Briggs & Stratton Management Discusses Q4 2013 Results - Earnings Call Transcript

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Briggs & Stratton (NYSE:BGG)

Q4 2013 Earnings Call

August 15, 2013 10:00 am ET

Executives

David J. Rodgers - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Todd J. Teske - Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Zoran Miling - Longbow Research LLC

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Robert A. Kosowsky - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Briggs & Stratton Fourth Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to your host, Dave Rodgers. Please go ahead.

David J. Rodgers

Thank you, Stephanie. Good morning, and welcome to the Briggs & Stratton Fiscal 2013 Fourth Quarter and Year End Earnings Conference Call. I'm Dave Rodgers, Chief Financial Officer, and joining me today is Todd Teske, our Chairman, President and Chief Executive Officer.

Today's presentation and our answers to your questions will include forward-looking statements. These statements are based on our current assessment of the markets we operate in, and actual results could differ materially from any stated or implied projections due to changes in one or more of the factors as described in the Safe Harbor section of today's earnings release, as well as in our filings with the SEC. We will also make reference to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP measures, is available in our earnings release and in our SEC filings.

This conference call will be made available on our website approximately 2 hours after the end of this call. A phone replay will also be available within a few hours after today's call. Now here's Todd.

Todd J. Teske

Good morning, everyone, and thank you for joining us today. As we reported in this morning's earnings release, our fiscal 2013 fourth quarter consolidated net sales of $477 million decreased by $24 million, or 5% from the fourth fiscal quarter of 2012. While we anticipated a rebound from last year's drought, the late start to the spring lawn and garden season put us behind our projections early in the quarter. While retail sales appeared to pick up during May and June, easily beating last year's drought-impacted season, it was not enough to compare positively for the season by the end of June. We believe that through the end of June 2013, the U.S. retail market for walk and ride mowers decreased 3% to 5% compared to the previous year, while shipments into the channel by OEMs were flat for walk mowers and slightly up for riding mowers. As a reminder, last year's season got off to a fast start with unseasonably warm temperatures in February through April during which retail sales of mowers was quite good until the impact of the drought took effect beginning in May. Because of the drought, retailers and OEMs had more inventory than desired as the season concluded. In addition, a lackluster snow thrower sales season did not help in terms of retailers being reluctant to buy more lawn and garden inventory in the spring, especially with lower sales in March and April compared to last year.

Equipment OEMs in turn were also cautious to reorder and build more inventories, and responded by reducing production. In response to these market dynamics, we took down production, which had the positive impact of controlling inventory, but also had the near-term impact of reducing fixed cost absorption, and thus, lowering gross profit margins for the quarter. Our placement of engines for the season was as we anticipated and discussed on previous calls. Based on our placement, we expect that our share for the season will increase in the U.S. with a slight decrease in Europe and the much smaller Canadian market.

While our quarterly sales decreased by $24 million, our adjusted net income for the quarter was $10.7 million, a decrease of $175,000 for the quarter compared to last year. The adjusted net income excludes our restructuring, legal settlement and impairment charges that Dave will discuss in a few minutes. For the full fiscal year, sales were approximately $1.9 billion, a decrease of about $200 million from the previous year. Approximately half of the decrease was the result of exiting the sale of lawn and garden products to national mass retailers. In addition, we had lower sales of engines for snow throwers in the U.S. and Europe and lower sales of engines for lawn equipment in both Australia and Europe. Sales of engines for walk mowers in the U.S. increased over the last year, while engines for riding mowers decreased due to channel inventory reductions. From an operational execution standpoint, we remain focused on carrying out our restructuring actions in order to streamline and reduce cost.

During fiscal 2013, we benefited from over $37 million of cost savings as a result of the difficult but necessary actions we took last year to reduce costs. In the difficult market environment we've been operating in the past several years, our employees have done a great job in responding to the challenges through lean process initiatives, eliminating waste and reducing cost whenever possible. We will continue to focus on this moving forward to maintain our cost competitiveness. As part of our restructuring, we announced last year that we were exiting the business of selling lawn and garden products to national mass retailers, and we are extremely pleased with the transition out of those lower margin products. The impacts of the transition can clearly be seen in the $160 million of operating cash flow generated during fiscal 2013 due in part to reducing our U.S. products inventory by $50 million. In addition, the remaining inventory of the mass retail SKUs is extremely low. This was simply a great job by our products team in executing this transition. As I've said before, we will continue to sell engines to OEMs who serve the mass market retailers. Also, as we previously announced, our Murray and Snapper brands of mowers can be found this summer at Wal-Mart stores across the country. We've been extremely pleased with the response of Wal-Mart's customers to those products, which are manufactured by our OEM customers here in the U.S. using Briggs & Stratton engines in all of them.

As we exited the sale of lawn and garden products to mass retailers, we turned our focus to our dealer brands: Simplicity, Snapper and Ferris, with the introduction of dozens of new innovative products and features with a complete renewal of the Simplicity line of tractors, including the first of its kind Simplicity lawn tractor with independent suspension and the reintroduction of a new and improved Snapper rear engine rider. The early responses from dealers and consumers have been extremely positive, with our dealer sales increasing over last year by double digits and outpacing the quarter from 2 years ago as well. Our new consumer products sold at dealers accounted for over 40% of our sales to dealers in the fiscal year, while lifting our overall margins in our Products portfolio. Further, we saw strong increases in commercial mowers carrying the Ferris and Snapper program.

We also made headway in 2013 in expanding geographically with our acquisition of Branco in Brazil last December. So far, Branco has met our expectations in terms of having great products, great people and a great dealer network. They're also on target from a financial standpoint, helping us to increase our margins on our product portfolio. In addition to adding distribution in Brazil with Branco's 1,200 dealers, we had established product and/or engine distribution with over 20 new distributors in Mexico and Central and South America. We also added new distributions throughout Asia, including Thailand, Singapore, Malaysia, Indonesia, Cambodia and the Philippines. Establishing distribution is these countries is critical in expanding our international sales presence and establishes a foundation to grow outside of our traditional markets. We will continue to invest in these regions to grow our international sales.

While our business in fiscal 2013 was significantly impacted by weather, both good and bad, it would be fair to say that the market recovery here in the U.S. fell short of our expectations. Even so, our team has remained focused on executing our strategy in the things that we have within our control to make us a stronger company, a leaner company and one that is well positioned to capitalize on future growth in both our traditional markets and emerging regions around the world. Now I'll turn it back over to Dave to walk through our financial results for the fourth quarter and for fiscal 2013.

David J. Rodgers

Thanks, Todd. Our fourth quarter consolidated net sales were $477 million, a decrease of $24 million or about 5% from net sales in the fourth quarter of last year. Fourth quarter consolidated net loss was $55 million or $1.17 per diluted share. It's important to note that the fiscal 2013 fourth quarter results include total pretax restructuring charges of $3.8 million related to the restructuring actions that we announced in fiscal 2012, a pretax write-down of $90 million related to goodwill and intangibles of the Products segment and a pretax charge of $1.9 million related to a negotiated settlement between the plaintiffs and several defendants of a horsepower class-action lawsuit in Canada. For those of you who have followed Briggs & Stratton for a while, you're aware that we and many other industry participants have been in ongoing litigation regarding horsepower labeling in the U.S. and in Canada since 2004. The U.S. matters were settled back in 2010, and the Canadian litigation began soon thereafter. With the settlement that has been agreed to between the parties to the litigation, we can now hopefully put these issues behind us for good.

I should also point out that the entire amount of the goodwill and intangible impairment is noncash in nature. The cash portion of the restructuring charges in the quarter was $2.8 million and the legal settlement will be paid in the first half of fiscal 2014, subject to court approval. As disclosed in the non-GAAP financial disclosures section of our earnings release, after excluding restructuring charges, the noncash goodwill impairment and the Canadian horsepower legal settlement, our fourth quarter adjusted net income of $10.7 million or $0.22 per diluted share, which was approximately the same as last year's adjusted net income of $10.8 million.

Fiscal year 2013 consolidated net sales were approximately $1.86 billion, a decrease of approximately $204 million or 10% from fiscal 2012, with most of the decrease happening in our first 3 fiscal quarters as we previously discussed. Excluding total pretax restructuring charges in fiscal 2013 of $22.2 million, the goodwill and intangibles impairment and the Canadian legal settlement, our fiscal 2013 adjusted net income was $45.1 million or $0.93 per diluted share, a decrease of $12.7 million from fiscal 2012 adjusted net income of $57.8 million or $1.15 per diluted share. Further information regarding the reconciliation from GAAP earnings per share to adjusted earnings per share can be found in this morning's earnings release.

Engines segment sales for the fourth quarter were $299 million, a decrease of $23 million or 7% from the prior year. Units shipped in the quarter were lower by approximately 7% from last year. The decreased sales were the results of certain OEMs reducing production levels in order to control inventories with a later start to the spring lawn and garden season. Sales were also slightly impacted negatively by reduced pricing on certain SKUs to pass through lower commodity cost and unfavorable currency primarily related to the euro. For the full fiscal year, total engine units sold were approximately 8 million units, a decrease of about 8.5% from 8.75 million units in fiscal 2012. For the fourth quarter, Engines segment adjusted operating income was $14.1 million, excluding $1.7 million of restructuring charges and the $1.9 million charge for the Canadian legal settlement. The Engines adjusted operating earnings is a decrease of $9 million from last year's fourth quarter adjusted operating income of $23.1 million. The adjusted gross margin rate for the Engines segment was 18.8%, a decrease of 230 basis points from an adjusted gross margin rate of 21.1% in the prior year. The decrease was primarily related to lower absorption of fixed cost as production in the quarter was down approximately 20% compared to last year.

During fiscal 2013, we produced a total of 8.1 million engines, a decrease of about 700,000 units from 8.8 million in fiscal 2012. Our ending inventories were slightly higher than last year at approximately 1.4 million units. Lower average cost of commodities for the fiscal year were largely offset by certain price decreases implemented earlier in the fiscal year and unfavorable exchange rates. Engines segment engineering, selling and administrative expenses were $3 million lower than the prior year's fourth quarter, excluding restructuring and the Canadian legal settlement.

Within the Products segment, sales for the fourth quarter were $203 million, a decrease of $17 million or 7.8% from $220 million last year. The decrease is primarily related to decreased shipment of lawn and garden equipment to mass retailers in the U.S., partially offset by higher sales of lawn and garden equipment to dealers and the addition of the Branco acquisition, which we did not have in last year's fourth quarter. For the full year, the Products segment had lower sales of almost $100 million related to our exit of the lawn and garden products sold at mass retail. Dealer inventory of consumer lawn and garden equipment is lower than last year, as retail sales of mowers gained momentum in May and June, indicating that the dealers will have lower inventory carryover in the upcoming winter season. The Products segment had an adjusted loss from operations of $922,000 in the fourth quarter, an improvement of $4.6 million from an adjusted loss last year from operations of $5.5 million.

Products segment fourth quarter adjusted gross margins as a percent of sales were 12.7%, an increase of 1.3% from the adjusted gross profit of 11.4% last year. In addition to closing the Newbern plant last year, we reduced manufacturing production by approximately 15% compared to last year's fourth quarter in order to reduce inventory, which decreased in the U.S. Products business by approximately $50 million. The lower production reduced our gross margin rate by 3.1% in the quarter compared to last year. The favorable impacts of our restructuring and other cost reduction programs and the impacts of selling higher-margin products in Brazil through the Branco acquisition and in the U.S. through our dealer network more than offset the impact of the reduced absorption in our 2 remaining U.S. Products manufacturing facilities.

With respect to our balance sheet, we ended fiscal 2013 with total cash on the balance sheet of approximately $188 million and net debt of $37 million. Our net debt increased by $35 million due to a strong cash flow from operations of $160 million. Free cash flow for the year was $116 million, and capital expenditures of $45 million were below depreciation and amortization of $56 million.

Operating cash flow improved approximately 144% or $95 million from fiscal 2012. The improved cash position at the end of the year was achieved even as we increased the dividend by 9% during the year, repurchased $30 million of common shares outstanding, contributed $29 million to the pension plan, and acquired Branco for approximately $60 million. This was accomplished by our employees being focused on reducing our working capital in the business by close to $100 million during fiscal 2013.

I should also note that the funded status of our defined-benefit pension plan has also improved somewhat since fiscal 2012. The plan was underfunded by almost $300 million at the end of last year, whereas at the end of fiscal 2013, the plan is underfunded by approximately $150 million. The returns on the assets in the plan and the increase in the discount rate of 55 basis points improved the funded status year-over-year. As a reminder, we've already announced that the plan will freeze future benefit accruals to nonunion employees beginning January 1, 2014, and those employees will move to our enhanced defined contribution retirement savings plans. Total average leverage and LTM EBITDA, as defined in our credit agreements, were $241 million and $135 million, respectively, resulting in a leverage ratio of 1.79x, which is well within our debt covenants and provides us with adequate liquidity moving forward.

That concludes what I wanted to say about the fourth quarter financial results. So I'll turn it back over to Todd for his concluding comments and our thoughts on fiscal 2014.

Todd J. Teske

As you can tell from Dave's comments, decreased sales volumes both positive and negative at times due to the weather, and the corresponding actions we took to control inventories and reduce production, were the primary drivers of our earnings in fiscal 2013. The focus we have on cost reductions throughout our business provided -- proved beneficial in a challenging year like fiscal 2013. The restructuring actions that we took in the latter half of 2012 to reduce costs and make needed changes to improving our portfolio of products offerings benefited us during the last year.

In addition to controlling cost, we also made investments to grow through the Branco acquisition, expanding our international distribution network in Latin America and Southeast Asia, and invested in a growing global standby generator market. As we look forward during fiscal 2014, we will continue focusing our efforts on executing our strategic plan to grow the Engines business, grow on higher margin products and diversify geographically.

As indicated in our press release this morning, we are projecting net income to improve over 10% from adjusted net income in fiscal 2013, and be in the range of approximately $50 million to $62 million or $1.04 to $1.28 per diluted share prior to the impact of any share repurchase activity and any additional costs related to our announced restructuring programs. We are projecting net sales to be in the range of $1.88 billion to $2.03 billion, which takes into consideration lower sales of approximately $10 million to $15 million due to exiting the sale of lawn and garden products to national retailers and lower sales of snow throwers in the current year due to adequate inventory in the channel going into this fall, particularly in Europe. The lower end of our range contemplates reduced generator sales to the extent we do not have landed hurricane activity stimulating generator demand. Although our econometric model indicates that lawn mower sales in the U.S. are expected to increase over 10% next season on the strength of home sales over the last year, our fiscal year 2014 forecast contemplates a normal start to spring and a U.S. lawn and garden market being higher by 4% to 6% based on discussions with OEM and retail industry participants. To the extent that the market is higher, we are confident in our ability to deliver more engines within a matter of days from our U.S.-based manufacturing facilities.

The upper end of our sales and net income range contemplate this higher market recovery, as well as storm activity for generators. We are currently beginning discussions with all of our key customers regarding product lineups for the 2014 spring and summer selling season, and we should have a better idea of placement at our fiscal 2014 second quarter conference call. While we do not provide guidance with respect to quarters, keep in mind that last year's first fiscal quarter included the impact of selling portable and standby generators due to channel fill after Midwestern tornadoes in June and the landed Hurricane Isaac in August. Consolidated operating margins are forecasted to be in the range of 4.5% to 5%. The improved operating margins include the benefit of an incremental $3 million to $5 million of savings as a result of our restructuring actions. However, as is typical, our production activity is lowest in the first fiscal quarter. The lower production levels reduces our absorption of fixed manufacturing cost, causing gross margins to be lower in the first quarter before rebounding in the following quarters as we have additional manufacturing throughput.

From a cash flow standpoint, cash flows are anticipated lower than the particularly strong cash flow in fiscal 2013. Improved earnings and additional cash generated from net working capital reductions of $10 million to $30 million, primarily related to inventory reductions, will contribute to cash flows from operations. We are not required to contribute to the pension plan in fiscal 2014. Lastly, we anticipate that capital expenditures in fiscal 2014 will be in the range of $50 million to $55 million.

That's the end of our prepared comments, and now we'd like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mac McGore [ph] with Longbow Research.

Zoran Miling - Longbow Research LLC

This is actually Zoran, in for David Macgregor. Just first one, could you maybe comment on current OEM production schedules and maybe the corresponding impact that's had on your current quarter production levels?

David J. Rodgers

Yes, this is Dave. What we can tell you is that certain of the OEMs did gear down production during our fourth fiscal quarter, and a lot of that was in response to the late spring that we had. And so I think you've seen at least one of the OEMs having reported since then indicate the impact that that's had on their manufacturing productivity as well as their inventory levels have come down. But beyond our most recent quarter, which we're reporting this morning, I can't comment on production levels in the current quarter. What I'd expand on just a little bit is given the time of year and the likelihood that typically the dealers and the retailers like to come into the fall season without building up a lot of green goods inventory, so more inventory coming in the fall and then hanging onto it through the winter, I wouldn't anticipate that they're going to be ramping up production significantly during this time of year, just as a normal rule of thumb.

Todd J. Teske

Yes, I would add to that, Zoran, that, basically, when you look at retail sales that have happened here over the last -- since kind of the end of the fiscal year, year-over-year, they've been strong and we would expect them to be strong because of the drought a year ago. We do look at them kind of compared to a couple of years ago, and they're hanging in there. They're doing well. What's happening, though, I think, right now is there's a lot of inventory that's being sold because when you think about through the end of June, as we reported, we think that the retail sell-through, especially at mass was down, not up, and which meant then they had to deplete some inventory they would have had. As we kind of look into next year, I made the comment about our econometric model would indicate that sales should be up higher. We came into this year, this last year, fiscal '13, kind of thinking the same thing, and it was kind of interesting talking with our economist that we use, it's an outside firm that we use, and he believes that housing had a benefit to us this year, but it was the payroll tax that had an impact on consumer spending as we really got into kind of the first half of the year. So now as we look into fiscal '14, I think what'll happen is everybody will try to manage inventories throughout as we enter the season. And what's happening is when you look at kind of retailer expectations, again, we think that there could be strong up, if you will, in the market. But when you go out and you talk to the retailers, they're not nearly as optimistic. Now they also don't run specific their own -- I don't believe they run their own econometric models that would be specific to our industry. We do share it with them, but at the end of the day, they kind of look -- have a tendency to look at things of more macro kind of comp store sales for where they're headed. So we're a little bit concerned that going into next year, if the weather is normal, it could be a good year. It sets us up well, and it sets up the OEMs well because we both of us have U.S. manufacturing capability and so at the end of the day if it does break earlier, it breaks normally and there isn't enough inventory, I don't think anybody's going to risk a stockout at the end of April into May. And so we're there, and we've said that. That's part of our business model, that we're there to be able to flex capacity along the way. So it's going to be kind of interesting as we go along into next year, given expectations for how things will finish up now through the next month or half or so as the season winds down, how much inventory is actually out in the channel and then how well people decide early on to ramp and if they temper it back what that ultimately means once we get in season.

Zoran Miling - Longbow Research LLC

That's really helpful. I certainly appreciate all the color there. And maybe just touching on your econometric model, it seems like you've been fairly accurate in the past just looking at the graph that you have in your slide deck there. But has there been periods in the past where your econometric model has said one thing, but your customers have said another, understanding that there's a pretty significant delta, I guess, between what your model's telling you for next year and maybe what your customers are expecting?

Todd J. Teske

No, and that's exactly what we're seeing for the upcoming season where -- and we've seen it before where, basically -- and again, I'm not fully privy, if you will, to everything that happens kind of at retail, and obviously, we have a lot of discussions with our OEMs. But oftentimes, at retail, they'll look at it on a more macro basis, and so we have seen situations where their expectations will be different than our expectations, or I shouldn't say our expected, the econometric model would show. And so we have seen situations like that, but we also -- I've been with the company for a while. I've also seen situations where that happens, and all of a sudden, it becomes obvious that there will be stockouts because the expectations were too low. And at that point in time, it really comes back to what I was alluding to before, to the ability to ramp up and really go fast, and so we're not going to build inventories assuming a double-digit up season. We're going to be very cautious as we go through, especially the first half of this year, but then recognize that we have the ability to ramp up if it does come back. We -- I think the payroll tax, as I mentioned before, had more of an impact than perhaps any of us thought it would have.

Operator

Our next question comes from Peter Lisnic with Baird.

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

This is Josh Chan, filling in for Pete. Could you talk a little bit about how the monthly progressions of your sales occurred this quarter, I guess, namely, at what point did it sort of differ most from your initial expectations that you outlined in April?

Todd J. Teske

Well, what effectively happened in the quarter is, obviously, there was plenty of rainfall. We anticipated -- let me back up. As we got out of last season, I'm talking about as we got out of fiscal 2012 and a year ago, you would have heard me say I'm continuing to be concerned about the drought for the upcoming season. So what happened was there was no snow early on in the season or much snow of any consequence. I continued to be very concerned. And then when we got to kind of February into March, it was snowing, it was raining, and the drought was really -- there was a significant relief from the drought. At that point, we were anticipating something a little bit more of a normal season, meaning, normally what you would see is retail activity would start down in the far south, come into February roughly, and then you get -- it move its way up so that -- and you're in full swing, come April, toward the end of April in the northern part of the country. What happened was it was -- it didn't warm up. There was a lot of moisture, but it didn't warm up. And so it seemed like everything was delayed here in the U.S. by about 4, maybe 6 weeks, depending on the region. Same thing happened in Europe. In fact, we think Europe was delayed even a little bit further to the tune of about 6 to 8 weeks. So if you kind of factor that in, it kind of sets everything back, and all of a sudden then, we started to see better retail sell-through toward the end of May into June. Even in July, it seemed to be pretty good. But remember, people were ramping back inventories when the season didn't break kind of on a normal basis, but there was still inventory that was accumulating in the channel. So as we kind of work our way through the remainder of the season, we think as we ended our fiscal year, there's a little bit more inventory than what people would have particularly normally had at the end of June, and we're kind of working through that now. So hopefully, that helps you understand kind of how maybe the season was delayed and how it's playing out.

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

It does, it does. And maybe continuing a little bit with that, I mean, you said that through June, retail was down maybe like 3% to 5% versus last year. So if you played out maybe until the season ends, looks like it's tailing off a little bit here. When everything is said and done, do you think that -- what do you think retail sales will be -- would have been compared to last year, and I guess where would inventory stand based on your guess now?

Todd J. Teske

We would -- I would tell you that by the -- when the season ends, so kind of end of September time frame, we would anticipate that the season would be flat to maybe up slightly, depending on the category. It's a little harder at this point to call inventories because what's happening is inventories have been improving from where they were at the end of June, but right now, it's really hard to predict where ultimately the inventories will shake out. I don't anticipate that they will be unusually low in the channel overall, and so we'll just -- we'll see where it ultimately shakes out.

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then on your own internal engine inventory, you ended the year quite a bit above your normal preferred range. Is it the thought to be able to get that down to your preferred range by the end of next fiscal year or would that be too aggressive of a reduction in your view?

David J. Rodgers

I think our plan for next year, Josh, is to bring it down modestly. I don't think you'll see us bring it down to the 1 million or 1.1 million next year, but we do have plans to under produce next year to the demand or the shipments slightly.

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And last question, is there a way that you can ballpark some of the revenue benefit last year from the weather events, whether it's to any of those hurricanes, things of that nature that benefited your Products business?

David J. Rodgers

Yes, we don't typically break out what the revenue and the margins are by product line, Josh, but what I'd encourage you to do is if you go back and take a look at each of the quarters, you'll see commentary, and most of the portable generators, as an example, happened right near a weather-related event. And so to the extent that you know when the weather-related events are, you can see those impacts in each of our quarters.

Operator

Our next question comes from Sam Darkatsh with Raymond James.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Two questions. I'm trying to understand -- thank you for the insight in terms of how you get to the high end of your guidance and what assumptions are included therein. I was interested in, and conversely, how you get to the low end of the guidance to what is assumed there. Are you still assuming 4% to 6% retail sell-through at the low end also or is it something below that? Because I noticed your overall sales were only up 1% at the low end. I'm trying to get a sense of what assumptions are baked in -- therein.

David J. Rodgers

The lower end, Sam, would just be volume-related impacts, as well as the impact that it has on our manufacturing throughput. There's nothing more to it than that.

Todd J. Teske

Well, included -- and we take out all the generators, really, at the very low end.

David J. Rodgers

Oh, yes, there's absolutely no...

Todd J. Teske

There's no storms.

David J. Rodgers

No storms in the lawn.

Todd J. Teske

I shouldn't say take out. There's the base level of business we do in gen, Sam. But basically, there's absolutely no storms, there's no -- the storm level activity even on ice or anything like that would be extremely low.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

So the Engines or I should say the lawn and garden expectation is 4% to 6% at the low end and then north of 10% at the high end? Is that how we look at it?

David J. Rodgers

No, it'd be 4% to 6% is somewhere in the middle, Sam. And at the lower end, it's going to be lower than the 4%.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Okay, that's what I was getting at, okay. That is a little more clear. Second question, I understand that you don't have visibility yet in terms of what your listings and placements look like yet for the next season. Incorporated within your guidance, however, what is your ballpark assumption for market share for next year?

David J. Rodgers

Well, it's still very early in the process, Sam. Our going in typically is that we have an understanding of what the retailers and the OEMs are trying to do as far as sunsetting certain SKUs or adding new features and new things in. You've heard us talk about innovation in the last several quarters and to the extent that we have been working on innovation with our OEM customers, we're aware of certain things that are new to the market moving forward, and so we typically will bake in some of those things far as incremental SKU placement. And we also are working through with certain of our OEM customers, longer-term views as to what their strategy is in terms of using our engines moving forward. That's very helpful in the process as well. So we know about SKUs that may be sunsetted. Typically, there's not very much change in that year-over-year. I don't think there's any significant change that we're aware of, moving forward for this year, but we do know about some of the new innovations and the placement that we're working on with our OEM customers, and we factor those in as well.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

So generally speaking, no assumption for material market share changes one way or the other yet in your guidance?

David J. Rodgers

I think it'd be -- that's fair to say that it's flat to maybe up slightly.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Okay. Last question, if I could. Your operating margin guidance of 4.5% to 5% is suggestive of margin expansion on a year-on-year basis. I'm guessing that's both gross margin and operating margin expansion. Based on your expectations of when you're going to be ratcheting down production and what have you, how should we look at gross margins year-on-year as we go through the fiscal year? Would they be lower year-on-year in the first half and then up in the back half or how do we look at the progression?

David J. Rodgers

You're exactly right, Sam. I always encourage folks that are modeling out our quarters to take a look at the history. And I think, sometimes, people don't understand all the time that when you look at our first and second quarter, in particular, our production is lower, and that lower production and the absorption of fixed cost does have an impact on what the gross margin rate, and therefore, the operating earnings are in the first half of the year. That can be seen as we have losses typically in the first quarter of our year because the production levels are so low, as well as the sales levels typically come down in that time of year as well. I think this year is no different than that. As you think about the comments that we made earlier in our prepared remarks, you saw the significant impact that production can have on both the Engines business and the Products business and that production is typically lowest in the first and second fiscal quarters.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

I guess what I'm getting at is on a year-on-year basis. I know on an absolute basis, the first half gross margins are going to be light. But on a year-on-year basis, would they be also lighter versus last year in the first half and then expand in the second half year-on-year?

David J. Rodgers

The only thing I'd caution you on, Sam, is the impact of hurricanes. Last year, we had Sandy, which was a fairly significant event that can improve the absorption, and obviously, the sales and the margins in both the Engines and the Products business. When you look at it overall, I mean, clearly, our expectations for the year is that the operating margins are higher in both the Products business and in the Engines business, and that should be helped out by incremental volumes, the mix of product as far as what we're selling through the dealer channel. You heard us talk about both Branco and the dealer channel margins mixing up a little bit, and beyond that, I don't really comment on the quarters.

Todd J. Teske

Sam, one of the things that you might want to think about is I think you're on the right track in terms of thinking about how production might kind of play through. So if you look at controlling inventories, for example, as we kind of go through the first quarter, we're going to continue to control them. It's hard to say what production levels -- we don't disclose the quarterly production levels, but the fact is that I would think about it the way -- in the way you are thinking about it, and that is first half of the year control inventories so you're not going to see a big pop with regards to absorption of fixed cost, per se. And then the other thing that Dave was alluding to that I just want to touch on even a little bit more is if you think about kind of some of the margin expansion on the product side, it has to do with a lot of products that ultimately start to get into the channel, latter part of second quarter into third quarter, and so as we have -- we're coming out with a lot of innovation both on the Engines side and the Product side, the Product side, in particular. And what you'll find is that as that sell-in gets to be ramp up, we would anticipate to have higher margins at that point in time. So I think your instinct of thinking about it from first half, second half, we're going to continue to run cautiously. We ran cautiously a year ago, but if you think about it that way, I think you're on the right track.

David J. Rodgers

Maybe one last comment, Sam. As far as spending goes, you did hear us make some comments about investments that we're making in standby, not only in the U.S., but internationally, as well as international distribution. And so you're going to see the ESG&A go up year-over-year, and that will impact all 4 quarters, not just the latter part of the year.

Operator

[Operator Instructions] Our next question comes from Robert Kosowsky with Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Quick question. What's the anticipated negative impact on margins into 2014 from under-producing as you try to work down inventory a little bit?

David J. Rodgers

Well, I think you heard us say, Rob, that working capital will contribute to cash flow next year between $10 million and $30 million. We do want to take out some additional inventory in the Products business as well as in the Engines business, but I don't think you'll see it be nearly the drag that it was on a year-over-year basis in '13. I don't think you'll see it be nearly as significant in 2014.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then, I guess, shifting gears on the Branco acquisition. How much does that contribute to sales, say, this year and this quarter? And how much did it contribute to operating profit in the fourth quarter or 2013?

David J. Rodgers

Well, moving forward, we're not going to break out Branco specifically. But if I go back to comments that we made when we bought -- or when we did the acquisition, what we said at that point in time was that we bought a business that did annual sales of about $40 million annually and that the operating margins were in the low to mid-teens. And then we did confirm today that for the quarter as well as since the acquisition, that it's very much met our expectations.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. So it was accretive over the course of the year and in the quarter?

David J. Rodgers

Yes.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then otherwise, Todd, it's been -- we just haven't seen this volume rebound really happen. And I'm just wondering, are you seeing any factors right now kind of durability of products or just persistent consumer weakness that is making you question whether or not lawn and garden is evolving to more like a GDP growth market and less of a cyclical rebound market.

Todd J. Teske

Rob, it's interesting because I had this discussion with our economist, and we kind of -- we focused on a few things. This year, as I mentioned before, he believes the payroll tax increase had a pretty substantial impact, not just on us, but categories very similar to us. The -- I think there is something that -- we've been doing some work in terms of expansion of the replacement cycle or the lengthening of the replacement cycle, and I think there has been some. And because the mowers, we think, are better quality than perhaps they have been, say, 10 years ago. I also believe though that there's not been as much innovation in the market that -- to drive kind of that replacement cycle back to more normal levels, which is why we've been working on a fair -- a number of things, again, both in the Engine and the Products side to drive more innovation that would hopefully then cause people to say they want something new and better. There's a third factor that we're trying to get our arms around that becomes kind of interesting as you think about it. The marketing mix, the theory is the marketing mix has changed for retail because when you look at this category, there's really 3 levels of marketing advertising that goes on. One is at the engine level, and we've always done some things on the engine side of the business. So a lot of our competitors, especially those coming from China, they obviously don't. Then you get into the level of the OEM, and there is always advertising that goes on there, and then you look at the retailers, and retail generally has been the one that drives it. And oftentimes, it's the Sunday tabs, if you will, that when somebody's flipping through the Sunday newspaper, they'll see these tabs, and it will be top of mind then in terms of should we replace our products or whatever. That mix is shifting, and it's shifting to online and it's search engine optimization and it's things like that. And so realistically, we think that, that could have a bit of an impact too going forward. And so what we've been doing is talking a lot with the -- and continue to talk a lot with the OEMs and the retailers about how that marketing mix might be influencing the category, and there is a direct correlation that when you do -- in this category, that when you do advertise, people do react. So we're addressing that. The other thing you'll see us do is we'll -- as we come out with innovation, it's going to be important to keep it and get it in front of the consumers, and you'll see us do some more, incrementally more promotion to drive that innovation, and again, I think that will have a favorable impact on volumes as well. Fact is though that when you step all the way back, housing and weather have an impact. The weather has an impact within a year of when a season will start, and housing will continue to have an impact going forward. And there's a lot of discussion in the media with regards to the improvement in housing, and there's no doubt that it is improving. But you also have to remember that it's coming off an extremely low point, a low base, and we don't anticipate that we're going to see 2003, '04 and '05 housing levels again any time soon. Now those were extraordinarily high periods of time in terms of sales of existing homes and new housing sales, new home sales, but we do see the impact of an improved housing market coming through. So those are kind of 3 factors that we have kind of been looking at, we are addressing and to the extent that we can, and then kind of being able to try and drive our business accordingly. So I'm not discouraged that -- because I think the future in this category is really good because I think it will snap back or it will come back, and the question's how big of a snap back will it be.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. That's definitely helpful. And then otherwise, just 2 other questions, I think you mentioned some success on the Ferris brand with the commercial mowers, is that -- can you kind of expand on that? And how do you see that kind of category for you growing, either on the Engine side or the Ferris side as well?

Todd J. Teske

Sure, sure. You look at commercial cutters, and people are getting back to commercial cutting. We don't see a big shift. A lot of people ask us, is there a big shift where people aren't cutting their lawns anymore? We don't see a big shift where the consumer market goes way down and taken over by commercial cutters, but we do see continued growth. And really, when you look at it, the big deal for commercial cutters is productivity, and that's where we continue to look for ways both through our engine business and through our products business to enhance the productivity of the commercial cutters, whether it be through maintenance intervals, whether it be through the ability to mow faster because of suspension or many other things. And so we've continued to add to our dealer base as it relates to Ferris and Snapper-Pro, and we continue to invest in new products. Some of those 40 new products we talked about were, in fact, Ferris products and Snapper-Pro products that came out that did extremely well this past season. So I would -- as we look forward, we'll continue to invest in that part of the business, whether it be from the commercial engine side and the commercial cutting side because we continue to see some really nice growth that can happen in that part of the business.

Robert A. Kosowsky - Sidoti & Company, LLC

All right. And then one last question, what was the pension benefit going to be for this year, Dave? Did you mention that? I think I missed that.

David J. Rodgers

In fiscal year '14, the pension benefit will be in the area -- and this is net of the enhanced 401(k), in the area of $5 million to $7 million.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. So $5 million to $7 million from the pension and $3 million to $5 million from the cost cuts? And then all the other assumptions like hurricanes and weather, is that...

David J. Rodgers

Yes, and just to link it back to what we've previously talked about with the pension is that we said, as a result of making the pension freeze that, that would be $10 million to $15 million annually. And the freeze starts halfway through this fiscal year so that kind of links it together for you.

Operator

And I'm currently showing no further questions. I will now turn the call back over to management for further remarks.

David J. Rodgers

Great. Thank you, everybody, for joining us today. We will look forward to speaking with you again after our first quarter ends, and we'll have our conference call in October. Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.

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