipeline for fiberglass boats under 24 feet and aluminum product are up over last year's second quarter, while our pipeline for product 24 feet and larger is down. In fact, our pipeline for boats over 24 feet in length is at record low levels.

Our goal in managing the pipeline is to work with our dealers to have retail sales for wholesale sales while maintaining minimum dealer inventory levels, which permit dealers to meet seasonal demand and gain market share. In light of our market share gains and the strength of the aluminum fish boat and pontoon segments, the pipeline is in the correct position.

Our pipeline management plan will continue to reflect quarterly changes in inventory levels, resulting from seasonal demand factors and our dealers' view of minimum stocking levels in light of ongoing retail demand. Our third-quarter pipeline inventory should continue to contract as we wind down the model year and Marine selling season.

In summary for the Boat Group, higher sales, increased fixed cost absorption, fixed cost reductions and lower restructuring charges led to the segment's first quarterly operating profit since the second quarter of 2007, a great reflection of the progress we are making in our Boat segment categories.

In our Engine business, global production in the quarter was higher than year ago levels. (inaudible) strong growth in sales in its domestic outboard business, reflecting market share gains, and solid increases in its Parts and Accessories operations, which led to the segment's overall sales growth of 7%.

Revenue growth in Mercury stern drive engine business was flat compared to year ago levels. Although stern drive boat retail demand experienced overall declines in the quarter, Mercury was able to maintain consistent sales levels as result of market share gains in its gas stern drive product categories.

Mercury's solid topline growth, the combined effect of cost reductions, increased fixed cost absorption and improved operating efficiencies help drive improvements into second-quarter operating earnings. During the quarter, the segment's operating leverage was negatively affected by product mix, higher variable compensation costs, as well as an increase in research and development spending.

I will take a few minutes to give you a brief update on our engine production in Japan, as well as to discuss Mercury's global supply status pertaining to the various parts it sources from the area that was affected by the earthquakes that occurred in March and June.

Mercury's engine and parts production in North America and Asia have continued to operate without any disruptions. Mercury small outboard engines are produced in Japan through its joint venture with the Tohatsu Corp. in a facility that was not damaged by the earthquake. This facility was shut down for only a week in early April. Currently all of its affected suppliers have implemented countermeasures and are now delivering production parts without interruption.

In summary, we continue to believe Mercury is well positioned to continue to meet market demand for all of its outboard and stern drive engines.

Based on somewhat limited public information, it is our belief that other outboard manufacturers in Japan are experiencing production recoveries with certain product categories being more affected than others, and we further anticipate industry supply to continue to return to normal as we proceed through the year.

Now let's take a look at our two recreational segments. Life Fitness continues to perform exceptionally well. Sales were up 15% as compared to last year's second quarter.

During the first half, revenues increased by greater than 20%, slightly less than $300 million, which represents the second highest first half in its history. Segment operating earnings in the quarter grew by about $10 million, resulting in more than $40 million in earnings in the first half, a record for Life Fitness.

In addition to the benefits from increased unit volumes, a more favorable product mix, increased fixed cost absorption, an improved warranty experience contributed to the higher level of profits.

Sales in Bowling and Billiards were up slightly in the quarter. This increase represents the Bowling segment's first quarterly revenue growth since the second quarter of 2008. Same-store retail bowling revenues were up low single digits, while Bowling products sales were down slightly versus the previous year. The segment's operating earnings were about $4 million higher than last year's levels due to the improved operating efficiencies, the absence of a prior year facility write-down, and lower bad debt expense.

I will now turn the call over to Peter for a closer look at our financials, and then I will give you an update on our perspective for the remainder of 2011.

Thanks, Dusty. I do want to begin by clarifying a portion of the balance sheet schedule included as part of our press release this morning. Total inventory in the schedule is properly stated at $527.3 million, flat with year-end 2010. However, the schedule overstates our finished goods balance and understates our work in process balance by approximately $110 million. We are in the process of correcting this schedule on the wire, and our 10-Q will obviously contain the correct information.

I will move now to an overview of certain items included in our second-quarter P&L, and we will also comment on certain forward-looking data points.

Let me start with restructuring, exit any impairment charges which actually reflected a net gain of approximately $300,000 in the quarter. Ongoing restructuring actions at our Marine operations and the charges pertaining to them of approximately $5 million were more than offset by gains associated with the sale of a few of our idol Marine properties. Our current estimate for full-year restructuring charges is between $6 million and $10 million.

Net interest expense, which includes interest expense, interest income and debt extinguishment losses was $21 million in the quarter, a decrease of $6 million versus the same period in 2010. During the second quarter of 2011, we recorded a debt extinguishment loss of about $900,000 on debt retirements at $25 million. These debt retirements included a portion of the 2013, 2016 and 2027 notes. A debt extinguishment loss of $4.1 million was recorded in the second quarter of 2010.

Now, in addition to the $44 million of debt retirements completed in the first half of 2011, we have thus far retired $23 million of debt in the third quarter, resulting in a debt extinguishment loss of approximately $6 million. Including the impact of the debt retirement actions we have taken to date, we expect net interest expense for the remainder of the year to be approximately $20 million per quarter, excluding any losses on debt extinguishment. However, it is likely that additional debt extinguishment losses will be incurred over the remainder of the year as the Company continues its efforts to reduce debt levels.

During the quarter, foreign currency had a modestly positive 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 effect that currency exchange rate fluctuations have on year-over-year earnings comparisons. Changes in foreign currency also had a favorable effect on our sales in the quarter.

In the second quarter, we recorded a tax provision of $17.6 million, which primarily relates to earnings from our foreign operations. In the second quarter of 2010, we recorded a provision of $15.2 million.

Now, as a quick reminder due to the Company's three years of cumulative book losses in various taxing jurisdictions, GAAP requires that the realization of related deferred tax assets be considered uncertain. Consequently we continue to adjust our deferred tax evaluation allowance, resulting in effectively no recorded federal tax benefit or provision associated with our losses or income from U.S. operations. Our 2011 tax expense will, therefore, continue to be comprised primarily of foreign and state income taxes.

Higher pretax income was a primary factor causing the increase in tax expense during the second quarter. Our effective tax rate for the first half, including special tax items, is approximately 24%. This rate is lower than our previous tax rate guidance due to the recognition of favorable tax adjustments. We anticipate recording favorable tax adjustments by year-end for matters that have not yet been concluded in certain foreign jurisdictions, which will more than offset the impact of a modest increase in earnings from our foreign operations this year. So, as a result and given our current earnings guidance range, we continue to expect our overall 2011 tax provision to be less than our 2010 tax provision.

Now let's turn to a review of our cash flow statement. Cash provided by operations in the first half was $81 million. Some of the key items in this section of the cash flow statement include adjustments to earnings for non-cash charges such as depreciation and amortization of $54 million. Our current estimate for D&A in 2011 is approximately $105 million. Pension expense resulting from our defined benefit pension plans totaled approximately $16 million in the first half compared to $19 million in the prior year. In the first six months, the Company made cash contributions to its defined benefit pension plans of approximately $21 million. The $5 million outflow in the cash flow statement in 2011 reflects the amount by which cash contributions made during this period exceeded pension expense.

We expect our full-year pension expense to be approximately $32 million, which is a decrease of $7 million from 2010. This reflects the benefit of higher asset levels, planned contributions and lower interest costs associated with planned liabilities. For the full year, the Company plans on making cash contributions to its defined benefit pension plans of at least $60 million to $65 million. However, these contributions could increase as the Company continues to assess its ERISA funding alternatives.

Changes in our primary working capital accounts were a use of cash in the first half of the year and totaled approximately $109 million. By category accounts and notes receivable increased by $122 million, which is largely the result of seasonally strong second-quarter sales. Our crude expenses decreased by $23 million, and partially offsetting these uses of cash was an increase in accounts payable of $37 million. Inventories, as I mentioned, were essentially flat.

For 2011 our working capital performance will primarily be a function of our revenue assumptions. We currently believe the range should be between flat to a modest usage of cash, and given the seasonality of sales in our Marine businesses, we anticipate the liquidation of working capital in the second half and especially reductions in receivables to have a positive impact on cash flow.

Capital expenditures for the first half were $32 million. Our 2011 plan continues to reflect approximately $80 million of capital expenditures. This increase versus 2010 reflects expenditures to develop new products in anticipation of improving market conditions and to fund our Marine manufacturing plant consolidation activities. Partially offsetting our capital expenditures was $16 million in proceeds from the sale of property, plant and equipment in our Marine segments.

During the first half of 2011, cash flow statement includes about $46 million of net investments made in short and long-term marketable securities. This is part of the program initiated in the fourth quarter of 2010 to expand the Company's cash investment program to include marketable securities with a maturity beyond 90 days. The new program is designed to increase earnings on a portion of the Company's cash reserves. The investments have maturities of two years or less and include high grade corporate commercial paper and government securities. The purchases and sales of these marketable securities did not affect our calculation of free cash flow.

So, in summary, during the first half, we generated $73 million in free cash flow, and after using approximately $50 million to retire debt, our cash and marketable securities in the first half increased by about $20 million, ending with a balance, as Dusty said, of $677 million.

Supplementing our cash and marketable securities balance is a net available borrowing capacity from our revolver of approximately $229 million, which when combined with our cash and marketable securities provides us with total available liquidity of $906 million. When comparing year-over-year free cash flow amounts and cash balances to the first half, I would remind you of the $109 million federal tax refund that we received in the first quarter of 2010.

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

Thanks, Peter. I will conclude our call today by reviewing our 2011 outlook. As you can see from our first-half performance, we continue to remain disciplined to generate substantial free cash flow, perform better than the market, and demonstrate outstanding operating leverage.

As I said in my opening comments, our plan for our flat 2011 Marine market is unfolding generally as we discussed with you in January and April. It also continues to be our view that smaller boats as in 2010 will continue to outperform large ones. Although our view of the Marine market demand has not changed, we are now planning for high single-digit consolidated Brunswick revenue growth. This increase in our targeted topline growth is based on our ongoing efforts, as well as achievements experienced thus far to improve market share in all of our business segments.

Our 2011 net income should also benefit from our previously announced Marine plant consolidations, as well as some of the items Peter has already discussed with you -- lowering restructuring costs, along with reduced net interest, pension and depreciation expenses, as well as the lower tax provision.

Our forecast of third-quarter SG&A will continue to reflect comparable levels of operating expenses that were accrued in the previous two quarters with the exception of a gain on sale of a distribution facility recorded in the first quarter and a bad debt reduction experienced in the second quarter. Also, I would like to remind you that the SG&A in the third quarter of 2010 included a favorable adjustment to variable compensation expense.

After taking all these factors into consideration, we currently expect our 2011 earnings-per-share to be in the range of $0.60 per share to $0.75 per share. As a result of seasonal factors that affect our Marine businesses, as well as the potential for further debt retirement activity, we currently expect our second-half results to be a net loss. The performance thus far in 2011, combined with the results we delivered in 2010, reflects all the hard work of our employees, our leading dealer network and our suppliers. Our strong brands, outstanding product quality, and a premier distribution network have enabled us to grow our businesses in what for the most part has been a relatively flat Marine market and a very challenging economy.

While we remain confident that the recovery of global Marine markets will be consistent with improving economic conditions over time, we are focused on growth without economic recovery, and we are well positioned for continued growth. We will maintain our focus on market share gains, but we have significant other organic growth opportunities and have begun to prioritize, resource and fund these opportunities.

In addition to market share gains in these organic growth opportunities, we continue to monitor our fundamental Marine industry dynamic, coming into play which provides additional opportunity. The average age of boats has increased by about five years since 1997. Our internal analysis indicates an average age of about 21 years in 2010. We believe the increase is primarily due to a higher mix of older boats, reflecting the aging of boats sold during the 70s and 80s when new book sales averaged 400,000 boats a year.

It is also likely that some of the increase can be attributed to owners holding on to their boats longer through the recent economic downturn. Our announcements also indicated that boats built during the peak retail years of the late 80s, which are now becoming 25-years-old, are reaching an age when obsolescence or scrappage should start to increase, which could have a favorable impact on new boat sales.

And finally, sustainable growth can be derived from our recreational businesses. In particular, Life Fitness continues to strengthen its position in the commercial fitness equipment marketplace. We believe it will benefit from equipment replacement and facility expansions, opportunities in new health club market venues, as well as participation trends and demographics that should benefit both of our recreational businesses. And, as we continue to focus on organic revenue growth, including specific regional opportunities throughout the global marketplace, we will kind currently and opportunistically target debt reduction and pursue the full funding and eventual de-risking of our frozen defined benefit pension plans.

Thanks for listening, and now we will take your questions.

(Operator Instructions). Ed Aaron, RBC Capital Markets.

Nice job on the quarter. I wanted to start with the full-year guidance change. It sounds like a portion of it is operating, and a portion of it is not operating. Can you maybe just help us break down between those two things by giving us a sense of the change in your restructuring expense outlook and tax rate outlook and how much those two things combined account for the increase in full-year EPS guidance?

As we look at our guidance increase, we see about $0.05 a share of it associated with restructuring reduction, which is not a reduction as I said. It is an expense, but we have offsets with gains, and about $0.03 a share generally from a reduced view of taxes. So maybe $0.08 of the $0.25 spread in the top end of the range would be associated with what we would call non-operating points.

The tax comparison versus our model for this quarter was up a much bigger benefit than that. So I guess that would seem to imply maybe even a higher tax rate in the back half than what we and perhaps others had been modeling far. Is that the right way to read it?

Well, read that we had set a 24% year-to-date, and we had previously said we would be operating 32%. So we are down from 32%, and the 24% rate is going to be more representative.

Okay. Thanks. And then Dusty, just to get a little bit more perspective on the market, I wanted to ask you specifically about the trade-up segment because that is obviously where there has been the most pressure, the declines moderating in Q2, which is encouraging. But there does not seem to be a whole lot of signs of life there. And when I look at that part of the market, it seems like a lot of those customers are in a similar financial position with respect to their boats to the extent that they are still under water. Which just kind of suggests to me that we could at some point see a real step change in that market, in that segment's growth rate, but there is not a whole lot of visibility on our end as to when that might happen. I would just love to get a little bit of perspective from you on that segment of the market in particular.

I think you accurately described what our feeling is. There is a real opportunity for a step change, but we don't know when it is going to happen. That is my own view is that we need a couple of things to come into play. Let's say three things, one of which I believe has occurred, two of which are still to come. The one which has occurred is the general decline in availability of great used boats.

Now I think the next two things that need to happen for us, first, we need the value of homes in the housing market to improve. Because some portion of these buyers, because if you believe that the statistics that 30% of homeowners are underwater on their mortgage, some percentage of those, and it may be a like percentage, would also be applicable to people who own boats. Until they can work their way through that, they are not going to be willing to take any risk on a trade of a boat or go upside down in any way on a trade.

And then the next thing that has to happen for us is unemployment does need to improve because, again, if we think real unemployment, not stated unemployment, is nearing 20%, some portion of those folks are also boat owners, and if we extrapolate, the same percentage into boat ownership, those folks are also not in a position to take any risk on a trade.

And until the economy improves dealers -- and I applaud them for this -- are not willing to take any risk on trades. So all this in my judgment is going to rise and begin to get better as the economy improves, but we are not seeing it yet.

Fair enough. And the only thing I would add is it is a confusing industry to cover sometimes because the changes -- the unit trends and the dollar trends can be a lot different. So to that extent, it would be helpful to the extent that you can to maybe give us some disclosure where possible about the underlying drivers of your business in terms of units versus dollars in small boats versus big boats. I don't know how much of that you can give, but any help there would be great.

That is surely something we can work on. We have a good view of it.

Jimmy Baker, B. Riley & Co.

Congratulations on a great quarter in a challenging Marine environment. First, I was hoping we could actually touch on the unsung hero of your business segment, the Fitness Group. Another quarter of strong growth there and impressive operating leverage. Can you drill down a little on what channels and geographies are driving the growth and maybe comment on its sustainability and what you see as a potential multiyear growth rate for that business?

We think -- let me answer the last part first -- we think multiyear growth can be double digits. What is happening right now is, first, as we look at the commercial markets where we are very strong and we go to clubs, there is a growing trend for clubs separating into high-end and what I would call cheaper, quicker, lower end. So you may not have showers and a bunch of attendants there, but you can get in and out of the club and exercise well. And those club owners look for great equipment that has a long life and performs well, and we are certainly serving that market well in capturing a big chunk of it.

We are seeing what we call the vertical segment, which includes hotels, etc., continuing to do well and, in fact, improving, and we are capturing a nice part of that market. And then global sales in this business are 53% of their total sales, and global sales are doing very well. So this is a business with a great product, an absolutely fabulous sales force and distribution mechanism that is attacking the market all over the world wherever there is an opportunity, and it sure does not feel like they are missing many opportunities right now. They are doing a great job. And we think demographic, cultural and other issues that we look at in the future for this business bode very well for this business.

Thank you. And Dusty, can you maybe talk about your strategy in the Boat Group for model year 2012? Obviously the market has been mixing away from you for some time now towards the smaller outboard product. I mean do you feel like if you had the right innovative product, you could draw some demand back to stern drives, or do you need to just go with the market, bolster your entry-level lineup and then attack it that way?

We are not satisfied at all with just sitting and going with the market. And, in fact, we are working on some innovative product, and you will begin to see that for the Fort Lauderdale/Miami boat show.

It's great to see the Boat Group positive at the operating line here at kind of trough industry volumes. But assuming a flat mix, what type of industrywide unit sales do you think we would need to be at for the Boat Group to break even on an annual basis? Maybe 155,000 units, is that about where you are at?

We can break even lower than that. We have been relatively open about this, and I am going to go ahead and state it. Fundamentally our stern drive inboard businesses and our outboard businesses are profitable. We have a couple of brands that are going through significant difficulty caused by either global conditions, the state of our product in the marketplace, or perhaps even how people are looking at certain segments. We are working very hard to fix those businesses, and if we don't believe we can get them fixed, then we will need to take some other action. But we don't need the market -- once we take care of those issues -- to be at 155 or 160 to be profitable in our Boat business. We can be profitable -- once we fix those issues, I want to be clear -- at lower levels.

That is helpful. As the Marine industry stabilizes and you continue to see improvement in your business, should we start to see some improvement in the efficiency of the cap structure by maybe using some of this cash on the balance sheet for debt pay down?

Absolutely. And I think that is what we signaled here in this call as you look at second half. We will be opportunistically -- and it has got to be the right deal for us -- looking at transactions that come in the door for us to take care of debt. And what we are signaling is, if we do some of that, we will have debt extinguishment costs that will impact our earnings in the second half. But we factor the potential for that into our guidance.

Okay. Great. And just lastly, could you maybe give the weeks of dealer inventory at the end of the quarter?

31.5?

31.5. Okay. Great.

James Hardiman, Longbow Research.

Congratulations on another really strong quarter. A couple of questions. I was hoping you could -- and it sounds like you're not going to quantify sort of the market share -- but I was hoping just maybe qualitatively you could help us wrap our brains around the magnitude of the market share gains that you are seeing in the Boat business, especially in light of MarineMax reporting same-store sales this morning up 33%, and they commented that new boat sales were up even more than that.

Now obviously there were a lot of reasons why they might be outperforming the rest of your dealer base, geography being one big reason. But they are, I think, 20% of your business or somewhere in that neighborhood.

So can you walk us through maybe the magnitude of the type of market share gains that you are seeing?

I lay awake last night wondering how the heck I was going to answer this question. (multiple speakers)

So did I.

First, I do want to highlight our dealer network, which is getting these market share gains for us and sort of yellow line MarineMax who is doing an absolutely outstanding job with the brands of ours that they carry all across the United States. But all of our dealers are helping us get these share gains.

I think I will say this. Depending upon how one measures the market, if this segment is worth competing in or this whole NMMA category, in the second quarter, we captured more than a full point across the entire industry of market share gain. And, as we look at the year-to-date, something less than 1%, and we are just going to keep driving for the rest of the year. Is that helpful to you?

It is. I believe I guess the only other number that you then need is what generally the market share is. I mean if you are looking at mid-teens sort of market share if you picked up a point, that would be about 6%, 7% of out performance versus the industry. Is that generally how I should think about things? I mean I guess depending on --

Your math is pretty good.

Okay. Excellent. And then sort of along those same lines, although I think you did a great job answering that question, you talked in the first quarter about how you shift a little bit more into the channel versus what shipped out from a seasonal perspective and that the second quarter would be the reverse of that. Was that still the case? I mean second-quarter boat sales looked like they were up pretty nicely, but can you speak to the ship in versus ship out in the second quarter?

So we shipped a little more in than we shipped out. And, again, as I have tried to call out, it was all small boats. Fiberglass boats under 24 feet and aluminum boats, and for the larger stuff, it goes the other way, and, in fact, our pipelines are at record low levels.

And there are three things going on here that I want to make sure I highlight. Buried down in the numbers -- and this is a statistic we have given, but I'm going to cut it one more level. I have said across the industry we believe the dealer count had been taken down through this downturn by about 30%, but that our storefront count was flat.

But, remember, we took about 30% of our brands out during this time. And, therefore, our storefront count has actually gone up in our continuing brands. So, as we have added dealers in these continuing brands, we needed to stock those dealers up, so they are at minimum stocking levels in what they believe is consistent with the marketplace. And that has been some portion of this increase in our pipeline is that increased dealers in what we are calling internally our continuing brands. That is number one.

And number two, the growth in the market has been in small boats, and we were fairly open in 2010 that we lost share in 2010 for two reasons. First, we believe there were folks who had not done all that we had done in 2009, and we could discount and get rid of boats, and we were not going to chase those discounts.

But, secondly, we were fairly open that we did not ramp up at the speed the dealer network would have liked, and the market would have given us the opportunity to do early in 2010. And, therefore, our dealers were a bit hurt in the smaller boats sales where the customer comes in, is ready to do the transaction, and there needs to be a boat there.

So, as we work through the minimum dealer, the minimal stocking levels with our dealers, it has become apparent to us as we are gaining share, the market has flattened. We have stopped the declines in this market that we have been experiencing prior to this year that we needed -- and in our dealer count -- we needed more boats out with our dealers, and it should be small boats.

So that is what we have been doing is responding to dealer pull. And over time, obviously this has always got to work out, wholesale has got equal retail, but there are going to be variances around season and as we see the market or our position in the market change.

Very helpful. And then just last question on market share and I will hop back in the queue, can you just speak -- it sounds like you have done a phenomenal job so far this year. Can you just speak to maybe the sustainability of those market share gains both this year and beyond sort of what initiatives do you have in the queue here that you think will allow you to gain longer-term market share, and I guess how much market share is there to gain to get back to historical levels? Is that a big opportunity in and of itself?

First, I do want to draw a bit of lining of we are talking about boat market share, but remember boat sales in 2010 were only 25% of Brunswick sales. Our engine sales were 50% of our sales. And over on the Engine side, we have seen really nice steady improvement in market share in our outboard business where it is highly competitive, and in our stern drive business, it has been even a bit more impressive. Even though the stern drive market is down more, we have been able to stay flat in our stern drive gasoline business. And that is I will openly admit driven by the fact that the other large competitor there has exited certain gasoline stern drive segments. They are the (inaudible). They are 3 L. They are not catalyzed at 4.3 L, etc. But our Engine business across the globe and particularly in the United States has been steadily gaining share now for several quarters, and that is a real important piece of our revenue increases and our market share gains.

It is also important to understand that Life Fitness is a little harder to measure because it is harder to find statistics there, but we clearly believe as we see new club openings, our association with the vertical market, and the number of units they are adding, that that business is also taking share.

As we step that back, we have tried to communicate that we are going to do wonderfully as the market improves, but now we are not going to sit around and wait for the market to improve. And we have got to start generating growth. The first thing we could do is get focused on market share because we have leading brands and leading products and leading distribution network. We just have to get going. We will continue that.

But we also believe, and I mentioned in my concluding comments there, several, many, numerous -- whatever word you want to use to describe it -- organic growth opportunities available to this Company, and we are hard at work now on positioning ourselves to go capture them.

I don't think we can get from market share alone, get our sales back to pre-recession levels because it would just be some impossible market share. So we will just continue to dig away in a market that we have, but as importantly and over time more importantly, we are going to be looking at other organic growth opportunities.

Tim Conder, Wells Fargo.

Let me offer my congratulations, gentlemen, again. Dusty, staying on that market share gain opportunity, first of all, you are alluding that you did gain share versus a competitor, Volvo, that has walked away from a couple of pieces of the gas market. When did that anniversary largely I guess is the first part of that question?

And then in outboard, if you could kind of give us a little more color, granularity? How much do you think gaining share was maybe due to a little bit of shortage of availability from competitors with the disruptions in Japan versus you had said before and you are alluding to it here also, I believe, that you really have not taken on some of your outboard competitors in especially some other geographic markets. So just some color on those market share gains.

Clearly some of the share gains we got were the inability of some of the Japanese suppliers to get into the market. I cannot with accurate belief tell you what percentage of our market share gain has been caused by that. But even before that, we were seeing share gain globally.

In terms -- but I do want to be clear. Some portion of that that we have gotten here toward the end of the first quarter and certainly the second quarter has been assisted. We have had a little wind at our back because of the Japanese problems.

As we look globally, the one thing that as we put people on the ground all around the globe and establish real working offices with our employees and begun to work more closely with the distribution network, is there has been an awakening on our part of additional commercial and government opportunities, especially in the outboard business, and we have been hard at work capturing those. And we are continuing to understand those markets on a global basis and are getting more focused on them, and those provide us an interesting opportunity.

We also, I think, are doing a real good job of getting a little more than our fair share of what I will call fast emerging markets. Brazil is an example. We have been in those markets for a long time. We have been focused on recreation, and as recreation in some of these markets has improved, our long-standing nature in many of these markets has given us a real opportunity to do a little better.

So we see lots of opportunity. We have just got to stay after it and continue to put the right people in the right place and work with the right distribution. I did not --

I did not quite understand the question on the stern drive. Can you help me with that?

Yes, so your comments they were all outboard, correct?

That is correct.

Okay. And then on the stern drive, the question is, clearly you are gaining share against Volvo because they have been walking away from part of the market. When is that -- when does that sort of fully anniversary? I mean you are able to pick up share because they walked away. Are you pretty well done with gaining share due to that here in the first half of the year, or should that continue the balance of the year?

I think that there will be some more to gain because Volvo has credits, and they can continue to build some of the non-catalyzed product. I don't think they will be doing it in 3 L; I think it is 4.3 L and a couple of others. So they have still got to build through and use up all their credit, so no, we have not gotten all the share we will be able to get yet.

Okay. And then before I think you threw out in response to another earlier question on the breakeven level, post fixing you said some brands potentially or not being able to and changing them, can you just again remind us of that? Is that around that 130,000, 135,000 units for the industry?

That had been on a company Brunswick basis. So yes, 130,000, 132,000, 135,000, pick a number. This company can be breakeven.

Okay. And then, and I apologize if I missed this, another call just right before yours ran over a tad. But the cadence of your retail sales across the quarter April through and then maybe through July here, can you give us an update there as to how that trended, especially in the developed markets?

I don't know with any number or any view that I would be comfortable talking about July. But April was a nice month, May was not a nice month, and June was a nice month. And I alluded to that in my comments, that even within quarters, it has been fairly lumpy. With the second quarter overall, two out of three were good.

Okay. And then from more of a, let's call it a Congressional standpoint, a lot of fluid pieces in Washington these days. But there have been some proposals to eliminate the second home mortgage interest production as it relates to boats, yet not RVs or literally homes. Can you talk about anything current where that stands from your standpoint and the potential impact more so for the industry or Brunswick in particular? How are you looking at that, planning for that should that come about?

First, I have no good information about which I could update you on the present status. It will obviously have an impact, but our view is that it will not materially impact us.

Okay. Just a little bit more color as to why you are taking that view, Dusty?

Just looking at the profile of our buyers.

Okay, okay, okay. And then, in general, dealers continue to remain cautious. You talked about some areas there is a little too much inventory in the channel, the larger boats. Other areas they are a little bit under. How is the receptivity over the quarter here? Is that a little bit better, the willingness to take inventory, or not, and then how do you feel about that?

I want to make sure that I'm clear on the first part of your statement before you got to the questions. I don't have the view that we have too much inventory anywhere, and that leads me then to answer your question.

Generally, if you lump all the comments from our dealer network, is that they need a few more boats. And we just work with them on a day-to-day basis around that. And one of the great things our manufacturing footprint now gives us the opportunity to do is we can I don't want to say turn on a dime, but we can turn in half a football field where before it took us five miles and make production adjustments, and we are getting pretty good at that.

Rommel Dionisio, Wedbush Securities.

Dusty, I wonder if you can just comment briefly on used boat pricing, some of the trends we are seeing both at the lower end, the aluminum, the outboard and maybe compare that with the higher-end fiberglass, larger fiberglass boats?

Stabilized, not to pre-downturn levels, but certainly not continuing to fall and generally since the beginning of the downturn where they dipped dramatically have probably risen and now stabilized across all prices.

And one more question, with regards to the dealer health, obviously I mentioned that the (inaudible) those brands, those dealer brands are doing pretty well, the dealers of those brands are doing pretty well. What about your Hatteras, your Meridian? I mean obviously this has been several years now with pretty continued difficulty on the higher end margin fiberglass boats. Are you seeing any attrition or might you expect to see some attrition among dealers of those higher end brands?

If we deal with Meridian first, Meridian is generally and fundamentally sold through the Sea Ray distribution network, and therefore, there is absolutely no issue with the dealer network from Meridian.

Our largest dealer for the Hatteras brand is MarineMax, and obviously they are doing quite well. We have had some smaller dealers who we have worked to position them so that they no longer need to stock the big expensive Hatteras product, but they continue to act as dealers for us in all the good markets. So we are comfortable with that position.

Okay. Good and congratulations on the quarter. Thanks very much.

Joe Horvorka, Raymond James.

Just a couple of quick questions. I think you said that week's inventory was 31.5, but earlier you said it was up 10%?

Yes.

So the year ago number, I think it was 27. Did that change?

Did the 27 change?

Yes. I know we have done some adjustments with brands going in and out.

I'm looking up something real quick, Joe.

It is 31.5, from 27.

It is 31.1 versus 27.1, I think, is the exact number.

Got it. Okay, I just wanted to confirm nothing changed. Could you state what your retail was up in the quarter?

What our retail was up in the quarter?

Yes. I know you gave the industry numbers broken out by the segments. But how much was your retail up in Q2?

It was up 7%.

Okay. And there was there a geographical --?

And I want to be clear, that is in units.

That is in units, okay.

And that is globally, as Peter just reminded me. It is a good point.

That is global?

Yes.

Okay. Were there any variances geographically in the states, one region stronger than the other, all regions (multiple speakers) --?

My gosh, yes. It is almost night and day on a regional basis in the United States. If we look across outboards, we see states like Minnesota, Michigan, Ohio, Illinois, Missouri, Arkansas, Louisiana, all up, but we can also look at a whole bevy of states that are down.

When we look at the stern drive inboard market, the West Coast is really, really down. It is an absolutely difficult market in every place out there. We have some great dealers who are doing a very good job of improving market share, but these are in really tough markets.

On the other hand, we see places like Florida and Michigan where things are getting better, and we are positioned with our dealer network to take advantage of that.

At this time I would like to turn the call back to Mr. Dusty McCoy for concluding remarks.

Thanks, everyone, for being on the call. As always, we appreciate the great questions. I want to make sure that I have got -- I have wobbled around a couple of questions. I want to make sure I am very precise in my answering.

At today's market and we have said we think the Marine market is flat, it is going to be flat, and that is 130,000 something, probably on the high side of 130,000. We are obviously much better than breakeven in light of the guidance we have been giving. And after we fix the brands that we are working hard on that are having difficulty right now, the Boat segment in our view will be breakeven at the markets that we are at today. I just wanted to make sure I clarified all that because I wandered around it a couple of times.

Thank you for attending our call, thanks for the great questions, and we're going to go back to work. If you have more detailed questions, obviously Bruce is always available to everyone. Thank you very much.

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