賓士域 (BC) 2012 Q3 法說會逐字稿

Good morning and welcome to the Brunswick Corporation's 2012 third quarter earnings conference call. All participants will be in listen only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Bruce Byots, Vice President Corporate and Investor Relations. Please proceed.

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

Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filing in today's press release. All of these documents are available at our website at www.brunswick.com.

Also during our presentation today, we are using certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation as well as in the supplemental information section of the consolidated financial statements accompanying today's release.

I would now like to turn the call over to Dustan McCoy.

Thanks, Bruce. Good morning, everyone. I'm going to start with an overview of our third quarter results. As you're aware, earlier this month we announced a series of restructuring impairment actions in our boat segment, which represented third quarter charges that we estimated to be in the range of $25 million to $32 million pretax. As Peter will explain, the amount actually booked in the quarter is approximately $28 million. Because this amount is significant, we will be describing many of our financial metrics for the quarter on an adjusted basis, which excludes restructuring and impairment charges, losses on debt retirement, and any special tax items. We believe that this adjusted comparison provides a necessary important perspective on the Company's operating performance in addition to GAAP comparisons and will improve comparability versus past periods. In addition, we expect further restructuring charges related to previously announced actions in the fourth quarter this year as well as further debt extinguishment expenses. And so we will be referring to adjusted financial metrics in Q4 and for the full-year as well.

Our third quarter results demonstrate 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. Gross profit, as well as adjusted operating earnings and net earnings per diluted share, each increased by double-digit percentages versus prior-year. Our engine segment experienced strong revenue growth during the quarter but was partially offset by lower sales in our boat, fitness and bowling and billiards segment. We experienced slower sales in Europe an all four of our segments.

For the total Company, excluding Sealine, revenues declined about 15% in this region. If we include 2011 Sealine sales, European sales declined 19%. Revenue generated from a U.S. and rest of world customers increased by 4%. We continue to make excellent progress in reducing our debt balances. Debt outstanding at the end the quarter was $598 million, the lowest level since June 1997. Sales increased by 1% in the third quarter.

Sales of our ongoing European businesses declined by approximately $17 million. Additionally, revenues from the Sealine boat brand, which we divested in the third quarter of 2011, were approximately $5 million in the third quarter of 2011. I will comment in a few moments about some of the other major factors that affected our topline during the quarter. Year-to-date, our sales have decreased by 1%. Sales of our ongoing European businesses declined by about $80 million, or 17% during the first nine months. Sealine sales during 2011 were approximately $37 million. U.S. and rest of world revenues increased 3% year-to-date.

Operating earnings, excluding restructuring, exit and impairment charges were $66 million for the quarter, a 35% increase compared to 2011. Operating margins, ex charges, increased by 180 basis points to 7.4%. The increase from operating earnings reflects strong gross margin improvements, partially offset by increases in operating expenses. Operating earnings, excluding restructuring, exit and impairment charges, were $249 million for the nine months, an increase of 9% compared to 2011. This reflects an increase in all of our operating segments. Operating margins, ex charges, increased by about 80 basis points to 8.5%.

Net earnings for the quarter were $0.02 per share including $0.31 of charges for restructuring, $0.08 of losses on debt retirements and $0.02 of losses from special tax items. Excluding these items, our diluted earnings per share were $0.43 per share. This compares to a net earnings of $0.05 per share in the prior year, which included $0.14 of charges for restructuring, $0.13 of losses on debt retirements, and $0.01 of losses from special tax items. Again, excluding these items, 2011's earnings per share were $0.33. In summary, our adjusted EPS increased by $0.10, or 30%.

Net earnings for the nine months were a $1.36 per share, including $0.32 of restructuring charges and $0.13 of losses on debt retirement. Excluding these items, our diluted earnings per share were $1.81 per share. This compares to net earnings of $1.10 per share in prior year, which included $0.20 of restructuring charges, $0.18 of losses on debt retirements, and a $0.02 benefit from special tax items. Excluding these items, 2011 earnings per share were $1.46. Our year-to-date EPS, as adjusted, increased by $0.35, or 24%.

Now let's take a look at our operating segments starting with the Marine Engine segment. From a geographic perspective, sales to U.S. markets were up 14% while sales to Mercury's European customers decreased 12% in the quarter. Rest of world sales, which we define as the sales outside the U.S. and Europe, were up 3% year-over-year. In the aggregate, Mercury sales increased 11% for the quarter. U.S. sales growth was led by strength in outboard engines and by solid growth in parts and accessories. In Europe, difficult economic conditions had an impact on all product categories. Sales were most dramatically affected in Southern Europe where the economic weakness is most pronounced. Rest of world experienced modest growth, mainly from our P&A business. We continue to see weak conditions in Australia.

From our product category perspective, sales on our U.S. outboard engine business delivered strong growth reflecting a healthy aluminum and fiberglass outboard boat marketplace. Strong demand continued for our new 150-horsepower 4 stroke, the Verado engine family and engines in 7590 and 115-horsepower family. During the quarter, the Mercury team launched projects to support the segments anticipated growth into increase manufacturing capacity. Mark Schwabero and his team are doing an excellent job of adjusting to this increased demand, which resulted in strong growth in units produced compared to the prior-year. The strong growth in United States outboard sales was partially offset by lower sales in Europe. Stable conditions were experience in rest of the world markets. Unfavorable global demand trends continue to affect revenues from sterndrive engines.

Mercury's parts and accessories businesses reported a strong increase in U.S. markets and modest growth in rest of the world revenues. The continued solid performance in this area of Mercury is due to stable boat in participation, new product launches and market share gains. Record year-to-date sales and earnings were achieved by land and sea in Attwood. Both of these organizations have done an excellent job of delivering outstanding products and services to a very demanding marine marketplace. Growth was partially offset by a decrease in revenues in Europe.

This slide summarizes the basic trends being experienced within the engine segment by product category and region. As you can see, almost 70% of this segment is selling products in the markets with modest to strong growth with the segments product categories. All but about 30% reflect declining conditions. Mercury's operating earnings increased by approximately $22 million, or 41% during the third quarter. The quarter reflected strong improvements in sales and production in the outboard business, continued solid performance in PNA, and increases in sterndrive production. The segment also benefited from cost reduction activities and lower restructuring charges, partially offset by spending on growth initiatives. After taking account of all these factors, operating margins, excluding charges, were just under 15% in the quarter. This represents a 240 basis point improvement versus the prior year's quarter.

In our boat segment, [Q2] revenues were down 7% compared to the prior period. If we exclude the impact of Sealine, revenues decreased by 5% for the quarter. Adjusting for the Sealine divestiture, our boat segment in Europe experienced a 38% decline in sales. Rest of world sales increased by 23%, which included growth associated with our Brazil initiatives. In the U.S., which represents two-thirds of the segment, revenues declined by 9%. The overall U.S. boat market is up year-to-date in units but because of mix and the impact of Europe and the Sealine, our sales did not track the U.S. boat market unit growth.

Before we explore these factors further, let's stop and take a look at the U.S. power boat industry statistics provided by Statistical Surveys Inc. to get a view of how retail demand is unfolding by boat categories in United States. As you can see, based on preliminary third quarter data, aluminum and fiberglass outboard boat products continue to demonstrate strong growth, although at a slower rate than the first half of the year. The fiberglass sterndrive inboard boat market decreased at a greater rate than the previous quarter. In SSI's industry report, published in Soundings Trade Only, fiberglass boats greater than 30 feet in length, which represents about 70% of our fiberglass sterndrive revenues, was down 7% year-to-date.

This chart demonstrates our current regional trends affect our specific mix of boat categories. While the worldwide recreational boat industry is more heavily weighted to outboard products, more than half of our global boat sales dollars are concentrated in the fiberglass sterndrive inboard category, which continues to experience market declines.

During the quarter, Brunswick's global retail sales in units grew by approximate 5%. Global wholesale shipments, on the other hand, increased by 1% as dealers reduced pipeline inventory. As a result, our dealers ended the quarter at 26 weeks of boats on hand on a trailing 12 month retail basis versus 27 weeks-on-hand a year earlier. Pipelines for aluminum product are up over last year's level on unit basis. The weeks-on-hand on a trailing 12 month retail basis are down reflecting the stronger than expected market growth.

Pipelines of smaller fiberglass product are down slightly but up on a weeks-on-hand basis. Pipelines for fiberglass sterndrive product 24 feet and larger are down and continue at record low levels. Weeks-on-hand are also lower versus the prior year as dealers are adjusting stocking levels in response to weak demand. Assuming current retail trends continue, we would expect aluminum wholesale shipment trends in the fourth quarter to increase consistent with market dynamics. We would expect to end 2012 with a modest increase in pipeline inventories versus the end of 2011.

The boat segment's third quarter operating earnings declined when compared to 2011 with margins excluding charges at a minus 7.7%. The major factor driving the earnings decrease was higher restructuring charges. A decline in sales also contributed to lower earnings and was caused by international weakness, primarily in Europe, and continued declines in the firm -- fiberglass sterndrive inboard marketplace.

Now let's look at are two recreational segments. Sales of Life Fitness decline compared to last year's third quarter -- a quarter with double digit percentage sales growth. Higher sales in North American health club customers and stronger U.S. consumer sales were more than offset by declines in another U.S. distribution channels and in markets outside of North America. Solid revenue growth over the past two years supports our longer-term outlook for this segment. When we combine the organization's outstanding performance with positive demographic and wellness trends in the fitness sector, Life Fitness is well-positioned to continue to deliver excellent results. The numerous product introductions, which we have discussed with you throughout the year, should begin to generate solid growth for this segment starting with the fourth quarter and continuing into next year. Segment operating earnings in the quarter grew modestly where operating margins remain strong at 15.2%.

Sales in Bowling and Billiards declined 6% in the quarter. In the retail business, we were operating fewer U.S. bowling centers versus last year's quarter and equivalent center sales were lower in our European centers, which partially offset a slight increase in U.S. equivalent center sales. Bowling products also posted revenue declines in the quarter as European sales decreased by approximately 20%. The segments operating earnings increased modestly as improved operating efficiencies were partially offset by lower sales. Operating margins were higher by 80 basis points.

Now I'll turn the call over to Peter for a closer look at our financials and then I will come back to give you an update on our prospective of 2012 and beyond.

Thanks, Dusty. I'd like to begin with an overview of certain items included in our third quarter P&L and also comment on some forward-looking data points. Let me start with restructuring, exit and impairment charges, which were approximately $28 million in the quarter with most of the charges being non-cash. Approximately $17 million of charges pertain to impairments associated with our Hatteras, Cabo and European and Asia-Pacific boat brands.

These charges mainly reflect the continued weakness in inboard sport-fishing products as well as weak powerboat demand in Europe and certain Asia Pacific regions. We also recorded about $8 million of charges associated with the decision to closer our Knoxville facility, consolidate cruiser manufacturing and exit Bayliner cruisers in the U.S. and European markets. These charges primarily include impairment, severance and other costs. Dusty will further elaborate on this consolidation action in his closing comments.

We anticipate that additional charges pertaining to our current year actions will be recognized in future periods. In the fourth quarter 2012, we estimate charges in the $5 million to $10 million range. Therefore, our current estimate for full-year 2012 restructuring charges is in the $34 million to $39 million range, or $0.37 to $0.42 per share. Net interest expense, which includes interest expense, interest income and debt extinguishment losses, was $23.8 million in the quarter, a decrease of $6.3 million versus the same period in 2011. The reduction was the result of lower losses on the early extinguishment of debt and the impact of lower debt balances.

In the third quarter, we repurchased approximately $78 million of debt. We plan to opportunistically repurchase additional debt during the fourth quarter, which could result in additional $20 million to $25 million in debt reduction and extinguishment charges of approximately $3 million to $4 million. Our estimate of net interest expense for the year is approximately $79 million to $80 million. This would result in a reduction in net interest expense of about $18 million to $19 million compared to 2011. As a result of our debt reduction activities in the quarter, our debt outstanding at the end of Q3 was $598 million. As you can see from this table, the 2.25 notes due 2013 have been fully retired.

During the quarter, foreign currency had less than a 2% negative effect on our sales due to a stronger dollar versus certain currencies in key sales markets, including the euro. Currency had a minimal impact on operating earnings as compared to the prior year, which reflected a mix of favorable and unfavorable exchange rate movements. This does include the impact of hedging activity, which helps to moderate the effect that currency exchange rate fluctuations have on year-over-year earnings comparisons. We estimate that currency will have a similar impact on full-year sales and earnings unless exchange rates change significantly from current levels.

Our tax provision for the third quarter was $10.5 million compared to a negligible tax provision in the third quarter of 2011. Our third quarter tax expense was comprised of foreign and state taxes as well as specific nonrecurring charges from special tax items. These nonrecurring special tax items reduced our EPS by $0.02. Our 2012 tax expense will continue to be comprised mainly of foreign and state income taxes as well as the effects of the recurring -- of the non-recurring special tax items. We expect our overall 2012 effective tax rate to be approximately 20%.

Turning to a review of our cash flow statement, cash provided by operations in the first nine months was $107 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 $71 million. Our current estimate for D&A in 2012 is approximately $95 million. Pension expense resulting from our defined benefit pension plans, which are frozen, totaled $18 million year-to-date compared to $24 million and the prior-year. In the first nine months, the Company made cash contributions to its plans of approximately $42 million. We expect our 2012 pension expense to be approximately $24 million, which is a decrease of $8 million from 2011. In 2012, the Company plans on making cash contributions to its defined benefit pension plans of about $75 million to $80 million.

For the nine months, primary working capital accounts were a use of cash and were comparable to 2011 levels. Given the seasonality of sales in our marine businesses, we are anticipating we will be lowering working capital in the fourth quarter, especially from reductions and receivables. Based on our current assumptions, we currently believe the changes in working capital should result in a use of cash for the total year. Capital spending in the first nine months was approximately $69 million. Our 2012 plan includes approximately $115 million in capital expenditures. In the increase from 2011 primarily reflects amounts required to fund our growth initiatives. Partially offsetting our capital expenditures in 2012 were $19 million in proceeds from the sale of property, plant and equipment in our marine segments.

So in summary, we generated $60 million in free cash flow year-to-date, which in addition to cash balances was used for debt retirement activity. Supplementing our cash and marketable securities balances is the net available borrowing capacity from our revolver of approximately $276 million, which when combined with our cash and marketable securities, provides us with total available liquidity of $731 million.

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

Thanks, Peter. Earlier this month we announced that our Bayliner boat brand plans to refine its North American and European product portfolio by focusing on its core valve rider and deck boat models as well as other day boat craft types new to the brand such as jet boats. The complex of the global marine marketplace continues to evolve and it's our continuing challenge to adapt our brands, models and technologies to best appeal to today's boating consumers as well as the shifting global marine marketplace. We believe this effort will solidify our position in the market and offer dealers and boaters a wide variety of choices and models. Additionally, Bayliner will make its Brazil operation the center for its cruiser business but will suspend the brands cruiser sales from production outside of South America.

We will continue to maintain our leadership position in the North American cruiser segment with our Sea Ray brand. This strategic repositioning of Bayliner further reduces the need to maintain the boat group's current cruiser production capacity in the United States, particularly in view of the current market weakness for cruisers that I mentioned in my earlier comments. As a result, we will consolidate our U.S. cruiser production for Sea Ray into our Palm Coast, Florida, and Vonore, Tennessee, facilities. This will be more efficient and still allow us to retain capacity equal to three times our current worldwide cruiser demand, enabling us to adequately increase production when the market improves. As a result of this consolidation, our cruiser plant in our Knoxville, Tennessee will cease production by the end of 2012. We believe these actions will save approximately $10 million to $12 million a year once fully implemented.

We continue to be pleased with the progress we are making in our numerous growth initiatives which are underway throughout our entire organization. These initiatives are important to our topline health in these difficult economic times. Let me update you on four of the many initiatives on which we are investing and working. Joystick Control, which in the past has made sterndrive powerboats so easy to control, will soon be available for outboards. In fact, this is an advanced system designed specifically for Mercury's 250- and 300-horsepower Verado outboards. It leverages our expertise from our Zeus and Axius systems and will work on boats with twin, triple or quad Mercury Verado 250 and 300-horsepower outboards. Mercury expects the product to hit the market during the second fiscal quarter of 2013 and it will be demonstrated at the Fort Lauderdale International Boat Show, which started today.

As we continue clockwise on this chart, Life Fitness has introduced a system of cardio technology which included a line of new products called Elevation Series with Discover tablet consul. It is compatible with Android devices as well as with Apple operating systems and is navigable by swipe like a tablet. As we showed some of you at our Florida investor event earlier this year, these products provide internet access with virtual reality running landscapes as well as on-demand entertainment like movies, music videos and television series along with custom workout tracking. Exercisers can access personal content like social media or music, even email, movies and e-books. A related new online product management, Life Fitness Connect, also let fitness facilities access and customize the look of the council screens and track the use of each product. The published console software and open platform by its outside parties develop new programs that work directly on Life Fitness equipment making the possibility of new console programs endless.

Now going to bottom right, Sea Ray recently introduced the 370 venture. The first express cruiser created specifically around outboard engine power rather than traditional sterndrive engine. Reaction from our dealer network has been encouraging and the new configuration offered our designers more space and opportunity for a number of features not normally found in a cruiser of this size. Including a larger master berth and main deck sunroom, featuring our full-length sunroof and oversized hall windows providing incredible interior light.

The bottom left -- Brunswick boats are now being produced in Brazil. Our new plant Joinville, Santa Catarina, will produce Bayliner and Sea Ray boats and cruisers ranging from 23 feet to 41 feet. The first boats made in Brazil are scheduled for delivery at the end of the month. Brunswick recently made its debut at the important San Palo Boat Show, the largest nautical event in Latin America where Boston Whaler joined Sea Ray and Bayliner and displayed a wide variety of sport boats and cruisers. With our investment in Brazil, we are now able to import boats with favorable importing VAT rates. So as this picture shows, we now have boats in our dealer showrooms around the country.

And finally, I'd like to conclude with a few comments regarding our outlook for the remainder of the year. Our ability to continue delivering earnings growth will be the result of the successful execution of our strategic initiatives -- a few of which I've just described. Our current plan reflects the extremely varied set of geographic and product demand trends that have affected our topline performance thus far in 2012. As a result of these factors, we are targeting modest revenue growth for the full-year based upon our current view that the fourth quarter will reflect improving sales growth. We continue to believe that as a result of cost reductions and improvements in operating efficiencies our target gross margin for 2012 will be approximately 24%. And although our operating expenses will be higher, we still anticipate a strong annual increase in operating earnings.

As result, we are increasing our estimate of 2012 diluted earnings per common share as adjusted to a range of $1.65 to $1.75 per share from $1.60 to $1.75 per share. This last slide expresses our previous GAAP guidance on an adjusted basis, which we believe is useful in understanding the Company's operating performance. As you can see, our current guidance for the full-year has increased the bottom inch in maintain (inaudible).

And with that, we will now be pleased to take your questions.

(Operator Instructions)

Ed Aaron from RBC Capital Markets.

I wanted to start by asking about the gross margin. You have to go back an awful long time to find a quarter with a gross margin at this rate that you did in Q3. And I'm just wondering if, first, if there were any unusual or less sustainable factors that might have benefited you this quarter? And then just looking at the full-year gross margin guidance of 24%, it implies a flat to down Q4, I think, on a gross margin basis with accelerating sales. So I'm wondering why you might not be able to do a little bit better than the 24% on a full-year basis.

You probably caught us. We think we might do a little north of 24%, Ed. There is nothing strange, if you will, in our gross margin numbers. What we are seeing -- and let's use Mercury as an example. This is an indication of the cost structure we've created throughout this Company and what it can deliver once we begin to get volume. And if we take a look up at Mercury in the third quarter, we first have overcome the production issues we were having both with sterndrives and the ability to fulfill demand for our new 150-horsepower engine and 759115 engines.

So when things like that began to flow through this cost structure, we are still recognizing the benefits of closing the Stillwater facility. When you add all that together and you get volume in any of our businesses, we're going to get great gross margin growth. So we are comfortable with 24% -- I would have to admit to you, it probably ought to be a little north of 24% -- it will probably still have a 24% in the first two numbers. There will be a point something, but it ought to be a little higher than what we are projecting here.

Okay. Thanks. And then, Dusty, could you also address your Q3 market share performance? I think your boat retail sales globally moderated by just a couple of points, but the market in U.S., anyway, slowed by more than that, especially in the big boat segment where you over index and then presumably Europe and the rest of the world were a little tougher this quarter. So 5% retail number seems pretty good relative to that. I'm wondering if anything stands out in terms of a driver of what seemed like an improved share trend at least relative to maybe Q2?

Yes. And let me just go through every. We might as well do places where we are a little weaker and places where we are very little strong, Ed, just to get everybody level set. As we are looking at right about less than 20 feet in our Sea Ray brand, we deemphasized focused there and when we've done that we've lost a little share there. In the larger roundabouts, which go up to 30 feet, we've had significant share growth of there. And that's a great focus by our team and I'm really proud of what they've been doing.

In the cruiser and larger segment, even though that market continues to decline and we have a lot of market share there, we continue to grow that share. In our outboard fiberglass, we're flattish. And then in our aluminum business, I just can't pat our fellows on the back enough in that business. We are having just remarkable unit growth and even though that part of the market is strong, we continue to gain share across our brands there. Primarily in fish boats and slight share gains in pontoons. So that's how the whole picture looks, Ed.

Thanks. I will jump back into queue. Thank you.

Tim Conder from Wells Fargo Securities.

Thank you and, guys, thanks for just staying on task and on plan here. A clarification question first, if I may. Is the outboard backlog generally resolved or will that take you through the fourth quarter, maybe into early first, before that's totally satisfied?

I think it is not totally satisfied. We continue to work it down and it will take us through the end of the year. It may be, Tim, as you said, even in the first quarter to get it completely in line.

Okay. And then from the perspective of what you are doing with Bayliner and the cruiser segment. Granted that's going to be focused now -- the cruiser part -- in Latin America, Brazil in particular, and then going away in the U.S. and Europe. Is there any way to say, hey, is this part we should take out of the comp sales? And again, we've got a mixed bag here. It's not a clean thing like happened with the Sea line just totally getting out of that. Is anything you can kind of give us directly as far as modeling going forward from that perspective?

I wouldn't worry about the modeling.

Okay. Enough said. And then from a broader question, and then I will get back in queue here also. The three scenarios that you outlined, base case and then 2 plus 5 and -- a base case and a plus 5 and plus 10 scenario at the Miami boat show, given what's going on in Europe, given the changes that you are making with the operating structure with the changes here in Bayliner, anything you can update us on as far as those -- the base scenario and the other two scenarios now?

Yes. We are nine months into a three-year plan, but as I'm looking at it -- as we look at the right now, Tim, I would say we are somewhere between the base case and the 5% case.

Okay. So over all, those scenarios in your view are still valid, Dusty? Obviously some puts and takes to get there, but those scenarios are still valid and then your being between the base and the 5% case, that -- I think I'm perceiving that correctly.

Absolutely, Tim. They're sort of stamped on our forehead. We've made a commitment and we've got our sleeves rolled up to deliver.

Okay, sir, thank you.

Mike Swartz from SunTrust.

Maybe you could just talk about the -- Europe in general, at a high level. Did you see any incremental deceleration there? Or is it hanging in there as it was in the second quarter at about -- down high-teens, 20%?

I don't think we saw any additional deceleration. It was ugly. It used to look ugly. And as we're sitting here right now, we don't see anything in the near term that's going to change it, Mike.

Okay, great. And also in the press release, you kind of glossed over some of the longer term investments that you've been making in the engine business. Could you maybe flush those out a little more and then give us an idea of when we should begin to see those investments, I guess, come to light?

I don't want to give away too much competitive information so let me try to put it to (inaudible). Firstly, we have a fair bit of new product coming to the market in '14. But we also are expecting continued increase in demand, especially in outboard product, so we have been making investment as we speak even in improving our capacity as we work through '13. And then you will see a fair bit of new product coming to the marketplace in '14 and in '13 and '14 and perhaps even '15 we are going to continue to invest in increased capacity.

So we've got a lot to get invested up at Mercury. We've got a great engineering team, a great R&D up there -- good operations. But they've got a lot coming at them, a lot to get done. And it is a business that's performing really well in this marketplace and it is a place we want to continue to invest significantly.

Okay, great. Thanks for the color.

James Hardiman, Longbow Research.

A couple quick questions here. I think you touched on third quarter worldwide -- you had that 5% demand increase from a unit perspective. Wholesale shipments were only up 1%. You may have touched on this but I just wanted to clarify here. How should we think about that delta for the fourth quarter?

If I recall correctly, you increased your baseline inventory in last year's fourth quarter on some of the aluminum boats and outboard engines. Should wholesale and retail be the same in the fourth quarter? Should wholesale maybe be a little bit ahead of retail? Obviously you are facing a tough comp. How should I think about that?

We're going to bring wholesale and retail much closer in line in the fourth quarter. And that will be -- it's frankly a tale of two cities. In our aluminum business, which is doing really well, is going to have to get pretty well cranked up in the fourth quarter. And the fiberglass business, which is -- if you see all the numbers, James, continues to suffer from overall market decline. But we will ensure that our wholesale shipments are more closely matching retail in the fourth quarter.

Got it. And then along those same lines, $1.81 in adjusted earnings through three quarters, the guidance is $1.65 to $1.75 -- so that basically assumes a decline of $0.06 to $0.16 for the fourth quarter. Coming out of the second quarter, there was some hope that you might be able to break even in the fourth quarter. Are you backing off of that? Or is it more sort of like the gross margins -- you'd like to be up there, but you're being conservative here?

I think realistically we are backing off a little. We lost $0.30 on an adjusted basis in the fourth quarter of last year. We are obviously going to kick the heck out of that. But as we've sat here and watched the economic difficulties around the world, everybody is sort of holding their breath waiting for this election to be over and what's going to happen afterward. We pared back our view a little bit of what we're going to be able to do in the fourth quarter. We think that's the responsible thing to do right now.

And as we -- the real key always, James, that drives us, is ensuring that we have the appropriate level of inventory in the field to match the marketplace. And again, as we are looking at the marketplace, it is a difficult place right now so we're going to act prudently in the fourth quarter.

Got it. Thanks, guys.

Jimmy Baker from B. Riley & Company.

Wanted to start with some questions on Mercury. It is just hard not to -- it's hard to look at the margins that you put up the last couple quarters without inferring that there should be some potentially fairly significant upside to what you laid out in a three-year plan for that division. So at this point, would you say Mercury is outperforming your expectations or is it maybe better to think about this is that you expect some significant margin dilution from ramping into -- whether it be your diesel initiatives or non-marine verticals that would prevent margins from continuing to improve as volume increases?

Here's the way to think about it is I think it is fair to say Mercury is, from a financial standpoint, doing better than perhaps we planned. But that's our folks there responding magnificently to a different marketplace than we envisioned. This mix has changed dramatically and when we were talking in Miami, Jimmy, we were thinking as the market increased it would be the sort of increase that would pull all product types through relatively equally. And that's just not what's happened.

So as a result, yes, Mercury is got incredible demand for its outboard product. We've been taking share with the new product. So from a financial standpoint, yes, a little better driven by marketplace adjustments. But as we look across the whole Company, of course, that also has then an impact on our boat business because we've seen the mix be different. So as we look at our total -- look at what we think we can do in 2014, we have to balance those two.

Okay. That's helpful. And staying on the boat side, and I don't want to belabor your pipeline management strategy, but I'm surprised you didn't ship a little bit more into the dealer pipeline given the trends you've seen at retail, even adjusting for ongoing mix issues. Can you just talk about the rationale there, either in terms of conservatism on your end or a lack of appetite from your dealers versus maybe some capacity issues on the aluminum side?

You know, frankly, it is all three of that. As dealers sit and look at all the economic conditions and uncertainty and the political environment that everyone else sees, they want to be careful. We want to be careful because we see all that ourselves and we, therefore, don't want to overload dealers. And we've got -- we always have a bit of capacity issues as we do model changeover in our plants in third quarter.

So when you add all that up, we are comfortable with where the pipeline is, but we -- so we did say we increased wholesale fairly dramatically and our pipeline's still down. So we've got some work to do in order to get our dealers ready for the next model year or the next selling season.

Okay. And last one for me. If I can just be a little bit nearsighted, the revenue growth implication for Q4 -- obviously the strongest of the year. Can you walk through your segments ranking them in terms of where you expect the strongest growth on a year-over-year basis in the fourth quarter?

Can I do it this way? Again, that might be a little more detailed, Jimmy, than I'd like to give out. Here's how we are thinking about it. In the engine business, we've addressed -- or worked hard to address capacity bottlenecks in our outboard business. And we are really working now to satisfy backlog of pent-up demand in our new 4 stroke and the 759115 and we think there's continued growth on top of that then in the outboard, fishing boat -- both aluminum and fiberglass and the pontoon segments.

As we look over at our fitness business, we've got an incredible amount of new product that will begin to sell and deliver to the marketplace this quarter. We've got our new Discover consoles, the Synergy 360 product that we've talked about, the new Lifecycle GX and our new Elevation series cardio product are all going to be flowing into the marketplace very differently in the fourth quarter versus what we've done in the past.

And as we look at our bowling business, we've got a nice international bowling capital equipment backlog which we are going to have to satisfy in the fourth quarter. And then as we look at the boat business, we believe there's going to be favorable comparisons in our outboard fishing and outboard fiberglass business in the fourth quarter. So without giving you any percentages, it is just generally across the board -- of course some will be higher than others, but we've got a nice even view toward how we're going to be able to increase in the fourth quarter.

Okay. That's very helpful. Thanks for the color and great execution, as always.

Well again, I always say, the people you are talking to have little to do with the great execution, but I appreciate you saying that and a lot of our employees listening to this and thank you for mentioning it.

Rommel Dionisio from Wedbush Securities.

With regard to looking at the portfolio -- boat brands the way you have them set up to date, even after this Bayliner restructuring. Should these market trends continue, do you give some thought as to what to do with the rest of the cruiser business? You've still got the Hatteras business and so forth. Are you just position that business to see, in the case of a recovery of that market, to be prepared to have the capacity to take advantage of that?

We are in the cruiser business. It is been one of the real centerpieces of our Sea Ray brand. We continue to gain share with that brand, even in a declining market. We are comfortable and assured that the cruiser market will ultimately return. We are continuing to invest in new models there. So we are solidly in the cruiser business and are not going to be getting out. But we have made the decision -- our Sea Ray brand is what's been really carrying the water in that segment and we want to get that brand positioned to continue to do well in the future. So we will not ever be adjusting our portfolio to get out of that.

Okay. And one quick follow-up, if I may. With continued weakness in Europe, I realize I've asked this question in prior conference calls, but just with continued weakness in Europe, can you just give us an update on the state of dealers' health of your dealers and the European market -- if they are still viable and still hanging in there?

Generally, their health is good. We went through some tough times with some dealers in Scandinavia, interestingly, Greece, and Southern Europe. But as we look across the dealer network and look at outstandings with them, et cetera, we're -- they are quite healthy. It is a bit like the United States, if I can just give one more piece of color. Once you get through the real shock of how far things can drop and the weaker dealers fail, then what you have are just some great dealers who are great small business people who begin to make the adjustments they need to make in order to do well. And I think that's what we are seeing.

Great. Thank you, Dusty.

Craig Kennison from Robert W. Baird.

Dusty, would you comment on the used boat market, especially any trends in the used boat prices?

First, the used boat market continues to be a healthy part of the industry. We continue to hear -- especially for instance in the cruiser segment -- if a good used cruiser comes in the marketplace, it sells immediately. What's been interesting, though, is one would normally expect in that sort of environment that perhaps used pricing would narrow between the historical gap between new and used and we haven't really seen that.

We don't sell a lot of that used product, but this is anecdotally in discussions with our dealer network. That is consistent with the research we've done of cruiser owners who tell us we are continuing to boat, we're going to buy new when we feel better about the economy and our personal situation and the only [treasure] we're going to do is we think we're getting a good deal. So they're very educated buyers. They're great boaters. They understand the marketplace well and they've got to have that, quote, good deal. And to them, a good deal is one that maintains what they view as the historical spread between used (inaudible).

And as a follow-up, could you characterize the general loan terms of a small boat versus a large boat, just in terms of the duration of a typical loan?

I think they're generally both five to seven years.

It doesn't necessarily get longer in a cruiser segment, for example?

Yes, it would. It could go up to 15.

That's helpful. Thank you very much.

Gerrick Johnson from BMO Capital Markets.

In the fitness segment, can you talk about the other U.S. distribution channels that saw declines? What were those? And then in the club channel, how is that performing? Do you see any deceleration of growth in the club general? Thanks.

The declines were in military and hospitality. In the club market, there are some really great club owners, are doing some great things that are our customers and we continue to see those guys growing.

Okay. Good. And the 5% increase in global retail demand in the third quarter, pardon me if I missed it, but did you break that or can you break that out between the U.S. and international?

We didn't and it is not something we would care to do.

Okay. And then maybe --

I did describe, Gerrick, what we thought market share changes had been in the U.S. earlier.

Okay. And that's in units. Do you have a dollar number for that retail demand growth?

No.

All right. Thanks anyway.

Ed Aaron from RBC Capital Markets.

Thanks. Just a follow-up on the fitness question. Do you think that the slowing that you saw in Q3 -- is this a function of comparisons and maybe some timing around new products? Or do you see any kind of macroeconomic impact on that business? I'm just trying to test your conviction around putting up mid to high single digit type topline growth in that business going forward over the next year or two?

The former not the latter.

Good. Thank you.

Carla Casella from JPMorgan.

Hi. I was just wanted to ask about your capital structure. Would you consider taking out your 11.25% bond given that you guys have enough liquidity to do so and given the price of the coupon?

Well the 11.25%s are out -- the 2013. The 2016's -- it is still economically not in our best interest -- not in our shareholders' best interest to take them out at this time. The call expense would exceed the benefits we would get from refinancing them at this time. Interest rates would have to go up considerably for it to have been a bad decision for us to wait, as we expected to do, until some point next year.

Very helpful. Thank you very much.

The last question comes from the line of Joe Yurman from 1221 Partners.

Fantastic job -- let me start with that. I have a question about the comments that you made today and have made over time about investments in growth. And I'll direct those comments particularly to the engine side of the business -- and somewhat the boat side of the business, let's call it marine.

Can you talk about the distribution of the investments from two particular vantages? Investments and innovation to grow new markets or to take market share as some of the existing aggregate demand may go away for the foreseeable future, versus investments in process such that we retain some of the high operating margins that we are seeing currently? That's my first question. And then one for Peter. Peter, if you can give us any update on your discussions with the rating agency, maybe some type of a glide path to the investment grade rating? Thank you.

You're welcome. Look, as we look at investments up here -- so I'm probably not smart enough to break them out quite the way you have and the assumptions we make as we are making investments is that we've retained the business that we have and then we bring new products into the marketplace. We actually expect the margins to get better (inaudible).

What's been the great thing our business guys have done is when we got into the 4 stroke business in the (inaudible) -- cost of 4 stroke are always going to be higher than cost of 2 stroke and therefore Mercury will always go to (inaudible). So what we're seeing now is extremely great engineering, great innovation, (inaudible) so we're beginning to see now with all this new product coming into the marketplace that our margins are improving. And then with that we're getting better, from an operating standpoint, everyday (inaudible). And when you add all that up, we're comfortable with Mercury's ability to meet [thin] margins and hopefully (inaudible).

Great.

On the rating agency front -- we stay very closely connected with that. We know exactly what's going on. At (inaudible) we have positive outcome and we believe as (inaudible) to continue (inaudible) for the next 12 months. And that's actually one of the reasons (inaudible).

Sure. All right, guys. Great job.

All right, ladies and gentlemen, at this time we would like to turn the call back to Dustan McCoy for some closing remarks. Please proceed.

Thank you, ma'am. As always, we appreciate all the interest, the great questions we get. And with that, we're going to sign off and go back to work. We are living in a tough world and we've got our hands full but we're going to keep delivering what we've been saying we will. So thanks, everybody.

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