賓士域 (BC) 2011 Q3 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2011 third-quarter earnings conference call. All participants will be in a listen only mode until the question and answer period. Today's meeting will be recorded. If you have any objections you may disconnect at this time. I would now like to introduce 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 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 FCC filings and today's press release. All of these documents are available on our website at www.brunswick.com. I'd now like to turn the call over to Dusty McCoy.

Thanks, Bruce and good morning everyone. By now I hope you've had the opportunity to review our third-quarter earnings release. I know a lot of folks have been releasing today. Our quarterly results continue to reflect solid performance across all of our business segments. Third quarter and 9 month operating earnings achieved our highest levels since 2006. This outstanding performance by our 4 business segments was accomplished despite some very difficult economic conditions.

Consistent with the previous 6 quarters, our consolidated results continued to demonstrate strong operating leverage. As we highlighted on our second-quarter call, our SG&A expenses in the third quarter of 2010 included a favorable adjustment to variable compensation expense. If we exclude variable compensation expense from our 2011 and 2010 results, our operating leverage for the quarter would be in our 2011 targeted annual range of 30% to 40%. Our results in the quarter reflected year-over-year revenue growth of 8% and net earnings of $0.05 per share. Including $0.14 of restructuring charges, $0.13 from losses on debt retirement and a $0.01 expense from special tax items. Excluding these 3 items, our diluted earnings per share would have been $0.33.

This compares to a net loss of $0.08 per share in the prior-year which included $0.14 of restructuring charges and a $0.01 charge from losses on debt retirements. Again, excluding these items, 2010 third-quarter diluted earnings per share would have been $0.07. Operating earnings excluding restructuring exit and impairment charges, were $49 million in the quarter, an improvement of $11 million as compared to the prior-year period. If we exclude variable compensation expense from our 2011 and 2010 result, our operating earnings increased by about $24 million in the quarter. In addition to higher sales levels, our earnings benefited from Company wide cost reductions, improved operating efficiencies, and increased fixed cost absorption.

Partially offsetting these items was the previously mentioned higher variable compensation expense. Our cash and marketable securities totaled $547 million and our total debt outstanding at quarter end was $703 million. This is our lowest debt levels since the first quarter of 2004. And you can see that laid out in a supplemental chart, I think we labeled that chart number 1 to our earnings release. (sic - see chart 1) Peter will comment in his remarks on the key drivers of our strong cash flows in the first 9 months. As well as provide you with a perspective on our 2011 targets, supporting our objective of generating free cash flow for the year.

Now let's take a look at our operating segments starting with the Marine Engine segment. From a geographic perspective, Mercury's non US revenues increased by 12% in the quarter. With all major markets experiencing growth, and with relative strength demonstrated in Europe and Asia Pacific. While Europe's growth in the quarter was healthy, results do continue to vary widely across the region. Revenues in Russia were extremely strong and revenues in core markets such as Germany, France, Italy, and Holland also increased at a healthy rate. However, the markets in southern and northern Europe continue to be quite weak.

Asia demand was very robust in the quarter pulled along by strong macroeconomic growth led by China. Asia's growth is more than offsetting subdued market conditions in Australia and New Zealand. Overall, Mercury continues to experience growth outside the US, due to sales into commercial and government segments, boat repower activity and healthy demand for service parts and accessories in all market segments.

US revenues increased by 8%. In the aggregate, the segment experienced top line growth of 9% for the quarter and 10% for the 9 months. From a product category perspective, sales on our outboard engine business continue to experience strong growth, reflecting and improving aluminum and fiberglass outboard boat marketplace, as well as, from market share gains.

We believe the overall impact of Japan's cash -- catastrophic events earlier this year and the resulting supply issues were, for the most part, not a material factor in the overall competitive landscape during the quarter. Global engine production at Mercury in the quarter was higher than year ago levels. Mercury's parts and accessories businesses continue to report solid increases in revenues. Sales declined in the sterndrive engine business compared to year ago levels.

However, Mercury's [aid] would offset some of the declines experienced in the overall sterndrive boat market with market share gains. Mercury's top line growth, the combined effect of cost reductions and improved operating efficiencies all had a positive impact on third quarter operating earnings. However, during the quarter, these positive earnings -- factors were more than offset by an unfavorable shift in product mix, higher material and variable compensation costs, and restructuring charges, as well as an increase in R&D spending.

In our boat segment, revenues were equal to the amount reported in the prior year's quarter. This compares and was affected by the divestiture's of 2 fiberglass brands. Sealine completed on August 31 of this year, and Triton completed on July 29 of 2010. If we exclude the sales of both brands from the segments results in 2010 and 2011, revenues were up 3% in the third quarter and 14% for the 9 months. We've attached a summary of the US powerboat industry demand statistics provided by Statistical Surveys Incorporated. As you can see from the data, the US retail market -- Marine market for 2011 is unfolding, generally as we had expected.

With the aluminum fiberglass outboard boat markets experiencing solid growth, while the fiberglass sterndrive boat markets continue to decline. Albeit, at a more moderate pace versus the prior year. I mentioned this just document is attached and it's attached to our Press Release and I think it is labeled as chart 2. (sic - see chart 2) On the International front also adjusting for divestitures, our boat segment sales outside the US decreased by about 11% for the quarter compared to the third quarter of 2010. Canada, now our largest non US boat market, experienced strong growth. Asia-Pacific also experienced growth in the quarter led by China which offset lagging markets in Australia and New Zealand due to weakening conditions in those markets. European fiberglass boat sales softened due to lower consumer confidence levels, resulting from macroeconomic concerns across the region.

During the first 9 months of 2011 Brunswick's retail boat sales growth was greater than that experienced by the overall market. This performance 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 it was at a lower percentages than on the fiberglass side. In summary, as a result of increasing retail demand at our dealers, we made the appropriate increases to our wholesale unit shipment levels. The resulting, our US shipment combined with slightly lower discounts, partially offset by low international shipments and the effect of a higher mix of smaller boats sales led to the boat segment adjusted sales growth of 3% in the third quarter.

We continue to man our pipeline stocking levels appropriate for the market. Our pipeline is up 8% versus the third quarter of 2010. The quarter ended with 26 weeks of product on hand on a trailing 12 month retail basis, which is comparable to the weeks on hand at the end of the third quarter in 2010. Our pipelines for fiberglass boats under 24 feet and aluminum product are up over last years third quarter. While our pipeline for fiberglass products 24 feet and larger is down and remains at record low levels. Increased fixed cost absorption and cost reductions led to lower operating losses for the boat segment in the quarter. Now let's look at our 2 recreation segments.

Life Fitness completed another outstanding quarter. Sales were up 14% as compared to last year's third quarter. During the first 9 months, revenues increased by 20%. US commercial revenues continue to be strong during the quarter with sales growth experienced in all major distribution channels. International sales were down modestly in the quarter, resulting from lower orders from Europe. Segment operating earnings in the quarter grew by about $6 million resulting in about $65 million in earnings in the first 3 quarters, a record for Life Fitness. In addition to the benefits from increased unit volumes, a more favorable product mix contributed to the higher level of profits.

Sales in bowling and billiards were up 7% in the quarter. This increase represents the bowling segment's second consecutive quarter with growth in revenues. Our bowling products business experienced strong domestic growth with same-store retail bowling -- while same-store retail bowling revenues were flat versus the prior year. The segments operating remarks were about -- earnings were about $2 million higher than last year's levels due to higher sales and improved operating efficiencies. Now I'll turn the call over to Peter for a closer look at our financials and then I'll come back to give you an update on our perspective on the remainder of 2011.

Thanks, Dusty. I'd like to begin with an overview of certain items included in our third-quarter P&L and I'll also comment on certain forward-looking data points. Let me start with restructuring exit and impairment charges, which were $13.2 million or $0.14 per share in the quarter. The majority of the charges pertain to the previously announced sale of our Sealine brand as well as ongoing actions in our Marine Operations.

Our current estimate for a full year restructuring charges is between $20 million and $25 million. Net interest expense, which includes interest expense, interest income, and debt extinguishment losses was $30 million in the quarter, an increase of $7 million versus the same period in 2010 primarily due to higher debt extinguishment losses. During the third quarter, we reduced debt by $84 million and have completed $127 million of debt retirement's in the first 9 months of 2011. In addition, we thus far retired approximately $8 million of debt in the fourth quarter resulting in additional debt extinguishment losses of approximately $1.5 million.

Now, including the impact of debt retirement actions we have taken to date, we anticipate net interest expense for the fourth quarter to be approximately $17 million excluding any losses on debt extinguishment. However, it is likely that additional extinguishment losses will be incurred during the remainder of the year and into 2012 as the Company continues its effort to reduce debt levels. During the quarter, foreign currency had a negligible 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 did have a favorable effect on our sales in the quarter.

Our effective tax rate for the first 9 months of 2011 was approximately 23%. This rate is lower than our previous tax rate guidance due to the benefits of certain incremental deductions in the tax provisions. As a result of a decrease in the effective tax rate, our tax provision in the third quarter was zero. In the third quarter of 2010 we recorded a provision of $5.3 million. As a quick reminder, due to the Company's 3 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 or income from US operations. Our 2011 tax expense will, therefore, continue to be comprised primarily of foreign and state income taxes. Given our current earnings guidance range, we 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 9 months 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 $79 million. Our current estimate for D&A in 2011 is approximately $105 million. Pension expense resulting from our defined benefit plans totaled approximately $24 million in the first 9 months compared to $29 million in the prior year. In the first 3 quarters, the Company made cash contributions to its defined benefit pension plans of approximately $42 million in total. The $18 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 in $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 in the range of $75 million to $85 million. Changes in our primary working capital accounts, excluding the impact of divestiture's resulted in a use of cash in the first 9 months of the year and totaled approximately $130 million. By category, accounts and notes receivable increased by $63 million, inventories increased by $22 million and accrued expenses decreased by $58 million.

Partially offsetting these uses of cash was an increase in accounts payable of [$16] million. For 2011, our working capital performance will primarily be a function of our revenue assumptions. We currently believe the changes in working capital should result in a modest usage of cash. Given the seasonality of our sales and our marine businesses, we anticipate the liquidation of working capital in the fourth quarter, especially reductions in receivables, to have a positive impact on cash flow. Capital expenditures for the first 9 months were $58 million.

Our 2011 plan reflects approximately $85 million of expenditures. This increase versus 2010, reflects expenditures and developed new products and to fund our marine manufacturing plant consolidation activities. Partially offsetting our capital expenditures were $23 million in proceeds from the sale of property, plant, and equipment in our marine segments. During the first 3 quarters of 2011, the cash flow statement includes about $60 million of additional net investments made in short and long-term marketable securities. This is part of a 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.

This new program is designed to increase earnings on a portion of the Company's cash reserves, investments and maturities of 2 years or less, and include high grade corporate commercial paper and government securities. Cash flow in the third quarter also included a transfer of $20 million of restricted cash -- a transfer of $20 million to restricted cash, this reflects cash used by the Company to collateralize a portion of the Company's obligations related to workers' compensation claims. The Company is required to provide collateral against these obligations under the terms of agreements with insurance companies and state regulators. The Company has traditionally collateralized these obligations with letters of credit or surety bonds. This new arrangement will result in approximately $500,000 of annual savings.

The related cash remains on the Company's balance sheet and is reflected as restricted cash, but is excluded from our definition of total cash and marketable securities. Neither of these transactions affect our calculation of free cash flow or liquidity. In summary, during the first 3 quarters of 2011, we generated $59 million in free cash flow and, after using approximately $145 million to retire debt plus the $20 million transferred to restricted cash, our cash and marketable securities in the first 9 months decreased by about $110 million ending with a balance of $547 million. Supplementing our cash and marketable securities balances is a net available borrowing capacity from our revolver of approximately $243 million, which, when combined with our cash and marketable securities, provides us with total available liquidity of $790 million. And I'll turn the call back to Dusty now for some concluding comments.

Thanks, Peter. I'll conclude today by commenting on our outlook. Thus far in 2011 we've successfully executed our core strategy of generating free cash flow, performing better than the market, and demonstrating outstanding operating leverage. As I said, the retail marine market for 2011 is unfolding in line with our plan. With the aluminum and fiberglass outboard markets experiencing solid growth, and the fiberglass sterndrive markets continuing to decline, albeit at a more moderate pace.

In summary, the 2011 total US market appears to be flat to up slightly when compared to 2010. As we enter the final quarter of 2010, we will continue to focus on this core strategy as well as pursue various operational and financial strategic initiatives that will enable us to continue to deliver future revenue and earnings growth. During the quarter, we will continue to position our marine products to give our dealers and distributors the opportunity to gain market share. In our engine segment, we announced a plan in September for Mercury to assume future responsibility for worldwide sales, service, distribution and support for the Cummins-MerCruiser diesel lineup of high speed diesel marine engine systems, including the TDI range of Volkswagen engines. The global diesel market is an area that Mark Schwabero and his team have identified as an excellent growth opportunity for us over the next several years.

For the remainder of 2011, and even beyond, we believe our fitness and bowling and billiards businesses can continue to benefit from their market-leading positions and overall operating strengths to deliver strong earnings and cash flow. We are still planning for high single-digit consolidated Brunswick revenue annual growth for 2011. This targeted top line growth is based upon improvement in market share, in all of our business segments. For the year, net income will benefit from our previously announced marine plant consolidations in asset sales, lower restructuring costs, reductions in interest, depreciation and pension expenses, as well as from a lower tax provision. After taking all of these factors into consideration, we currently expect our 2011 earnings-per-share to be in the range of $0.65 per share to $0.75 per share.

Please keep in mind that seasonal factors affect the fourth-quarter results of our marine related businesses. Our strong brands, outstanding product quality and a premier distribution network have enabled us to grow our businesses in what has been a very challenging economy. But we remain confident that over time the recovery of global marine markets will be consistent with improving economic conditions. We are focused on managing our businesses to deliver growth in a flat marine market environment. Our growth strategy is founded on the successful delivery of singles and doubles rather than the risky path of swinging for the fences. A portion of our growth initiatives is the steady introduction of improvements and breakouts in our existing product lines, such as Mercury's recently launched 150 horsepower outboard engine, which last week received an International Innovation Award sighting it's lightweight and superb fuel efficiency and performance.

Another exciting product enhancement is Life fitness' iPhone and iPad touch compatible virtual trainer website that services the tool to help exercisers customize and track an appropriate workout plan. At the same time, we are designing and introducing completely new products to expand our current portfolio. Mercury's Attwood business has been successfully developing cleaner fuel systems for the marine industry and was also a recipient of an International Product Innovation Award. And in bowling, we will soon introduce a battery powered lane conditioning machine, offering proprietors more convenience. We are also focusing our focus on the marketing and sales of Brunswick products in those markets where the opportunity for sales growth is highest. The boat group's recent move to manufacture Sea Ray and Bayliner sport boats and cruisers in Brazil is but one example of that.

These products and reasonable initiatives will drive continued growth in share, move us into new product segments, and result in sales and earnings growth for Brunswick despite weak marine markets. As these markets recover, our growth will be further accelerated. As we look forward to 2012, our entire organization is focused on maintaining its favorable cost position, and generating continued revenue and earnings growth, particularly through these organic growth initiatives. We further believe that our 2012 net income will benefit from previously announced marine cost reduction activities, lower restructuring costs, and reductions in interest expense. And as we continue to focus on organic revenue growth, we will concurrently and opportunistically target debt reduction and pursue the full funding and eventual de-risking of our frozen defined benefit pension plan.

Thank you for your time and we will now be happy to take your questions.

(Operator Instructions)

Ed Aaron, RBC Capital

I wanted to start by drilling a little bit deeper on the engine margins in the quarter. You listed a number of factors. Were those in order of magnitude, that you discussed them?

Yes, they were. That is typically the way we report them, Ed. That is the way we always try to report them.

And then on international, the performance was different between boats and engines, it seems, that in Europe it sounds like you saw pressure in boats but not really in engines. In Asia-Pacific, I think you said that China offset pressure in Australia and New Zealand for the engine business, but you said the opposite about the boat business. I was wondering at a high level how I should think about those differences?

Well, first, we intended to say that China helped both engines and boats and offset weaknesses in Australia and New Zealand in both segments, Ed. So, if I said differently, I apologize. Then as to the difference between the segments, let's try to go through 3 things.

First, in the boat business we serve recreational markets and Europe is, after the United States, the largest recreational market and it's been tough there for boats. On the engine side we serve commercial and government, we get a lot of re-power and we continue to have a very strong P&A business so as long as boats are used, so that's important.

Thirdly, as you look at boats, what we report there is dollar change and we can have a very small number of very large boats differ on a year-to-year basis and it can have a pretty dramatic impact on the dollar change. When you add all that up, that's the difference between the 2 segments.

The high end of your guidance stayed unchanged, but you absorb the Sealine charge, which we didn't know about last quarter. As we think about the quarter in terms of effectively a raise to guidance excluding that. What is kind of the incremental driver versus when you last update your guidance?

I sure hope you take lowering the bottom as a raise because that was our intent. Perhaps the biggest driver is as we position primarily our marine products this time of year for continued market share growth next year. We need to get a lot of products positioned and the pull-through of retail into our production and wholesale here in the fourth quarter is strong.

We have a very strong backlogs and our dealers are really looking for us to have product for them. We're needing to go to work a little bit more in the fourth quarter in order to be ready for the selling season next year.

Jimmy Baker, B Riley & Co.

Can you talk about the promotional activity in the marine engine market segregated by outboard and sterndrive? Are you feeling the effects of some renewed promotional activity in there in outboard market either here or abroad? How do you see that playing out through the boat show season and into the spring?

Our promotion activity is unchanged on a year-to-year basis. And in fact, we're -- Peter is just helping me here, he's the fount of all knowledge on numbers -- were actually helped by lower discounts on a year-over-year basis in both engines and boats. So, we're growing share -- here's the real understanding -- without the need to do any discounting. In fact we are going share doing less discounting and I think that is a tribute to our very strong dealer network.

Are you seeing more promotional activity from your competitors, specifically Yamaha?

No. No, not at all. You got a good feel of the market if you know something I don't, so tell me so we can go look.

Can you maybe share the Mercury's P&A number for the quarter?

Which number?

P&A sales in the quarter?

That is a not a level of detail, Jimmy, that we have ever gone to. From time-to-time we have given the percentage of total sales, which probably gets you the same number, but I don't have that one at the to my finger right now.

I wanted to touch on this retail slide that you've offered. I'm wanting to get some color on NM&A reporting flat sales here in Q3 and how you reconcile that with the SSI numbers and what you're seeing out there? With meaningfully positive growth in aluminum and positive growth in the fiberglass outboard, which dominates the unit volume in the categories that you participate in. Would you say that it is fair that you are seeing at least low single-digit positive growth in total of your share of the market?

First, you made a distinction between SSI and NM&A and what the chart we published is really SSI's view of the total industry that MN&A covers kind of a strange way of saying that but that chart is an SSI chart. Here's the way I would say it. On a year-to-date basis, we believe our retail boat sales are up 9%, versus the industry being up 1%. And, we know our retail in the third quarter was up significantly more than the 9% on a year-over-year basis.

So, were quite comfortable that we're gaining share. As we look at segments, we think we are gaining share across the board in sterndrive, inboard, fiberglass -- sterndrive and inboard fiberglass products. In aluminum fishing products. Were probably losing a little share in outboard fiberglass, but remember also that last year we cut back on the product offering of our Triton brand and it looks like there's a lot of small outboard fiberglass product getting sold in the third quarter.

The other thing I ought to point out is the numbers I have given you on our sales growth is our global growth and we don't really report or talk much about what we are doing in just the US. We continue to ask our businesses to drive growth across the globe because we think as the whole boat world is looking at it, the near-term growth opportunities are going to be outside of the US and we've got to be very good there.

On your debt repurchase activity, while very active in the quarter, it was a bit front-half weighted I suppose. I don't want to ask for too much detail on your strategy and I know you're not providing 2012 guidance. Can you give us some general color on how the magnitude of debt repurchases will track in 2012 relative to the magnitude that we have seen here in Q3? And what cash you feel like you need to keep on the balance sheet and how you'll be weighting debt repurchasing against pension contributions?

First, we will be weighting them essentially equally. We have the same level of -- we place the same level of importance on returning to our investment-grade status as we do on fully funding in fullness of time our frozen defined benefit pension plans. You will see that in this year, for example, we are making considerable contributions, $75 million to $85 million, to pension plans. Through today you can see from my remarks, $135 million of debt reduction.

When we look to 2012, it is not possible now to give any hard and fast rules as to what the balance of cash contributions will be to either of those 2 strategic imperatives. First, because the debt reduction is very much an opportunistic enterprise that our treasury staff does on a week-to-week and even day-to-day basis. It really does depend on a lot of moving parts and most fundamentally the price of the debt.

And it also depends upon our cash generation capabilities as we move through 2012. The pension contribution, of course, has a lot to do with moving discount rates and asset valuations and that makes that difficult to assess exactly what we are doing in the future.

As we look at 2012, I think the only scoping I can give is we will continue to reduce debt and we will continue to fund our pension plans and both will be significant calls on our cash during next year. And that is about as specific as we can get. Perhaps, on our fourth-quarter call, when we know a few more facts, we will be somewhat more specific.

Ed Aaron, RBC Capital Markets.

What you said about your retail of sales in the quarter intrigue me. 9% number year-to-date. Wasn't the number in Q2 more like a mid to -- closer to mid single-digits and Q3 the seasonally slower quarter, so that would just imply a pretty massive step up in the quarter. Am I understanding that right? When you look at the different parts to your business, where did you see that acceleration the most?

Your interpretation of math is actually right. We saw it in both fiberglass and aluminum, but more so in aluminum.

As I understand it, you're using your capabilities especially in P&A within your engine segments to get a bigger foothold in some of these markets and then ultimately you'd think that the boat business would follow that. How do you think about that as we look out the next couple of years in terms of progress that you're seeing within your engine business and some of those markets and the ability to drive the boat business to capitalize on that?

I'm not always sure that the boat business will follow the performance of the engine business, because in these markets, especially outside of the US, the markets themselves are so different. Boats are primarily focused on recreation, although we are really beginning to move forward on government and commercial business in boats. For our engine business, we're good at rec but we also have these other commercial and government opportunities and they can be very different than the rec opportunities.

Stepping back, here's what's happening in the boat world in our judgment. Everybody sees the same set of issues around economies. And then are looking for drawing economies that have lifestyles and consumers who also like boating or can be attracted to boating and many, many, many boat builders are going to these economies. Therefore, the winners are going to be people who can execute well and we really like our chances in that environment.

Tim Conder, Wells Fargo Securities.

Congratulations to you and everyone on just doing a continuing great job there.

Thank you, Tim. We hope we are becoming boring.

It's nice to be boring in this trajectory.

That's what we're hoping.

Given the divestiture's of Sealine and the Triton part, can you update us if there has been any material change on your statements that you made before on the break-even industry retail units that you need for the industry to achieve corporate break-even? You've mentioned that you have corporate operating margins similar to where things were in 2005 at a certain level of retail unit sales. Update us on those figures if that has moved the needle any with these divestiture's.

The divestiture's have had an impact, but more importantly, as our businesses have rolled up their sleeves they have done a magnificent job in identifying organic growth opportunities. We think the margin and margin dollar targets that we have previously disclosed are no longer applicable. And we have not really sat down and redone the numbers in a way that we can talk about them.

But at 200,000 units we would make more margin dollars then when the industry was at 300,000, that number is fairly significantly lower now in our view based upon our ability to go forward. But we've not in any detailed calculations around that and that is something maybe in the next call or 2 we'll sit down and give folks a view of that. These numbers have been lowered. But it is driven by our folks doing a great job identifying and beginning to execute against organic growth initiatives.

What is lowered is the remarket volume necessary to achieve the objectives that we set out in 2009. As a result of cost reductions and other things we've done in the Company, we find that we can achieve those numbers in even lower marine markets. We haven't seen the need to continually update it because we think our performance is in and of itself gratification that we are able to significantly exceed those 2009 objectives.

You referred to in one of the prior answers to the prior questions, that you are ramping up -- you saw the need to ramp up the pipeline a little bit, just because of the good pull-through. In one of the prior charts that you had given, I think you'd said somewhere between 15,000 units and 16,000 units ending inventory was a goal that. An updated numbers from that perspective?

I think it's going to be, right now, in the sort of market conditions we see, we would like to walk out of this year with around 17,000 units. And the way to think about it under 24 feet fiberglass and aluminum we moved up so that we can keep our dealers in boats as they go into the selling season. Above 24 feet fiberglass, we really got our hands around that one carefully and we continue to run at record low levels.

If you ask me am I concerned about any of that, I'm going to give you a surprising answer, but you didn't ask me, but I'm -- (laughter) I do have a concern and the concern is and maybe we don't have enough in the pipeline on some of the smaller products, but our guys are working real hard to make sure we are positioning our dealers well for next selling season.

That has implications to what you have done here with your guidance and it goes to one of the questions that Ed had asked earlier, about the raising of the guidance. Peter, I think you gave us some numbers that you had already repurchased. I think it's $23 million in the quarter on debt. Is that plus anything additional above that factored in to your $0.65 or $0.75 for the full year?

The $0.65 to $0.75 is an all-in number; takes account of any and all activities that we contemplate at the present time, including any remaining fourth quarter debt reductions.

Anything you can say at this point on restructuring expectations for 2012? D&A,, CapEx for 2012? You'd said that the fourth quarter interest run rate would be about 17,000. Would that be exiting fourth quarter? And obviously depending on how much more debt you repurchase. Should we annualize that 17? Would that be a good starting point and maybe it goes a little bit lower for 2012?

On the restructuring, that's obviously a function of decisions that we make in the future. We would certainly expect, as we sit here now, to have a lower restructuring number next year. That is not something we can absolutely promise because nobody quite knows what the future holds.

In terms of interest for next year, we did say that now the run rate has been reduced to $17 million and I can only say that to the extent we buy back some more debt in the remainder of the fourth quarter, that number multiplied by 4 would go down somewhat as a run rate.

I don't expect there is going to be a significant improvement in that interest number, because we have purchased, already, and bought back $135 million motional of debt already this year. In the next couple months, I don't think that we will continue unless the opportunity is enormous, I don't think we'll continue at a torrid pace.

And then the D&A, CapEx Peter, at this point?

For 2012, please stay tuned for the conference call 3 months from now. (laughter)

You talked about an annualized run rate of break-even on an operating profit basis for the boat segment exiting the fourth quarter of 2012. Would that imply that you would still expect an annual loss in boats for 2012? Or, reconciling given that the fourth quarter is traditionally a tough quarter to begin with on a seasonal basis.

Or should we expect a profit out of the boat segment in 2012, assuming you would have the larger seasonal quarters would be substantially reduced losses year-over-year or maybe some profits?

It is a bit too early to give you those precise numbers because we have not done our plan yet for 2012. We'll be able to give you a good view of that in the January call.

Laura Starr, Nuveen Asset Management.

You talked about expanding your relationship with, I can't remember who it was -- VW and Cummins on the diesel engine strategy and I'm curious on that if you could just give us a little more color. Is that because you can get into a better customer group? Does the government and commercial customers, especially overseas, want diesel -- more diesel engines? What about the consumer market and if you could have had a better diesel offering now would your share could have been higher? Can you talk about those opportunities as best you can right now?

What we have done is our CMD joint venture was the marketer and distributor of the high-speed diesel engines that the venture resulted in the marketplace and we have moved that out of the venture into Mercury. And the real star of that lineup is going to be the TDI Volkswagen engine and is -- I saw commercial this morning. More and more people are beginning to understand these under 350 horsepower diesel engines, perform as well as or better than gasoline engines.

This is particularly true in Europe. This TDI engine will do well in commercial and government, but we think the demand is going to be significant outside the US in the recreational markets. The reason we moved it from -- and it's in complete agreement with our venture partner, out of the venture into Mercury is our distribution system and our relationship with boat builders who would use this particular engine is probably more developed and a little more mature than what the venture has. So we think there is really opportunity here for us.

Would that be a big push in 2012 or not until 2013?

Oh no, were going right now. We announced it at the Genoa Boat Show in September and early October and we've got folks lining up for the engines.

Are they significantly more expensive than your existing lineup? Are they the same price just giving them more offering to pick from?

It just gives them a more offering to choose from. And it permits us to serve non-US markets who prefer diesel in a much more effective way.

Alex Gates with [Layton] Partners.

I had a couple of questions on your fitness segment and how you view the overall market going forward on the commercial side? If you're seeing a lot of new gyms opening up and if you're gaining market share there?

Perhaps, Peter and I should both talk to this because Peter actually managed the business for a good period. We are clearly gaining share, in our view, and we are seeing a bifurcation of the fitness market and I'll let Peter speak to that and how well we're doing and why.

I think the fitness market is extremely good now for 2 reasons. First proprietors of health clubs and hotels and gyms and universities are beginning to replenish some of the deferred maintenance of the machinery that they did in the past over the difficult few years. Equipment has different spans of life, but over time it needs to be replaced and with somewhat improving economic conditions, we see the fitness industry beginning to reinvest in equipment. So that is good across the board.

Are they mostly replacement machines or are they actually expanding their?

No, that's actually the second part of this story. The bulk of it is replacement, but there is also a very nice increase in new health clubs that are driven, to a great extent, buy the value proposition that says that with somewhat more difficult economic times, people are very interested in having an option of health clubs where their monthly fees can be within their individual budgets.

So, the club industry is growing at both ends of the spectrum. First, it is growing on the value side with smaller clubs that have less offerings, but they have a lot of fitness equipment. It's also beginning to grow again on the high-end side for the upscale clubs that offer a full range of offerings and so on both counts, Life Fitness is advantage.

Historically you have been mostly all in commercial. Is there any push to go into the consumer market? I know you guys value it at around $3 billion, so it seems like a significant market opportunity.

We've always had a presence in consumer, we are certainly attempting to grow our consumer present because it is just arithmetically our greatest market share opportunity. We have more opportunities or we are seeing more opportunities, actually, outside of the US on the consumer side than within the US, but it will be an area of focus of Life Fitness, but importantly it will not divert Life Fitness' focus from its core central meat-and-potatoes product line, which is commercial.

Carla Casella, JPMorgan.

I have a similar question on the commercial front but in the other segments. Can you remind us what percentage of the marine and the boat business is now commercial? Commercial and government. I guess I'd include those together.

On the boat side, it's relatively small, it's going to be under $40 million or under $30 million in that range. On the engine segment, I don't actually know because it's not something we track like we do on the boat side because we have a business segment in the boat side. That is one you may have to do a little follow-up with Bruce, Carla.

That sounds like it's a growing area for Mercury, especially overseas. Is that correct?

Sure is. It is an opportunity for us.

At this point, are you hedging any of your currency exposure?

We have modest currency hedges usually about [50]% of our larger known exposures. But it is just plain vanilla hedging.

Jimmy Baker, B. Riley & Co.

Just a quick on the follow-up to the fitness commentary earlier. Could you maybe give a little color on what allows you to drive such high incremental margins in that business? And what the long-term, or if you can give over the next at least couple 3 years, what the right operating leverage is to think of out of that business? If you do become more exposed to the consumer market and more successful in a vertical, does that deteriorate the operating leverage potential of this business?

We're certainly not going to engage in those portions of the consumer segment of the marketplace that would have significantly lower margins from the commercial marketplace. That would not be an objective. We are enjoying very, very excellent sales and operating margin conditions at the present time, and that is a function of things that will continue in the future.

We have fabulous products; Life Fitness team has a fabulous sales force, terrific installation, terrific service, terrific parts accessibility. All of the things that health club proprietors want and need. All that will continue in the future and we hope on the product side it will be even accelerated.

It is also true that Life Fitness is, at the present time, 1 of the most significant suppliers of choice because it is an extremely stable Company, it is -- got a very, very known and well-recognized management team and it is under the umbrella of a stable larger holding Company with a stable capital structure. For health club proprietors, I think they want to do business with an entity, with the management team, and everything about the business looks like it's going to stay there.

I think that drives significant sales and earnings at the present time, which may not always be the case in terms of the competitive situation. Will these operating margins continue at their current terrific rate? Perhaps not. Will there always be strong double digits? Yes.

This brand is a really powerful brand. One of the things we don't want to do is go into any markets where we get dragged in to competitors that want to play just on price. Our brand stands for extreme quality, durability, reliability, and the point Peter made, high-end or low-end, we are winning the battle with our equipment on both ends of these clubs and that's because of how great the equipment is.

The low-end guy can put it in and forget about it. The high-end guy can put it in and he's got a ride for his consumer, for his customer, that nobody else can provide. Were going to protect this brand going forward very, very diligently because it is a great brand. It's a great business team there; they're really performing well. We want to be very careful in trying to push them into markets that they don't really belong in.

Looking for some qualitative commentary regarding the sentiment in your dealer network and maybe if you could compare sentiment today to this time a year ago. 2011 to date seems in line with your expectations. Would you say it is in line with your dealers expectations? How do you see their sentiment impacting appetite for inventory risk here in model year '12?

I think our dealers in our aluminum product line-up feel better this year than they did last year. They've done a magnificent job of capturing share. They pushed us very well to keep the product coming and we have continued to introduce new product and ramped-up our manufacturing to serve them. Their view, in general, is please keep us stocked so that we can succeed as the selling season unfolds.

On the fiberglass side, in smaller product, that same sentiment would generally be there, but my view is it is not quite as strong as it is in aluminum. In large fiberglass product, both we and our dealers are going to be very cautious. That is why dealer inventories are at record lows in the United States in those products. And we and they are going to be careful and watch consumer sentiment and economic conditions in '12 before we decide to really begin to ramp up and put more product in their dealerships.

There are no further questions in queue. At this time we would like to turn the call back to Dusty McCoy for some concluding remarks.

First, thank everybody for a series of absolutely great questions this time. They all went to the heart of several issues and how we are performing. I'm incredibly proud of our organization and what it's doing and while we said it a bit jokingly at one point in the call, we do want to become boring and we want to get away from big swings in this business. I hope as you watch us you'll become more and more comfortable that we'll continue to perform and grow the top and bottom line without worrying too much about overall economic conditions. Thank you for your time and we will talk to you if not before, in the next call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.