賓士域 (BC) 2012 Q1 法說會逐字稿

Good morning, and welcome to Brunswick Corporation's 2012 first 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. Please go ahead.

Good morning and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO; and Peter Hamilton, our CFO.

Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements. 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 of these documents are available on our website at Brunswick.com. As you are aware by now, we have issued our Q1 results today by way of an advisory released; the full-text financial results are available on our website. We plan on using this method with all of our future earnings releases.

I would also like to point out that on April 19, we filed a Form 8-K to reflect a change to our segment reporting. These changes do not revise or restate the information previously reported in our consolidated financial statements. Please see the 8-K for the details supporting this revision.

Now I would like to turn the call over to Dusty.

Thank you, Bruce, and good morning, everyone.

I'll start with a few overview remarks regarding our first quarter results. A quarter which represented our ninth-consecutive quarter of year-over-year earnings per share growth.

This was a good quarter from any perspective. Our first quarter increase in earnings per share demonstrates the continuing success of our business strategy. Short-term financial performance continues to improve, even as we make increased investments for long-term organic growth. As anticipated, consolidated sales were modestly lower, due to specific factors affecting our Marine Engine and Life Fitness segments, on which I will elaborate shortly.

Our gross margin of 24.2% represents an increase of 20 basis points from the prior year. Lower depreciation and pension expenses, combined with successful cost reduction activities, contributed to the higher gross margin.

During the quarter, SG&A and R&D expenses in the aggregate increased by 3%, which is inclusive of company-wide investments in growth initiatives, many of which we highlighted at our investor meeting in Miami earlier this year, as well as the absence of the gains from the sale of properties and insurance settlements recognized in Q1 2011, partially offset by lower variable compensation.

Preliminary US retail boat demand was up in the quarter, with strong improvements continuing in aluminum and fiberglass outboard product categories. And, lower net interest expense, and a reduced income tax provision, contributed to higher net earnings during the quarter. Sales decreased by 1% in the first quarter, three of our four segments reported modest growth in the period, which was more than offset by a 2% decline in the Engine segment.

Operating earnings, excluding restructuring, exit, and impairment charges, was $68 million for the quarter, a decline of $5 million as compared to 2011. Operating margins, ex-charges, decreased by about 30 basis points to 7%. Factors causing the decline in operating earnings largely occurred in the Engine segment, which I will describe in more detail in a few minutes.

Net earnings for the quarter were $0.43 per share, including a $0.02 charge from special tax item. Excluding this item, our diluted earnings per share would have been $0.45 per share. This compares to net earnings of $0.30 per share in the prior year, which included $0.05 of restructuring charges and a $0.05 loss on debt retirements. Again, excluding these items, 2011 earnings per share would have been $0.40. In summary, our adjusted EPS increased by $0.05.

Now, let's turn to our operating segments, and we will start with the Engine segment. From a geographic perspective, sales to US markets were flat. While sales to Mercury non-US customers decreased by 7% for the quarter. In aggregate, the segment sales declined 2% for the quarter. US sales continue to experience growth from outboard and parts and accessories businesses, but were offset by declines in sterndrive engine.

Non-US revenues were affected by varying market conditions around the world. Growth across Asia continued to be healthy, especially in China. On the other end of the spectrum, Australia continued to be weak, even during the height of the retail selling season.

In Europe, business conditions were off versus the prior year with variations across the continent. There was growth in Russia; stability in Central Europe, that would be Germany, France, Netherlands; and weakness in much of the Nordic region as well as Italy and other southern European markets. Uncertain economic conditions are having an impact on overall demand in this region.

From a product category perspective, sales in our US outboard engine business continued to deliver solid growth. Reflecting an improving aluminum and fiberglass outboard boat marketplace, in addition to market share gains. Outboard engine production at Mercury in the quarter was higher than year ago levels.

Mercury recently launched its new 150 FourStroke engine. This innovative product brings many different engine attributes to the market including durability, fuel efficiency, and numerous other performance differentiators. This product has been well received from both freshwater and saltwater applications. Sales decreased in Mercury sterndrive engine business, compared to year ago levels, due to production ramp-up issues and overall weaker global market demand. These factors were partially offset by market share gains versus the first quarter of 2011.

Regarding our Mercury production ramp-up, Mercury's recovery plan is firmly in place and production is meeting recovery-plan daily production targets. Mercury's global parts and accessories businesses, which account for about 40% of the segment's annual sales, reported increases in revenues with solid gains in US markets, partially offset by modest declines in non-US markets, primarily due to unfavorable weather conditions in Europe.

Mercury's operating earnings fell by approximately $10 million, which included the effects of one-time gains totaling $11 million in the first quarter of last year. These gains related to a facility sale and an insurance settlement. Excluding the impact of these gains in 2011 and lower restructuring charges, the segments results decreased modestly. The quarter benefited from strong performance of the domestic outboard business, reflecting the strong market for outboard boats and the new 150-horsepower engine.

However, this performance is more than offset by the sales and margin impact of the sterndrive production ramp-up issue, weak European results, and growth spending. After taking account of all these factors, margins excluding charges continue to be a healthy 10%.

In our Boat segment, Q1 revenues were up 1% compared to the prior period. If we exclude the impact of the divested UK-based Sealine brand, which was sold in the third quarter of 2011, revenues increased by 5% for the quarter. We recorded solid growth in wholesale shipments in the quarter, reflecting the requirements of our dealers.

On the international front, adjusting for the Sealine divesture, our Boat segment sales outside the US increased by about 3% for the quarter compared to the first quarter of 2011. Canada, our largest non-US boat market, showed strong sales growth. European marine markets, which experienced double-digit declines in sales, were under pressure due to consumer concerns about macroeconomic conditions. As a result, we are continuing to plan for a decline in European industry sales in 2012, which we believe can be offset with share gains.

As you can see from the US power boat industry demand statistics provided by Statistical Surveys, Inc., US retail market for 2011 unfolded generally as we expected. With a preliminary estimate for the full year at approximately 139,500 units. This estimate reflects an increase of 0.5% compared to 2010. Although this increase is less than 1%, it does represent the first annual increase since 2004.

Based on preliminary first quarter data, aluminum and fiberglass outboard boat markets continue to demonstrate growth, while the fiberglass sterndrive inboard boat market was flat during the quarter, which represents an improvement compared to last year's decline. While we are pleased with the first quarter US retail market results, our view is that the level of growth in the first quarter is likely not sustainable over the year.

If we look at preliminary results for March, the largest volume month of the quarter, the market improved 7.6% versus March of 2011. As we break down March retail volumes, outboard products improved nicely, while sterndrive inboard fiberglass product volumes declined at high single-digit rate.

At this early stage of the season, the status of 2012 retail volumes in the fiberglass sterndrive inboard category remains unclear to us. We pay very close attention to this boat category, as it constitutes about 50% of our Boat segment sales dollars. During the quarter, Brunswick US retail boat sales growth was greater than that of the overall market, reflecting market share gains in specific market segments.

As we stated in our fourth quarter conference call, we increased our pipeline by approximately 2,000 units at the end of 2011 to establish stocking levels that are appropriate for current market conditions. Therefore, our quarter-end pipeline is up 11%, versus the first quarter of 2011.

The quarter ended with 39.5 weeks of product on hand on a trailing 12 month retail basis. And, this is comparable to the weeks on hand at the end of the first quarter in 2011. Our pipelines for aluminum products and fiberglass boats under 24 feet are up over last year's level, while our pipeline for fiberglass product 24 feet and larger is down, and that continues to be at record low levels.

The Boat segment sales growth and lower restructuring charges led to the segment reporting its first profitable first quarter since 2007. Getting over this important hurdle in the quarter is a great tribute to the progress Andy Graves and his entire team are achieving throughout the Boat segment.

Now let's take a look at our two recreational segments. Life fitness completed another excellent quarter. Sales were up slightly compared to last year's first quarter, despite having a difficult comparison to last year's record-setting quarter of growth. If we were to exclude the impact of last year's large order from one of its customer categories, sales for Life Fitness would have increased by 10%. International revenues on the same basis were up in the quarter by 2%, while US sales increased by 17%.

Life Fitness' solid revenue growth over the last two years supports our longer-term outlook for this segment. Chris Clawson and his team have done an outstanding job of executing their strategic plan, which has allowed Life Fitness to outpace its competitors and gain market share.

When we combine the organization's outstanding performance with a healthy fitness sector and positive demographic and healthcare trends, Life Fitness is well-positioned to continue to deliver excellent results. The introduction of new products, combined with the successful existing product line, has positioned Life Fitness for continued leadership in the commercial fitness equipment sector.

In 2011, Life Fitness introduced 25 new products. The four panels on this slide represent just a few of Life Fitness' new product introductions for 2012. Starting in the upper left, is the LifeCycle GX. Group cycling is one of the popular fitness activities today, and with its cutting edge design and features, the GX is the latest from the company that invented the exercycle.

Next in clockwise order, is Lifescape, the first in a series of technical innovations that we will be rolling out to enhance the cardio experience. It features interactive, high-definition hikes, runs, and bikes to famous locations around the world, with integrated machine controls that adjust video speed to that of the exerciser and resistance to match the terrain.

The Activate Series is a new streamlined connection of cardio equipment featuring a variety of efficient and effective workouts for any user.

Finally, the Synrgy360 combines several popular total-body, dynamic exercises into a system that helps personal trainers more effectively train individuals and groups, while giving users unlimited ways to exercise. Segment operating earnings in the quarter grew modestly, while operating margins remain strong at 15.1%. These are strong results given the difficult comparisons to 2011, when sales grew by 31%.

Sales in Bowling and Billiards were up 3% in the quarter. Our bowling products business experienced solid growth, while same-store retail bowling revenues were down slightly versus the prior year. The segment's operating earnings were up slightly due to higher sales.

Now I'm going to 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 2012 and beyond.

Thanks very much, Dusty.

I would like to begin with an overview of certain items included in our first quarter P&L and will also comment on certain forward-looking data points.

Let me start with restructuring, exit, and impairment charges, which were approximately $200,000 in the quarter. The net charge reflects continued manufacturing consolidation activities in our Marine Engine segment, partially offset by $1.5 million of gains primarily resulting from the sale of properties in the Boat segment. Our current estimate for the full-year 2012 restructuring charges is now in the $5 million to $10 million range, or $0.05 to $0.10 per share from previously announced actions.

Net interest expense, which includes interest expense, interest income, and debt extinguishment losses, was $17.1 million in the quarter, a decrease of about $10 million versus the same period in 2011. Lower losses on early extinguishment of debt, combined with lowered debt balances, contributed to the reduced net interest expense in the quarter. We did not make any debt repurchases in Q1 but are resuming activity in the next three quarters.

During the month of April, we repurchased approximately $10.5 million of debt. And for 2012, our plan continues to include debt reduction in the range of $75 million to $100 million. Our estimate of net interest expense for the year is approximately $76 million to $80 million. This would result in an reduction in net interest of $18 million to $22 million, compared to 2011.

During the first quarter, our debt outstanding increased slightly. It remains our objective to regain our investment-grade status as we continue to lower debt levels and increase EBITDA. In fact, both S&P and Moody's raised our credit ratings earlier this month.

Now during the quarter, foreign currency had a small negative effect on sales and a modest positive impact 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.

For the full-year 2012, we are planning for currency to have a modestly unfavorable impact on sales, primarily due to a weaker euro versus the dollar. We are currently forecasting only a slight decline in operating margin percentage due to currency, primarily resulting from a stronger yen versus the dollar and the euro. Our planning incorporates yen and euro exchange rates that are slightly unfavorable versus the current market rates.

Our effective tax rate for the first quarter was approximately 21%, compared to a rate of 32% in the first quarter of 2011. The reduced tax rate reflects our expectation that a higher percentage of our 2012 pretax earnings will be derived from domestic sources, which will not require a corresponding tax revision due to specific GAAP requirements. Our 2012 tax expense will continue to be comprised primarily of foreign and state income taxes. And, given our current earnings guidance range, we expect our overall 2012 effective tax rate to be approximately 21%.

Now let's turn to a review of our cash flow statement. Cash used for operations in Q1 was $70 million. Some of the key items in this section in the cash flow statement include adjustments to earnings for non-cash charges, such as depreciation and amortization of $24 million. Our current estimate for D&A in 2012 is approximately $95 million.

Pension expense resulting from our defined benefit pension plans totaled $6 million in the quarter, compared to $8 million in the prior year. In the quarter, the Company made minimal cash contributions to its plans. The inflow on the cash flow statement, therefore, primarily reflects the amount of the pension expense. We expect our 2012 pension expense to be approximately $25 million, which is a decrease of $7 million from 2011. This includes a benefit of higher asset levels, planned contributions, and lower interest costs associated with plan liabilities. In 2012, 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 divestitures, resulted in a use of cash in the quarter that totaled approximately $151 million. This change is largely due to the seasonal requirements of marine customers that by category accounts and notes receivable increased by $106 million. Inventories increased by $26 million. Accrued expenses decreased by $81 million and accounts payable increased by $59 million.

Given the seasonality of our sales in the Marine businesses, we anticipate the liquidation of working capital over the balance of the year. We currently believe that changes in working capital should result in a modest use of cash for the year, based on our current revenue assumptions. Capital expenditures in the quarter were approximately $18 million.

Our 2012 plan includes approximately $120 million in capital expenditures. The increase from 20 12 primarily reflects the amounts required to fund our growth initiatives. Partially offsetting our capital expenditures in 2012, were $9 million in proceeds from the sale of property, plant, and equipment in our Marine segments.

In summary, during the quarter, we reported a $78 million free cash flow usage which accounted for almost the entire reduction in cash during the quarter. Supplementing our cash in marketable securities balances is the net available borrowing capacity from our revolver of approximately $270 million, which when combined with our cash and marketable securities provides us with total available liquidity of almost $700 million. I'll turn the call back to Dusty, now, for some concluding comments.

Thanks, Peter.

As we stated in our press release, on the basis of our solid performance in the first quarter and early season improvements in the retail Marine marketplace, we are increasing our 2012 earnings guidance to a range of $1.30 to $1.50 per diluted share. Although we've raised the lower end of our guidance range, our outlook for 2012 remains generally consistent what the plans described during our investor event in Miami earlier this year.

We are continuing to target mid single-digit revenue growth in 2012, along with a strong increase in operating earnings. Our planning for the year reflects a stable to improving US Marine market and a declining European market.

As a result of continued cost reductions and improvement in operating efficiencies, our target gross margin for 2012 remains at approximately 24%. 2012 capital expenditures, SG&A, and R&D expenses, will be higher than in 2011 as we fund growth initiatives.

As Peter has commented, 2012 net income will further benefit from more restructuring costs and reductions in interest, depreciation, and pension expenses. Our second quarter will have some unfavorable comparisons to the prior year, similar to those that affected our first quarter results. Specifically, these are the absence of Sealine revenues, which approximated $20 million in the second quarter of 2011.

As we noted in slide 16 of the deck we've been discussing this morning, the non-recurrence of the large order from one of Life Fitness' customer categories, which mainly affected first quarter comparisons, is anticipated to have a modest impact on the second quarter of 2012 as well.

Although Mercury's action plan to wrap up sterndrive production is making excellent progress, the Engine segment's revenue growth and operating margins will continue to be negatively affected during the second quarter by these issues.

Lastly, we believe European growth rates in our Marine segments will not be comparable with those anticipated outside of Europe, due to continuing macroeconomic factors. So, we expect that the double-digit declines experienced in Europe in the first quarter will continue at least through the second quarter.

Our expectations, however, for the second half of the year are for significant sales and earnings increases as growth initiatives contribute, Mercury achieves full plant efficiencies, Life Fitness has more normalized comparison, and as our Boat segments benefit from a more stable Marine marketplace, which will enable it to produce and sell more product than in the second half of last year.

With these comments as background, we will now turn the call back to our operator to take your questions.

(Operator Instructions)

James Hardiman, Longbow Research.

My first question is just on the outlook. Obviously, you saw some pretty strong growth for the industry. Is it safe to say that that was better than what you were expecting, but then ultimately, the European declines were maybe worse, at that is why you are essentially where you were three months ago?

Or, is it more a function -- I think you mentioned, the assumption is that the US couldn't continue to sustain the pace that we saw in the first quarter. Is that the bigger reason why you haven't gotten a little bit more optimistic on the industry outlook? And, ultimately can you just talk maybe a little bit about why you think that deceleration is going to take place?

First, your first sentence, James, was generally right. But, here is the way I think we would describe it. The sterndrive inboard fiberglass market is behaving, generally in the first quarter, like we thought it would.

The outboard product categories, which are both aluminum and outboard fiberglass which is primarily our Whaler brand, we anticipated would be up. And, they are actually up a little stronger than we anticipated. And, our businesses are performing a little better there that we even thought they would with this increased market and share gains. So, when you look at the uptick in boats, we feel like the market is way up and one could say, well you are up a little less, but that is because the lower priced product, a bit lower margin product, is where the up is.

Then, we have to layer into that our look at Europe. Our judgment is that Europe, at least here in the selling season, it could remain, and is likely to remain, a pretty difficult marketplace. We are ending up, when you shake all that up for our Marine business on a global basis, to say it's flat to up slightly. I would put it in the 0% to 5% range.

It could change as we go into the quarter, into the real selling season; but where we sit right now, that is how we feel the whole marketplace looked. And, that is why we raised the lower end because we think we got lots of nice protection on the bottom side. But, we are not prepared to say that the market is going to give us the big uplift at this time.

Just so I'm clear on the market share side of things, I thought you said that generally you are performing better than that, call it 16%, growth for the industry. Was that the case overall at retail, or was that just segment-by-segment? Because I thought you may have just said maybe you were up a little bit less than the industry. Can you just clarify where you guys were versus the industry?

At retail, we are up more than the reported 16% for the industry, not in every segment. We have got some places and some brands where we might be down a little bit. But overall, we are up quite nicely versus -- at retail versus the 16% SSI is reporting in the first quarter.

Can you talk about how you have been able to do that? It has been a pretty well established bear case that, as you pointed out, 50% of your business comes from the part of the market that, from an industry standpoint, doesn't seem to be growing. So, your ability to beat the industry is even more impressive when you take into account the mix shift. Can you talk about your ability to gain share despite the negative mix shift?

First, even with a negative mix shift, we maybe doing just fine in a segment that is going down, James, from a share perspective. But, I think there are three things that are really helping our Boat business, and I want to stress we are gaining really nice share in our Engine business also, especially in the outboard category. Because we are -- we have a lot of share in the sterndrive business and it is hard to gain a lot more share, there.

First as we look at the boat side, we invested a lot of money in 2009 in our dealer network. We continue to work hard to keep our dealers healthy. We believe we are -- our dealer and network is healthier and better situated in 2012 than it was before we began this recession. And, I just can't give enough kudos to the dealer network because it starts there.

I think secondly, as we've gotten out of brands that we believe, because of a lower market, just weren't going to position us for a lot of reasons to be successful, our Boat -- the fellows who are in our Boat business have gotten very good at choosing the right products to take to the marketplace. While we have a few fewer products or models than we did prior to the recession, we've gotten a lot better at bringing the sort of models to the marketplace that actually sell and work well for consumers.

Thirdly, I think our communication with the dealers, because they are better and we are better, is permitting us to be a lot more flexible with the dealer network. I suspect many would say we are still not flexible enough, but we are doing the best we with the production capabilities that we have. And I think that partnering with the dealer network and really trying to help them hit their local retail market with the appropriate product would be the third factor, James.

Got it, thanks, and last question here. And, it is an unanswerable question. But, whether -- you talk a little bit about how it impacted your business, particularly at retail, and is that ultimately the reason why versus the 16% for the quarter, you are still thinking from an industry perspective maybe 0% to 5% just because there was some demand pull forward; is that how I should think about that?

Well, the first quarter is generally less than 20% of the sales for a year. I think there was some pretty good weather there, et cetera.

As we focused in on March, it is showing, which is the biggest month for us, it is still showing a great increase in the overall market. And, it is an increase in the market we like, are comfortable with, and think that will continue to improve as time wears on. But again, we go back to the real increase, the significant increases are incurring in outboard product, which are lower dollars. Therefore, our sales growth is governed a little bit by those lower dollars rather than the higher-dollar sterndrive inboard product.

Ed Aaron, RBC Capital Markets.

I guess I wanted to circle back on your full-year industry outlook. So, at the start of the year you talked about a flat planning assumption, and now the range maybe flat to up 5%. Just for clarification purposes, if the industry is at the upper end of that range, would that imply upside to the guidance that you have laid out in terms of where your earnings going to be?

Yes and no, Ed. There is one other factor that I want to always keep in mind, here. We've got a lot of new product coming to the marketplace and that is a part of our growth initiative.

And, Ed, a lot will be what we want the pipeline to be at any particular point in time and whether how much room we are leaving in the pipeline for all the new product we have coming. Yes, one would say, if it goes to 5% or even above, there ought to be some upside in our numbers. We are just going to have to wait and see how it plays out. And, then talk to our dealers about the new product stream that is coming, and then put in to the pipeline on a wholesale basis, which of course governs our sales and earnings, what we think is right considering all the circumstance.

Okay, that's fair enough. Can you also just address your ability to fully meet demand with product in the first quarter. The pipeline inventories look fine, but the feedback from some dealers seem to be have been that maybe they weren't getting certain boats fast enough to their liking. So, just was hoping you could comment on just how you manage that pipeline inventories through what seemed to be a pretty strong first quarter at retail?

Well, first, we tried to anticipate, in the outboard product, in improving first quarter versus last year. And, that's what we talked about at year-end, while we have increased the pipeline inventory by a couple of thousand boats, Ed.

We were trying to get that smaller product, in the part of the market that we thought was going to move very well, in place so that the dealers would be sitting there ready for the marketplace. And, we've been running pretty much flatout in certain of our businesses here in the first quarter to try to meet demand. But, we can never be in perfect balance.

And I have said, in answer to the last question, while I generally believe we are working a lot better with the dealers, and they would tell you we are getting them product much better to position them to compete in their marketplace, we are never perfect. I suspect, frankly, another issue here that probably would affect not only our dealers but other dealers, is the difficulty we've had in the ramp up of the sterndrive engine business come and therefore getting sterndrives to builders, as they need them, in order to meet dealer demand.

We put our customers through some pain. We put our own boat companies through some pain, and we are working our way through that, and we will have it taken care of by the end of the second quarter. But, I have no doubt that there are places where there are folks who would have liked to have some sterndrive product that didn't get it when they want.

Just one quick clarification on that, and then I'll pass it along. The sterndrive production issue, it sounds like it is going to run through Q2. Is that going to be fully made up for the back half of the year? Or, to the extent that maybe you end up shorting the market on those products, is that something that perhaps doesn't get made up for until 2013?

I think the latter is more the case. I doubt if we can fully make up this year.

Thank you very much.

Yes, it won't show up in the P&L as the full make up, Ed. Peter made that point, and that is the perfect answer.

Tim Conder, Wells Fargo Securities.

Dusty, just a little more clarification on your broad expectations here. Heading into the year, I think you said before that you planned for Europe to be down and it is unfolding that way. For the US, I guess the broader clarification is here, entering the year you said you saw the overall market flattish. Was that overall market a global comment, or a US market comment?

That was a global comment, Tim.

Okay. So, you're saying now globally you see the market flat to up 5% is what you're saying?

Yes, if the US continues, yes, that would be it. I want to keep stressing that the European market is very difficult right now. And, what we said in our prepared comments, Tim, was we think it's going to be worse than our plan had been.

Okay.

So, we are going to need the US market to be fairly strong in order to permit us to make all that up.

Okay. But again in general, entering the year you were saying flat globally and now you are saying flat to up 5%, with the European market being weaker than you anticipated and the US being stronger than anticipated, moving collectively again from flat to now flat to up 5%.

Correct.

Okay.

The only other thing I'll say, so we don't get people too excited, that movement is going to be in our view right now primarily in outboard-based products. Which is lower dollars and lower margin for us.

Okay. Again, in the Engine segment you called out some specific, the gains you had last year. And clearly this year, if you apples to apples it, you had a higher mix of outboards and then the ongoing issues, the ramp issues, the costs you are occurring there in the sterndrive. So again, that is why potentially, even though with the higher outboard because those two reasons you're not seeing the progress on the Engine side, is that correct?

Yes, but -- there are two things that are going on here, maybe we just need to step back and think about the whole Company here for a moment, Tim, and some of this happens in the Engine business. The issue in the Engine business was, we had $11 million of nonrecurring items last year that improved earnings. And, they weren't there this year. And, we had then the lower than we'd anticipated sterndrive production. When we mix those up, our Engine business was fundamentally on the earnings side flat, down slightly, notwithstanding the sterndrive difficulties that they have had.

And it speaks volumes then about how much we've increased our outboard production, how P&A performed in the US, didn't do nearly as well in Europe. And, we had to offset, with all of that, significant declines in Europe. So, the Engine business performed very well.

If we step back for the whole Company, -- we've got -- in the way that we look hard internally, how are we really operating? And if we -- and we've sprinkled this throughout our presentation this morning. There are lots of things, that have nothing to do with operations, that came in and out of our earnings in the first quarter last year and the first quarter this year.

And when I shake all of that out, and I'll let people talk to Bruce to get all the details because I don't want to take up the call, but our sales are up 1%, our EBIT was up 9%, and our EPS was up nearly 16% from a pure operating standpoint, with what's within our control and how were running this place.

And it is a real tribute to our people, with what is going on in Europe and all the other issues we've dealt with, that they have done this good of a job from a pure operating standpoint. And, from a pure operating standpoint our margins are up at the operating line, even with increases in SG&A and R&D that we had planned in order to fuel growth. So, it is great results for our folks, and Bruce can walk everybody through the details. But, it is all here in our presentation; you just have to step back and add it up.

Okay, totally agree.

On the outboard engine side, though, the 150 that you have introduced has been very, very good. I think that you have even alluded to that you are sold out on that product and are actually building some more tooling for that product. Number one, can you talk about how that is going?

Then, number two, the timetable for looking at expanding that new version family, whatever you're calling it here, the 150 is the current SKU in both the smaller engines and then larger engines to that new family?

First, the engine is so successful that we are on allocation, which is a good problem and a bad problem. We do need to ramp up the [milling] of additional tooling and get it in place and, Tim, we are likely several months away from doing that.

We have begun the investment process for a significant investment and in an entirely new horsepower range of product based on the 150 product. And I'd like, Tim, not to be a lot more specific in that for competitive reasons. But, we are pleased and very confident that we have a real winner in this new platform that come to the market in the 150. And, that platform is going to continue to be very successful both across cost and sales to keep us competitive for a very long time in other horsepower categories.

Okay. Last question on the engine is, so in essence you are saying you miss sales in the 150 and you've missed sales in the sterndrive here in the first quarter just because of the ramp issues on the sterndrive and not having enough product on the 150?

I think that's right.

Scott Hamann, KeyBanc Capital Markets.

Can you discuss some of the trends you're seeing in the used boat market in terms of volume and pricing?

Thanks, Scott. Here is what we continue to hear this from our dealers as late as even earlier this week, used boat pricing is increasing and the availability of high-quality used boats continues to be thinning. All of which, from many of our dealers' standpoint, point toward better new boat sales eventually, Scott.

Okay. Then, just in terms of the Sealine operating profit contribution of Boat segment this quarter, and what was it, do you expect it to be for the year, the benefit?

I'm looking to see if that is something we've talked about.

It is fairly modest, Scott.

Okay. And, is there still boat brands within the portfolio that are operating at a loss?

Yes.

Is it down to just one now?

Generally, yes.

Okay.

One category. I tend to think of it as a categories of our business. I would say that our Boat business in Europe is going to have a tough time this year also, Scott.

Okay, understood. Thanks a lot.

Gerrick Johnson, BMO Capital Markets.

I was hoping you could describe a little bit more clearly what you mean by pipeline? Is that outstanding unfilled orders?

No. That is boats sitting in dealerships, Gerrick.

Jimmy Baker, B. Riley & Co.

First, your comments on Europe, I would think a weaker than anticipated market there could ding you at Mercury and separately in your Fitness business. But, before the inclusion of international brands from Mercury to the Boat group, Europe was just 6% of the Boat group sales and now maybe that's 11% or so. So, it just seems like even if that market was down dramatically, the impact to the Boat group would not be that severe. I'm just wondering how you are thinking about that?

Generally, correct. Yes. I think that (inaudible) works.

The real issue, as we see Europe unfolding for the remainder of the year, is going to be in our Engine business. In the first quarter, sales in Europe across all of our businesses were down in a range of $20 million. And, that would have been -- that is a $4 million to $5 million downdraft in earnings. And as we see the year unfolding, that is going to continue to be an issue.

Okay. Then, staying at the engine business, maybe you can speak to market share trends there during Q1. I'm not sure if your commentary on your slide is based on wholesale or retail. From what I am seeing, it looks like you may have lost some share there in sterndrives domestically and maybe even outboards. It also seemed a little surprising that your Marine eliminations were up so significantly given the Boat group's modest growth and its weighting towards sterndrives.

It would seem that externally you lost some share at wholesale when you compare your results, both wholesale outboard activity and the results from your sterndrive competitors. I was interested in your comments there, if you feel like you can regain that share when your capacity ramps at Mercury? Or, if maybe your Mercury customers are not necessarily underperforming, but just under-producing relative to the broader market in Q1.

First let's start outboards, I am confident with realtime data in our outboard business that we are gaining significant share in the US, and gaining share, but at a much slower rate outside of the US. So, our outboard business is no issue.

On a quarter to quarter basis, that is first quarter this year to first quarter last year, we have seen some share gain in sterndrive, but I think the real world is, we are probably experiencing some share decline first quarter versus fourth quarter, or third quarter last year, in light of, Jimmy, our inability to make all the engines we need and want.

Are you speaking about share gains on a wholesale level or retail sale-through? Where you getting that data?

For the outboard business I'm doing it at both wholesale and retail. For the sterndrive business, the only retail data we have is through year-end, but we are doing a bit of extrapolation here as we try to determine sterndrive business at retail in the first quarter. And that is why I used -- I said my suspicion or belief is that we've lost share in the first quarter versus third quarter last year, fourth quarter last year, but we don't yet have the data at retail.

Okay, that is helpful. On the Fitness side, obviously performed a little better than you expected here in the first quarter, nice top line against a tough comp and still solid margins. One of your commercial competitors recently indicated they are seeing some broader industry softness here in April, have you observed that at all? Certainly your multi-year plan assumes more modest growth than in recent years, but still some pretty significant growth nonetheless. I would just be interested in your thoughts on that segment in Q2 and the balance of the year.

We still feel very good about the segment. I believe we are going to have nice top and bottom line growth. Look, our guys are out there in a war every day for sales. First against competitors, and then what's happening economically, for instance, in Europe and UK. But, we are doing very well in South America, doing very well in Asia. It is a very global business, and we are not losing any sleep over the Fitness business. And, in fact I would say our folks in our Fitness business are doing an absolutely outstanding job right now.

This is Peter. We like the marketplace a lot. The global number of clubs continue to rise. The number of club members continues to rise. The club revenues continues to rise. And, in that kind of a context, they are all going to need more equipment.

Jimmy, maybe our competitors are having difficulty because of us. And, we are continuing -- we cannot underestimate, in Fitness, the importance of the new product flow that we have coming out of that business.

Okay.

I happened to be out at ERSA, which is the big US trade event, you couldn't get into our booth because of all the new product.

Okay. I just have one more; I'll back out.

Just a question, now that you've talked -- international boat brands into the Boat Group and then have broken out the pension, and reported it as its own line item in its segments. That additional disclosure is great, but of course, it somewhat voids the multi-year targets you laid out for us in Miami.

So, can you update your target EBIT margins by segment, at least in the Marine segments through '14? And, on the dealer pipeline front, I think you ended 2011 with 17,000 units in the pipeline. How should we adjust that historical figure for the inclusion of those international brands?

That is something that we are looking at now. Perhaps the next time we are at a conference, we can update that. Remember, these are three-year numbers, and we don't update three-year illustrations on a regular basis.

But, suffice it to say, that the shift will benefit Mercury, and it will benefit the Bowling segment because those are the two segments that had the bulk of the, now frozen, defined benefit cost associated with them. And of course, it will hurt the corporate number because it will now bear the financing costs of pension. So, that is the big thing that will happen. And the -- of course it will not change the bottom line. And, we will update that as we work on our models and as we get to a public forum where we can get into that detail.

Craig Kennison, Robert W. Baird.

Thanks for taking my questions. You have addressed many of them. But, Dusty, maybe I'll go off the board with you. You sell a discretionary product here that certainly depends on wealth. Have you guys given any thought to the implications of tax policy, especially in 2013 when it may or may not change, and how that could affect your business and how you run it?

Yes, we think about it a lot. Here's where we are right now, is we believe the absence of a clear view on tax policy after the end of this year, Craig, is impacting boats and then in the engines that go on them. And, I am picking a number here, but let's say 30 feet and above because that buyer, at their income level, knows intuitively and from what they hear that they are going to be part of the how do we solve the deficit issue solution.

Our judgment, however, is that once the tax policy is known, people will make adjustments and move forward. But it is unknown that it is probably causing more issue than what it is ultimately going to be. Another great example, here, that we are all seeing are gasoline prices. There was a lot of naysaying that at $4 the bottom would drop out, and I think it is fair to say the economy across the US hasn't been harmed by the increase in fuel prices that we have seen.

The consumer ultimately makes adjustments and then makes the decisions about what they want to do and what they want to participate in. We continue to believe then that it is really important that we keep having lots of new product coming to the marketplace, so that our brands in all of our businesses (inaudible).

Rommel Dionisio, Wedbush Securities.

Just in your prepared comments you touched on investment spending later in the year. I wonder if you could just provide us a little more color on whether that is R&D or marketing? And, in light of the slightly improving boat market, at least on the lower end the outboard and the fiberglass -- fiberglass outboard and aluminum, is that going to change your marketing spend? In other words, if you see the market improving are you going to be spending more money to support some of these new product launches you are coming out with? Thanks.

Well first, in our prepared remarks, we did say we will continue to invest in growth. And, that is R&D, as well as in capital, and there is some marketing. In terms of whether we are going to spend more, likely not. We are getting very nice market share gains in the specific categories you mentioned. And, I think we are very happy with where our brands are positioned, and how we are positioning those brands as against the competition.

Just a quick follow-up to Jimmy's question to clarify. After the divestiture of Sealine, is your percentage of boat divisions sales from Europe about 10%? Or, is that before Sealine's divestiture?

That excludes Sealine.

Excludes, thanks very much.

Joe Horvorka, Raymond James.

Could you give your retail sales increase in the quarter? I know you have been doing it the last several quarters.

I will tell you what I will do. Peter is whispering to me, double-digit. What I was going to do is -- if you want, you can go into SSI which reports the industry and parse through where our brands are, and they are just short of 20% at retail, according to the SSI numbers. I'm not saying that they are perfect, in fact I would say they are not. But, if you want to get a perspective as to how, in that reporting queue, how we are doing versus the industry, that is what that queue would tell you.

You are saying if you weight the segments by your weighting, you are up 20%? I was unclear the way you say that.

Yes.

Okay, and that is a good approximation of where you are at in the first quarter?

Well, using SSI compared to the rest of the competition, yes. We are different places on our own internal reporting, but I have always been using, Joe, just the SSI number because it is a public number.

Okay. You made a comment that sterndrive was as expected relative to three months ago. I guess I was under the impression that sterndrive was expected to still be down in 2012. And, the offset would be the two outboard segments getting into a flat number. Was I misreading that before?

No, you weren't. And when we are saying as expected, focused a little more on March than perhaps the entire quarter. The entire quarter was flat, but March was down high single-digits. And, I think when you shake all that up, it's down to flat right now.

Okay. And, you also made a comment that the mix shift was going to be negative in '12. And, in part of the explanation of we are looking at a 0% growth for the worldwide demand three months ago, and now it is 0% to 5% plus, but we haven't changed much as far as the guidance on the top side. And, part of that was the shift towards the lower-margin product. But again, I thought we were also assuming that shift three months ago, or is the shift more dramatic now?

The shift is more dramatic now. The movement on a relative basis in mix has been stronger in the outboard product.

Okay, more so than you even expected?

Yes, and Europe has been weaker than we expected. And, when you shake all that mix up, Joe, that's why we're coming to the conclusions we are.

At this time, we would like to turn the call back to Dusty McCoy for some concluding remarks. Thank you.

First, thanks everyone for participating. Also, we always appreciate the quality of the questions. And you are going, in my view, right to the issues that I'm sure everyone is looking at.

I do want to stress, we are really happy with this quarter. Actually, from our perspective, we did very well. I tried to lay out, from an operating perspective, how well we performed. Then, as we said earlier, we will work our way through the second quarter, and we are confident about the remainder of the year.

Thank you for participating. As always, we appreciate everyone's interest and questions. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a very good day.