Brunswick Corporation Q4 2009 Earnings Call Transcript

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 |  About: Brunswick Corporation (BC)
by: SA Transcripts

Brunswick Corporation (NYSE:BC)

Q4 2009 Earnings Call Transcript

January 28, 2010 11:00 am ET

Executives

Bruce Byots - VP, Corporate and IR

Dusty McCoy - Chairman and CEO

Peter Hamilton - SVP and CFO

Analysts

James Hardiman - FTN Equity Capital Markets

Ed Aaron - RBC Capital Markets

Tim Conder - Wells Fargo

Matt Vittorioso - Barclays Capital

Alexander Fedoro [ph] - Sun Hung Kai Capital [ph]

Operator

Good morning, and welcome to Brunswick Corporation’s 2009 fourth quarter earnings conference call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President, Corporate and Investor Relations.

Bruce Byots

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

Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking comments about future results. Please keep in mind that our actual results could differ materially from these expectations.

For the details on the factors to consider, please refer to our recent SEC filings in today’s press release. All of these documents are available on our Web site at brunswick.com. Also, during Dusty’s concluding remarks, we will be referring to a chart containing boat pipeline information. If you have not retrieved this chart, you may do so by going to the Investor Relations section of our Web site. I’d now like to turn the call over to Dusty.

Dusty McCoy

Thanks, Bruce, and good morning, everyone. By now, I hope you’ve had the opportunity to review our fourth quarter earnings release. As a result of the strategic actions we took throughout 2009, combined with modestly improving economic and Marine market conditions, and these are comparisons, our fourth quarter year-over-year revenue declines, as compared with the previous five quarters, began to slow. I’ll comment in my concluding remarks about our plans for 2010.

We reported a net loss in the quarter of $1.40 per share on a sales decline of 22%. The net loss includes $0.78 per share of restructuring charges and $1.20 per share of benefits from special tax items. Our quarterly operating loss, excluding restructuring, exit, and impairment charges, was $120 million, a decline of approximately $130 million, compared to the prior year.

This is a complicated and a bit sloppy quarter. So in order to understand our true operating leverage, I should mention two items, which have been impacting our numbers. The largest part of the variance is the absence in 2009 of approximately an $18 million accrual reversal that benefit all of our segments in the fourth quarter of 2008. But taking into account the accruals reported in the fourth quarter of 2009, the total variance is approximately $100 million. These accruals relate to variable compensation and defined contribution retirement funding covering approximately 7,000 employees. In a cyclical business, we strive to make fixed costs variable, and this applies to our compensation and benefits as well.

The second item is an increase of defined benefit pension expense of approximately $20 million, primarily affecting the engine, bowling and billiards, and corporate segments. If we exclude these two items, the decrease in operating earnings from Q4 of 2008 to Q4 of 2009 will be approximate $2 million on a sales reduction of $180 million.

The next one illustrates another progress we are making in minimizing the impact of operating de-leverage. 2009 evolved in line with our planning assumptions. And with the great performance of our employees, we made remarkable strides in executing against our key strategic objectives. We exited the year with over $525 million in cash, a stronger dealer network with extremely low levels of inventories, and a leaner company with a significantly lower cost structure. This has been an extremely difficult period for the employees of Brunswick, but it is without question a year in which they should be extremely proud of their fundamental accomplishment, keeping the company financially strong while positioning it for revenue and earnings growth.

With these preliminary comments out of the way, let me begin with the review of some fourth quarter Marine industry data, and this data is preliminary at this point. Fiberglass, stern drive, and inboard boat unit demand fell by 30%. This compares to a decline of 47% in the fourth quarter of 2008. For 2009, units fell by an estimated 32%. Outboard fiberglass boat retail unit demand fell 10% in the fourth quarter. This compares to a decline of 41% in the fourth quarter of 2008. For 2009 units fell by an estimated 27%.

Aluminum product demand fell 20% in the quarter. This compares to a decline of 27% in the fourth quarter of 2008. For 2009, units fell by an estimated 25%. Based on this preliminary Q4 numbers, industry fire boat unit demand appears to have declined from 203,000 units in 2008 to somewhere between 140,000 and 150,000 units in 2009 over 20%, and 26%, and 31%.

Throughout 2009, we had as one of our top priorities a pipeline reduction strategy intended to support our dealer network in these difficult markets. To that end, we reduced a number of units we sold to dealers by approximately 20% in the fourth quarter versus last year. For the year, we reduced the number of units sold to our dealers by nearly 55%.

The global Marine market continued to be heavily influenced by retail discounting especially on aged and repossessed products. Throughout the industry, boats continue to enter the marketplace via non-traditional avenues. Consumer related repossessions, finance companies exiting the Marine space, or from OEMs and dealers going out of business. In addition, dealers and OEMs offered significant discounts to help sell boats in their inventories.

These conditions, combined with our pipeline reduction strategy, resulted in higher year-over-year discounts to facilitate retail boat sales. As a result of our reduced wholesale unit levels and the impact of higher discounts, boat segment sales declined by 38% in the fourth quarter, compared to a decline of 62% in the previous quarter and a decline of 58% in the fourth quarter of 2008.

As for our dealers, the reduction on wholesale unit shipment has allowed them to reduce boat inventory in the field, about 13,700 units versus the year ago. This is a 47% reduction. As a result, the quarter ended with 26 of products in the pipeline on the trailing 12-month retail basis, compared to 34 weeks at the end of the fourth quarter 2008. Once again, this is great work given the significant retail declines we’ve been experiencing.

Our dealers also continue to make excellent progress in the health of their floor plan financing metrics. Total domestic floor plan loans outstanding declined 55%, compared to the fourth quarter 2008 levels. We’re particularly pleased to see that our focus on helping dealers sell product greater than 12 months old continues to show positive results. Outstanding floor plan loans on domestic inventory, aged greater than 12 months were reduced by 38%, compared to year-end 2008.

Our boat production rates during the fourth quarter were once again below our wholesale unit sales. It reflected about a 40% decline in units produced versus the fourth quarter of 2008. This compares to our 20% decline in the fourth quarter wholesale shipments that are previously mentioned. For the year, boat production was approximately 65% lower than prior year levels. And more importantly, in our fiberglass boat business, our production levels were about 60% less than our full year retail demand.

In our engine business, overall production for the fourth quarter was up about 1% as significant declines in production occurred in Q4 2008. This follows reductions of 35%, 60%, and 75% in the previous three quarters of 2009. Similar factors that drove lower sales and earnings in our boat segment also affected Marine engines, but to a lesser extent, because the engine segment service, parts and accessories business as well as its international operations experienced only modest declines in revenues.

In the fourth quarter, Mercury’s overall sales declined by 11% versus the same period in 2008. This compares to the decline of 29% in the previous quarter and decline of 43% in the fourth quarter of 2008.

Sales for non-Marine businesses, Life Fitness and Brunswick Bowling & Billiards, were down 15% and 27%, respectively. Same store retail bowling revenues were down in the mid single digits. However, our exercise and bowling equipment businesses, which focus on commercial customers that rely on financing to fund purchases, declined more significantly.

Both Life Fitness and Bowling & Billiards continue to generate strong cash flows. In 2009, the success of our cost reduction program, combined with our inventory management strategy, enabled us to make outstanding progress in increasing our overall liquidity as well as reducing our net debt position. We entered the year with $527 million of cash on our balance sheet, compared to $317 million at the end of 2009. Our net debt position at year-end 2009 was $90 million lower than the previous years’ end balance.

In the year-end overall liquidity, which includes available borrowing capacity on our ABL credit facilities, approximated $615 million, reductions of certain current assets and liabilities contributed approximately $400 million to the increase in our cash balances during 2009, which primarily came from reduced inventory levels and lower accounts receivable. Peter will provide more detail on our cash flows, including the effect of our recent open market purchases in notes that further reduced our near term debt maturities.

Now, I’ll turn the call over to Peter for a closer look at our financials, and then I’ll return to give you a perspective on how we’re planning for 2010.

Peter Hamilton

Thanks, Dusty. I’d like to begin with an overview of certain items included in our fourth quarter P&O and also comment on some 2010 data points.

Let me start with restructuring exit and impairment charges, which were $68.6 million or $0.78 a share in the fourth quarter. This amount reflects charges for our continuing actions to realign our manufacturing footprint and associated workforce reductions. The charge is greater than our previous estimate, primarily due to approximately $50 million of non-cash charges or impairments at various boat segments under-utilized properties, which reflect our decision in the fourth quarter to no longer use these facilities in our continuing operations and to proceed with these positions.

Our view of 2010 restructuring charges is approximately $30 million. These charges are for actions currently implemented or planned, including approximately $10 million reflecting the plant consolidation actions at Mercury. The vast majority of our restructuring charges in 2010 will be cash.

Interest expense totaled $26 million in the fourth quarter of 2009, an increase of $7 million versus the same period in 2008. This increase reflects greater debt levels along with the higher cost of debt resulting from the refinancing activities completed in the third and fourth quarters of 2009. The fourth quarter 2009 also includes a $13 million loss incurred on the retirement of $85 million of 2013 notes, which were retired in the premium versus the recorded book value. For 2010, we expect interest expense to be approximately $24 million per quarter.

Turning now to taxes, in the fourth quarter, we recorded $108 million tax benefit, which reflects our ability to carry back five years our 2009 domestic tax losses to years in which we pay taxes. In 2010, we expect to generate additional tax losses. We will continue to book valuation allowances against deferred tax assets generated from these tax losses. This will result in our recording no domestic tax benefits for 2010 pre-tax (inaudible) losses. Consequently, our pre-tax and after-tax losses will be essentially the same, except for potentially having to provide for foreign and state taxes.

Now, let’s turn to a review of our 2009 cash flow statement, in addition, our comment on our expectations for 2010 and our objective to maintain strong liquidity by generating positive free cash flow.

Our cash balance at the end of the fourth quarter was $527 million, as Dusty has said. And that’s $209 million greater than year-end 2008. This increase resulted from approximately $113 million of cash provided by operating activities than of cash used for investing activities and supplemented with net proceeds received from financing activities of $96 million.

In addition to the extensive cost cuts that help mitigate our losses, the most significant source of free cash flow in 2009 came from a reduction in certain assets -- certain current assets and current liabilities of approximately of $400 million. A reduction in inventory of about $325 million was the primary driver of reduced working capital.

In 2010, our plan is to maintain at least flat year-over-year working capital levels by increasing inventory returns in line with historical levels and reducing day sales outstanding. The maintaining flat year-over-year working capital would be challenging in a rising sales environment, but we believe that is well within our reach. Of course, given the seasonality of our Marine businesses, we would anticipate using cash to fund working capital in the first half of the year, and then generate cash in the second half.

Also during 2009, we received net tax refunds of approximately $90 million. This primarily related to the filing of our final 2008 Federal income tax return and carrying back the net operating losses of 2006 and 2007.

We anticipate receiving a $100 million refund in the first quarter of 2010, which relates to our 2009 federal income tax return, and carrying back the net operating losses through the year 2004.

Capital expenditures in 2009 were $33 million. We plan to increase this amount to approximately $60 million in 2010 as we develop new products and anticipation of this wholly improving economy and we fund projects to reduce operating cost in addition to the non-cash impairment charges that I described earlier.

Now let's take a look at the major items that reduced our earnings, but are entirely or partially non-cash. Depreciation and amortization is $157 million in 2009. Our current view for 2010 is approximately $130 million. Pension expense for our defined benefit pension plans totaled $96 million in 2009, which included $14 million of curtailment and settlement losses primarily related to restructuring in severance activities.

Our cash contributions for 2009 totaled $22 million, including cash paid to fund our qualified pension plans and to make nonqualified pension benefit payments. Our funded position experienced a slight decline from year-end of ’08 as the impact of lower -- of a lower discount rate offset the benefit of favorable investment returns.

Our pension expense is expected to total approximately $40 million in 2010. This decline results from the decision to freeze benefits and the company’s two largest plans in 2008 and 2009. A by-product of these decisions is that longer amortization periods are now being applied to previously incurred, but unrecognized actuarial losses. There is also a lower expense resulting from the elimination of annual benefit accruals.

Our minimum cash requirement, associated with the pension plans in 2010, are expected to be between $25 million and $30 million.

And finally, we recorded provisions for doubtful accounts of approximately $50 million in 2009. In 2010, we do not anticipate these provisions to continue at last year’s levels.

Our year-end 2009 cash balance was $97 million less than the previous quarter. The fourth quarter reflect a modest negative free cash flow of $16 million, but the receipt of $20 million in government incentives in the form of partially forgivable loans pertaining to the Mercury consolidation. While these two factors were essentially offsetting, we did retire $85 million of the 2013 notes in Q4 for $97 million which accounts for the cash balance reduction in the quarter.

We did not have cash borrowings under our two ADLs at the end of 2009 and we entered the year with net available borrowing capacity of $88 million under these two facilities, which does take into account the $60 million minimum availability adjustment required by the fixed charge test in revolving credit facility.

When you combine the available borrowing from both facilities with our cash balance, we entered 2010 with approximately $615 million of liquidity. In 2010, we don't anticipate any borrowing under either of our ADL facilities. And I’d like to point out within 2010 we do expect to receive further state and county incentives of approximately $35 million to support the Mercury plant consolidation. And that should more than offset any incremental cash restructuring charges associated with this move during the year. These incentives will be classified as debt on our balance sheet and will accrue interests at low single-digit raise.

So in summary, based on the strength of our continued cash generation, we believe that we’ll end 2010 with extremely solid levels of liquidity and net debt at levels comparable to year-end 2009.

Finally, I’d like to supplement thus these remarks with an update on some team matrix that we’ve been sharing with you regarding the health of our dealer network. For the full year of 2009, boats tendered to us for repurchase totaled approximately $22 million, virtually all of which had been placed with alternative dealers. The actual cost to us during the year in carrying out this repurchase obligation was about $4 million.

We continue to conduct detailed, dealer-by-dealer analysis of potential future repurchase losses at each quarter. We actually decreased our boat goods reserved for this exposure by approximately $3 million in 2004 resulting in a total accrual of about $8 million at year-end ’09.

Our number of boat dealers over the past year has remained remarkably stable, experiencing a net decrease in dealers of less than 1%. But more importantly, we believe that the overall quality in strength of our dealer network has in fact improved. A leading Marine publication boating industry recently ranked the top 100 dealers in North America, 82 of the top 100 were sellers of Brunswick boat brands.

All these evidence we believe is -- all this is evidence we believe that the strategic actions taken over the past several quarters had maintained and in fact improved and related (inaudible) quality of our dealer network, which is a key differentiator for us in the money market.

Now I’ll turn the call back to Dusty for some concluding comments.

Dusty McCoy

Thanks Peter. I’m concluding that today -- that we’re reviewing out outlook for 2010. In Peter’s comment, he addressed restructuring charges, interest and pension expense, our tax provision and various cash flow assumptions and targets for 2010. I’m going to focus my remarks on the key revenue and earnings drivers that will affect our businesses in 2010 and beyond.

We still have a limited visibility in -- to both economic and Marine market conditions, there will affect the demand for our products. However, unemployment continues to be high. Mortgage defaults continue in high rates. Other credit defaults continue to rise. Home values have yet to recover. Lending remains constrained, although slightly better. And the policies and goals of the administration and congress remain muddled in the existing political environment. Given this background, we are planning for recreational Marine markets to be down slightly in 2010 versus 2009. As a result, we expect 2010 will be another year in which we report operating losses albeit significantly reduced than 2009.

We remain committed to the strategic focus that has ensured our financial health and uniquely positioned us compared to most of our competitors in the Marine, fitness, and bowling and billiards segments. We will continue to focus on maintaining strong liquidity, of keeping that net consistent with current levels, taking all reasonable actions to strengthen our leader network, and doing the work necessary to come out of this downturn stronger than when we began the period.

Although our 2010 plans reflect a modest reduction in retail Marine demand, our boat facilities will gradually increase shipments to our dealers throughout the year as production is ramped up and as wholesale falls on more in line with retail demand.

As indicated in our release, we posted a boat dealer pipeline inventory chart on our Web site. This is a slide that is similar to the one we’ve been using in our equity conference presentations over the past few quarters. We’ve updated to reflect our final 2009 pipeline numbers and have included our current range of 2010 wholesale shipment and retail sales assumptions. For those who are not connected to the Internet right now, let me take a moment to review the data on the sheet. We are assuming retail sales of our dealers will be down by approximately 10%, and our annual wholesale shipments, which corresponds the boat segment revenues, will increase in the range of 50% to 60%, although first quarter growth will be muted by the usual startup conditions, such as the building of our supply base and our commitment to maintain quality.

Given these assumptions, our annual pipeline declined between -- would decline between 1000 to 3000 units, with ending 2010 units in the range of 12,000 to 14,000 boats. Therefore, our plan currently reflects that the already low-filled inventory levels will drop even further in 2010.

Additionally, although over supply conditions still exist in the overall Marine market, we believe that our 2010 sales at retail will be comprised of a greater percentage of current (inaudible) boats. And based on the low levels of inventory in our dealer pipeline, the amount of discount dollar should be far lower in 2010 versus 2009. The factors affecting the Brunswick boat segment will also lead to improved revenue growth in our engine businesses, but the anticipated growth will be considerably less due to the mix of businesses between the Marine engine segments.

Our domestic parts and accessories business, which currently represents about a third of the segment’s annual revenue, is projected to be flattish for the year. In addition, international market sales, which currently represent about 45% of the segment’s annual revenues are projected to grow at roughly at 10% rate. Taking these factors into consideration, we anticipate our engine segment sales to grow at mid-teen rates.

In addition, we believe sales improvement will occur in our fitness and bowling and billiards segments as financing slowly becomes available and as proprietors of health clubs and bowling centers become concerned that their equipment is affecting their ability to attract and retain customers. Our current expectations reflect that these segments will experience modest growth in both revenue and operating earnings while continuing to generate strong cash flows. We expect to report improving margins and the majority of our margin growth will come from significantly higher revenues and production rates, which may combine with our lower cost structure will produce strong operating leverage.

Additionally, we expect to see margin improvement from the consolidation of our US engine casting and machine from Stillwater to (inaudible). This transition will take approximately 24 months, and will ultimately when completed result in approximately $40 million of total cost reductions.

We mentioned earlier our performance against our goals is to maintain liquidity, protect our dealers, and position the company for the future. Our extraordinary performance against these goals in this recession as a (inaudible) does to the transition from a focus on liquidity to a focus on continuous improvement in our financial results and strength relative to the competition in all of our business segments. Though all the economy and markets in which our businesses operate may remain challenging for the foreseeable future, this transition requires that in 2010 and beyond, as the world economies improve, that we remain disciplined to generate positive cash flow, perform better than the market in each of our business segments, and grow earnings faster than we grow sales.

Thank you, And now I’d like to turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Hardiman with FTN Equity Capital Markets. Please proceed.

James Hardiman - FTN Equity Capital Markets

Good morning, guys. A couple of questions for you, with the Genmar bankruptcy option behind us, can you give us a little bit of your thoughts in terms of the results of that option, how you think that’s going to affect the industry in terms of boats there are on the open market maybe suppress and reduce price as needed? Can you just talk about how that went versus your expectations and what are the implications there?

Dusty McCoy

It went about like we expected. Our view was that the primary players with the financial firms, not strategic firms. And in fact, most of the assets, at least initially, ended up in the hands of a financial firm. Of course, the prior owners or the prior primary owner, it then ended up with some of the assets. And it appears there has been a subsequent transaction with the financial player to get a couple of more of the assets.

So as we look at it, the financial firm, which is new entrant into our industry, is -- got a lot of gearing up to do and a lot of work to go get done. They got a fair bit of products sitting out there that’s going to have to feed the dealer network until they can get up and running and keep the dealer network healthy. There may be some level of discounting by that product. But when we step back, I don't know, probably as good as result for the industry as we could have expected. It looks like, Platinum, who was the buyer for significant portion of the assets is a good operator, at least in other things that they’ve done. And of course, we know Mr. Jacob’s operating capabilities. So this will begin to unfold through this year and it turned out about like we thought it would.

James Hardiman - FTN Equity Capital Markets

Great. And then in terms of the slide that you guys provided to create disclosure and we all certainly appreciate that. You talked about how 2010 inventory are probably going to come down a little bit more in that 1,000 to 3,000 units neighborhood. Is just the majority of that going to be first half weighted and when do you think you’ll resume trying to get back to a one-on-one in terms of selling versus (inaudible)?

Dusty McCoy

My judgment is that we’ll be back on Tier 1-1 in 2011. And we think that the industry will get cleaned out. One of the things that we looked at, James, is we make the best guess we could from talking to a lot of people about how much aged inventory was sitting out there in the dealer network. And we made some judgment about what additional repossessions may occur and then how this was going to come through in the marketplace. Then based upon that, we made the decision of how much we should put into the dealer network because we don’t need to be putting new product in and compete against a bunch of aged products or repossessed products that's going to take discounts in order to move.

And of course the other factor there was we need to do some planning about what we thought the overall market conditions would be at retail. So what you’re seeing there are our planning assumptions. They may or may not be right and we’re prepared to adjust. If the market were to get better, we will continue higher levels of production longer in the year in order to satisfy the market. But fundamentally, our judgment is that in 2011, we should have gotten this Marine market pretty well cleaned up and we ought to be able to operate on a one-to-one.

James Hardiman - FTN Equity Capital Markets

Thanks. And then along the same lines, it look like -- nobody really knows the answer, but you’re saying -- you’re guessing that your retail sales are going to be down about 10% versus 2009. Obviously, it’s I think you just touched on -- you’re going to be competing -- you’re in much better shape than a lot of your competitors, so you’re going to be competing again in lot of instances, reduced prices from your competitors. What does that say about what your thoughts are about the industry and what your market share position is going to be in 2010?

Dusty McCoy

In theory, we could suffer as a little market share loss in a -- with certain of our brands and in certain segments where there may be lot of boats and a lot of discounts. On the other hand, what we’re -- it’s early days in boat shows. I want to be very careful. But our dealers are doing fairly well. Actually, I'll put a stake in the ground. Boat shows are flat to slightly down. And they’re working at a smaller footprint because a lot of people didn’t show. A lot of (inaudible) haven't shown up in the show that showed up in the past. Attendance is flattish. It makes congestion look a lot bigger, the smaller footprint thing, number of people moving around in a smaller area that congestion looks a lot bigger. But the sales have to show is in a flattish to maybe slightly down below.

But the thing is the dealers are getting more margin because they’re able to sell current product in a much better margin and not have to go through the discount. It will be difficult to grow market share in 2010 in this market, but I’m not really resigned to the fact that we should plan on losing market share. And as a conclusion to my comments, you noticed that I said that it’s important that all of our businesses begin to think about outperforming the competition in all of our segments. Market share will not be the sole governance in determining as to whether we are performing our competition. But it’s not what we’ve got to get our head around as we begin the transition this company from the focus on liquidity to a company with margin than earnings.

James Hardiman - FTN Equity Capital Markets

Excellent. Just one final question, can you give us any metrics in terms of the contraction of your dealer base over the last couple of years? How many dealers have gone away? What percentage of sales do they represent? And where do we think that ultimately gets to?

Dusty McCoy

Peter in his comments gave a great statistics. Less than 1% of our dealers -- I’ll have that differently. Our dealer account is down less than 1% as we walked out of 2009. And a lot of the reason is we have the brand that if a dealer is in trouble in a particular market, we are not having any problem getting our brands placed at another dealership. And then by definition, James, that dealership is healthier than the dealership we left because it was in trouble.

And one of the really great attributes is our dealer network -- and again, Peter mentioned this in his comments, boating industry does a lot of work with the dealer network to both improve the dealer network, but also to measure performance. And they just finished up toward the end of the year. There’s award as the top 100 dealers, and 82 of those folks carry one or more of our brand. We’re very comfortable with our dealer network. We think it’s becoming a competitive advantage. And I’ll tell you, we really have some great dealers out there right now.

James Hardiman - FTN Equity Capital Markets

Perfect. Thanks guys.

Dusty McCoy

You’re welcome.

Operator

Your next question comes from the line of Ed Aaron with RBC Capital Markets. Please proceed.

Ed Aaron - RBC Capital Markets

Thanks. Good morning, everybody.

Dusty McCoy

Hi, Ed.

Ed Aaron - RBC Capital Markets

So Dusty, I was hoping you can maybe just talk a little bit about how their retail trends attract relative to your expectations recently? The reason I ask you is, I think maybe six months ago you were talking about an expectation for 130,000 maybe to 135,000 industry in the retail or unit sales this year over last year. And also we came out a bit ahead of that. At the same time, the rate of decline in the fourth quarter for the industry didn’t -- perhaps didn’t moderate to the extent that I thought it might just given the fact that we came up against the much easier comparison. So just we’d love to hear any color from you on how the back half of the year and total from a retail demand perspective check out versus your expectations?

Dusty McCoy

It was a little better than our expectations. I think there are a couple of things went on that made a little better than our expectations. First, our pipeline was beginning to get scoured as we went into the fourth quarter as a lot better aged product. And while we didn’t put a lot of this product into our dealers, I think we just enough to get some nice sales uplift there. And of course, we were continuing to discount the aged products. So the combination of the two made it slightly better that I thought. I think also the lending institutions have shown up in a little better form for consumers. And though it’s not where we’d like it to be or where it should be or where consumers would want it to be, it is getting slightly better.

Then lastly, in conversations with dealers, a lot of folks are now showing up at dealerships and at boat shows right now, Ed, who have the money to be a boat buyer. So if it doesn’t take -- it doesn't take as much -- the down payment -- I’ll say if the down payment is not such a constriction on the type of buyer that’s beginning to show up so they are able to live with the financing terms that are available.

And then perhaps the last thing is in aluminum business, if you have heard -- listen to our statistics is down a fair bit. The rate of decline is much better than the rate of decline in fiberglass. And I think that’s probably a reflection of those boats on balance have an average sales price significantly less than a lot of the bigger fiberglass product. And I think the -- it’s the first place consumers are going to start coming back to.

Ed Aaron - RBC Capital Markets

Thanks, Dusty. And then the second question is just from ASP perspective in the boat segment. How should we be the thinking about that for 2010, because I think you had a couple of quarters there where you were shipping down 15 units and your revenues were down 80% in dollars, which implies some pretty significant ASP compressions. So I would think we would get a decent trend back up in 2010. At the same time there’s a bit of a question of what the mix of sales is going to look like especially with the upward and aluminum declining a bit less at retails and other categories. So we’d love to hear any color on that.

Dusty McCoy

We’re thinking that our ASPs ought to be flat or thereabouts in 2010 versus 2009 because the discounting will be over.

Ed Aaron - RBC Capital Markets

And the reason that it wouldn’t be the up then is it because of the offsets for mix?

Dusty McCoy

I think it’s going to be number one a bit of mix, oh yes, it’s going to be primarily mix.

Ed Aaron - RBC Capital Markets

Okay. And then, Peter, maybe just one for you. You've had fixed cost reductions rolling through progressively through some period of time. Incrementally in 2010 versus 2009, how much should we assume that on a full year basis the fixed cost will be down?

Peter Hamilton

Well, we’re certainly going to strive to hold the $420 million of cost reduction that has taken place in the past two years. We will also encounter the obvious, hopefully, modest cost inflation in materials and in wages, but that in turn should be offset by improvements in cost reductions that we have moving forward. The biggest improvement in terms of overall fixed cost reduction will just come from the significantly increased sales, particularly in the boat group. And so, when you put all those things together, we’ll be moving from a fixed cost as a percentage of our total sales in excess of 30% last year in ’09, just something between 25% and 30% in this year 2010.

Ed Aaron - RBC Capital Markets

Thanks. I have a couple more, maybe I’ll jump back in the queue.

Peter Hamilton

Okay. No problem. You could do whatever you want. We’re fine either way.

Operator

Your next question comes from the line of Tim Conder with Wells Fargo. Please proceed.

Tim Conder - Wells Fargo

Thank you. And again, gentlemen and the whole team congrats on a great execution of the ongoing tough year of ’09.

Dusty McCoy

You’re very kind, Tim. We appreciate it.

Tim Conder - Wells Fargo

Dusty, back to the pipeline slide, maybe to follow on a couple of previous questions. The 12,000 to 14,000 units that you're somewhat targeting in '10 for your ending inventory assuming you're down in retail 10% fair. I think previously you've said that you're targeting 14,000 to 15,000 units, so. I think you said that you want to be cautious shipping in giving the (inaudible) of the final year of putting everybody else's stuff out. Is that it? And then maybe if we -- I know it's very early. But on a more normalized basis beyond '10, is that 14,000 to 15,000 ending inventory still where you're targeting on a normalized basis?

Dusty McCoy

Fifteen-ish is where we'd like to be. There are a couple of other factors, Tim, in addition to what I said earlier that I probably should have mentioned. There is a limitation that we need to be very careful about on our ability to come up and get our plants running at full fill. The supply base -- there's a great article on the Wall Street Journal yesterday (inaudible) of the fact. The supply base has really suffered as we've taken production down. And then as they come back up with this, we want to be very careful to come up in a way that they can perform and keep their quality at great levels and manage the working capital requirements in a way that they got the ability to afford.

Secondly, as we come back up, quality is going to be a really important focus on it for us. We can turn these plants on and hire a bunch of people, and start running products through, and we'll end up with quality problems.

And then thirdly --

Tim Conder - Wells Fargo

And then, Peter, get on too for the warrants expense going up, right?

Peter Hamilton

Yes, sir.

Dusty McCoy

More importantly, we don't want to have a Toyota problem.

Tim Conder - Wells Fargo

Exactly, exactly.

Dusty McCoy

Our consumers are who we're really focused on here ultimately. So when you put all that together, Tim, we're coming up we think at a very measured pace. Our fiberglass plants are going to have production to be in excess of 100% of what it was in 2009. And that is really a big come up now.

Our callback list have us bringing back great and experienced workforce in all of our plants. We've been incredibly happy with the number of people who have come back who was laid off as we went through the downturn. I'm very confident we got a great workforce and we've done a heck of a lot of planning to do this correctly, but we are going to do it carefully.

So as we get then over to 2011, 2011 is going to be a really interesting year around here depending upon what the market does. But even if the market were to stay flat, we got a lot of boats to make. We're going to have some nice revenue increases. We are going to begin to see the impact of our cost savings. So we're going to do 2010 right, carefully, check quality, help our supply base come up. And then 2011, I will begin to (inaudible) a very good year for us.

Tim Conder - Wells Fargo

Okay. So again just to summarize then the reasons you cited that 12,000 to 14,000 as your target ending inventory units for '10. But then '11, more back to that. As far as the normalized base, is that 14,000 to 15,000 would be more of a fair, normalized rate?

Dusty McCoy

Fifteen thousand should be more of a fair and normalized rate.

Tim Conder - Wells Fargo

Fifteen thousand. Okay. And then regarding the industry, Dusty, again you said 140,000 to 150,000 units in 2009. And you're looking for your sells at retail to be down 10%. Given your position in the market and you said you may lose a little bit of share, you're seeing the overall industry then would probably not be down quite that much as much as 10%?

Dusty McCoy

No. First, we're not predicting the industry. We're planning as to how we're going to run our company. Maybe I wasn't clear enough in my question -- in answer with James. In theory, one would say if there's a bunch of discounted boats that got to come through, one could theoretically argue that we could lose some share. I do not think we should. And that is not a goal across any of our businesses. So what we're fundamentally saying, we're planning not only for ourselves to be down in '10, but we're the market would be down '10 also.

Tim Conder - Wells Fargo

Okay, okay. And then, on some of your -- you gave -- and thank you for the additional broad detail outlook by the bowling and billiards division, and engines, and boats. Noticeably absent, unless I missed it, was I think guidance from Life Fitness.

Dusty McCoy

No. We said Life Fitness would have a modest sales increase and a modest earnings increase.

Tim Conder - Wells Fargo

Okay, okay. I apologize.

Dusty McCoy

That's okay. We lump sum together in one sense, I think.

Tim Conder - Wells Fargo

Okay. And then, Peter, more of a question for you, if I may. It was touched on a minute ago. But you mentioned in your preamble regarding some savings -- the total savings coming out of the Mercury consolidation of the manufacturing plant and so forth, outline that timeline for us. Did you get any in '09? Again, it's probably not much as any I would suspect. But then, how do you see that timeline maybe laying out of those cost savings?

Peter Hamilton

You're correct, Tim. It was very modest in the fourth quarter of '09, 420. And it was Dusty, I believe, who gave the statistic that when the plant consolidation is fully completed, we should experience approximately $40 million of improvement from the totality of the consolidation. But of course, that's two years away. So with respect to 2010, this year, you can assume that a relatively small, but material percentage of the $40 million should flow.

Tim Conder - Wells Fargo

Okay. And then by the end of '11 beginning of '12, you said basically be at that full $40 million run rate?

Peter Hamilton

Well, it'll take all of '10, and all of '11. And we'll commence '12 on the basis of the current planning with the benefit of the full $40 million run rate, yes.

Tim Conder - Wells Fargo

Okay, okay. Thank you, gentlemen.

Dusty McCoy

You're welcome, Tim.

Operator

Your next question comes from the line of Matt Vittorioso with Barclays Capital. Please proceed.

Matt Vittorioso - Barclays Capital

Hi, guys. A quick question for me, and maybe I missed it in your remarks. I guess I just -- I wasn't anticipating as big a loss in the Marine engines segment. Could you help me just bridge the gap from the third quarter run rate as of operating earnings to the fourth quarter? Is that seasonality? Is it the transition of facilities? What did I miss there?

Peter Hamilton

I'll take that one, Matt. Actually, in the engines segment, as you noticed, the experience in earnings reduction of $57 million, on the sales accounted [ph], $62 million. And by far the major element in Mercury's earnings production was the seasonal drop in part sales in the fourth quarter, compared to the third. People buy parts in the third quarter. They don't end (inaudible) at the winter, and the significant associated reduction in profitability that comes from lower part sales. And then the current weak market for new boats, Mercury's parts business temporarily here plays a much more pronounced role in the quarter-to-quarter comparisons, particularly third to fourth quarter.

There are other factors, though, affecting the engines segment's fourth quarter to third quarter comparison. One was some favorable contractual settlements reached in the third quarter, which obviously did not repeat themselves in the fourth. We did have higher bad debt experience in the fourth quarter as we were dealing with the problems of certain of our OEM customers going into bankruptcy. And we had higher R&D expenses in the fourth quarter, compared to the third. So those were the basic factors.

Matt Vittorioso - Barclays Capital

Okay. That's helpful. So typically, the fourth quarter for that business would be a bit lighter on profitability because of the decline in parts.

Peter Hamilton

Yes. But the decline wouldn't be as pronounced when -- as they are now when the new engine sales are as muted as they are by the market conditions.

Matt Vittorioso - Barclays Capital

Very helpful. And then, I'll just try this. I'm trying to get a little bit -- and I know you said that the losses in 2010 overall will be significantly less than they were in 2009. Is there any way you can help us model out how operating margins will -- or where they're going to end up in 2010? Is there any way you can be a little more specific on the magnitude of the loss you're expecting? Or how margins will steadily -- I guess they would steadily improve over the course of the year?

Dusty McCoy

Hi, Matt. And this is Dusty. (inaudible) this way. Last night, I made the mistake of reading the past couple of transcripts. I'm always amazed at how inarticulate I am orally. So putting that aside, we danced around a couple of questions in the second quarter and the third quarter. So I'm just put a stake in the ground as you guys are doing model building and this just helps us all.

I think our profit before tax -- this is what our planning is, and what -- how we've been building our cost structure and thinking about this company, I think our profit before tax breakeven point. And let me stop there. Taxes are not going to be an issue with this company profile because of the losses we've been accumulating. So I think in the near to what I call medium term, let's just focus on profit before taxes. We think our breakeven point is the sales level and in the range of $3.7 billion. And we're operating in what we affectionately call here internally steady state.

Steady state for us is wholesale (inaudible) retail. Discounting has returned to normal levels. Our cost savings have taken effect. And our recreational business is experiencing this normal growth rate. If the Marine markets were to become at steady states what they were in 2009, we think that's the sales level we can achieve. So hopefully that gives you enough to do some model building. We'll put some stakes in the ground now.

Matt Vittorioso - Barclays Capital

Sure. That's helpful. And then, one last question for me. Just broadly, if you're doing your best to be free cash flow neutral for 2010 and that they gave a lot of good guidance on some of the cash movements here and there, is there an overall strategy to discontinue to sit on that cash or will continue to look at your capital structures or else taking out some additional debt? Any broad sense of what you'll do with that cash?

Dusty McCoy

We have neon signs all around the building about what we're going to do with our capital structure. We'd like to have a laser focus on reducing our debt level in this company. If you would ask us today, $400 million might feel more like where we ought to be. So as we begin to look at our building to generate cash, and as we do so, and this is a great cash machine with banks or anywhere close to -- we could go back to our steady state.

We've got to go to work on reducing debt. And we're going to balance that against what we ought to spend in order to grow and take care of our businesses. And this company generates cash to take care of both when things are more normal. And that's what we're going to be focused on in our capital structure.

Peter Hamilton

And Matt, another, over time, possible use of our cash will be to supplement our currently under-funded defined benefit pension plan. And so, as we do generate free cash, the -- and as it does build up on the balance sheet, the decision will be -- and frankly pretty much of a financial one. Where do we get our best returns in terms of putting voluntary contributions into the pension plan and getting the investment returns to come from that, and the reductions in P&O expenses associated with that? Or do we do what we did in '09 and retire some debt? So that will be an ongoing review by Dusty and me, and our treasurer. And it's something that we will address as the cash flow situation materializes, and as we look at the two alternatives.

Matt Vittorioso - Barclays Capital

That's helpful. And I guess just on that pension, is there any -- is there an expectation in 2011 of what you're required contribution would be? Does that step up at some point from the $25 million to $30 million that you said for 2010?

Peter Hamilton

The discount rate does not change significantly, which is the biggest driver of our liability. And if asset returns do not change significantly from expected levels, yes, we will have a significantly greater past contribution that we will be required to make starting in 2011 as significantly greater than $25 million. It could be double that. That's one of the things that we are planning for in our overall scenario as to how our cash will be used.

Matt Vittorioso - Barclays Capital

Okay. That's very helpful. Thank you.

Dusty McCoy

You're welcome.

Operator

And you have a follow-up question from the line of Ed Aaron with RBC Capital Markets.

Ed Aaron - RBC Capital Markets

Thanks for taking the follow-ups. Dusty, when you look at the retail market in 2009, maybe on a seasonally adjusted basis, what month do you estimate marks the floor in terms of the retail sales?

Dusty McCoy

I don't think we've seen the floor yet, Ed. I mean when we say it's going to drift down a little more, we're not quite there yet. Are we on the same page?

Ed Aaron - RBC Capital Markets

Yes. I guess I might have interpreted that the first half if the comparisons are getting easier through the year that the first half might be down more, and then the second half perhaps could be a little bit better. But--

Dusty McCoy

You said 2009. Well did you mean 2010?

Ed Aaron - RBC Capital Markets

I meant, in 2010, if you're planning for down '10, I would think that there's a possibility that since the market was still weakening over the course of 2009 that the declines might be more significant in the first half, and then perhaps it'll be flat to up in the second half of the year.

Dusty McCoy

Yes. That's the old teaser. On the easier comparison, that works.

Ed Aaron - RBC Capital Markets

Okay.

Dusty McCoy

Can I correct something I told you earlier?

Ed Aaron - RBC Capital Markets

Sure.

Dusty McCoy

I sit here with little notes on the end of my nose, and on my forehead, and on my knees, and I'm 60 years old and I don't read as well as I used to. So I gave you a bad number on average selling price. Our average selling price I think will go up in 2010. And it certainly makes a hell of a lot more sense. And I think that's why you were a bit surprised when I told you flattish. It'll have to go up if we just think about it because of what our model mix is, et cetera. So our ASPs could go up, 10%, 15%, 20%, depending upon the type of boats and models.

Ed Aaron - RBC Capital Markets

Okay. That's helpful. Thanks. And then, Peter, you mentioned earlier that you had a $50 million commission for doubtful accounts in 2009. You said it won't continue at that level. But do you expect that there will be another provision there in 2010?

Peter Hamilton

Yes. That will still be a provision in '10. In the prior year, '08, it was approximately $30 million. And then it grew -- it has grown in '09 to $50 million. It's hard at this point with the turbulence amongst our -- particularly our -- in the Marine marketplace, it's hard to define what a normal bad debt number is. And of course that includes both domestic and overseas. But I would certainly assume that the number would reduce to something between the $50 million of '09 and the $33 million experienced in '08.

Ed Aaron - RBC Capital Markets

That's helpful. And then one last question, if I could, just on the cadence of the production ramp. Obviously, you're in a pretty seasonal business and in an environment where floor plan financing is difficult and (inaudible) to obtain. I would think that maybe the shipments would be perhaps more concentrated during or ahead of the selling season than might have been the case years ago before the credit crisis. How should we think about that in terms of how the shipments should ramp progressively through the year?

Dusty McCoy

Second quarter will be the highest level. First quarter will be next. And then third and fourth ought to be about equal with each other, but down from second.

Ed Aaron - RBC Capital Markets

Thank you.

Peter Hamilton

You're welcome.

Operator

And the next question comes from the line of Alexander Fedoro [ph] with Sun Hung Kai Capital [ph]. Please proceed.

Alexander Fedoro - Sun Hung Kai Capital

Hey, guys. How are you?

Dusty McCoy

We're well. How about you?

Alexander Fedoro - Sun Hung Kai Capital

Good, thanks. I just want to make sure you could hear me. I'm on one of these head pieces. Well thanks for all the detail on the call. And I may have missed some of the color on this question, but regarding the tax benefit, can you just quantify for us how much you're actually getting refunded and the timing?

Peter Hamilton

We said that it would be somewhat more than $100 million and we expect that during the first quarter of this year, February or March.

Alexander Fedoro - Sun Hung Kai Capital

Okay. So that'll be a cash -- there'll be a check written to you for $100 million?

Peter Hamilton

I think it'll be a wire transfer.

Alexander Fedoro - Sun Hung Kai Capital

Okay. And as far as the industry data, so where did the industry end for the year? I'm sorry if you -- do you have an assumption on that? Was it down 10% from the--?

Peter Hamilton

Towards the year?

Alexander Fedoro - Sun Hung Kai Capital

Yes. The three (inaudible) --

Dusty McCoy

In my prepared remarks, Alex, I'm going to give you the tag number of what I said. We think it's going to be down somewhere between 26% and 30%. And the reason we're still getting a range, that full industry fourth quarter data is not out yet. We just have some preliminary numbers.

Alexander Fedoro - Sun Hung Kai Capital

Okay. Got it. So that's roughly -- I'm just trying to update this--

Dusty McCoy

That'd be 140,000 to 150,000 units that's down 26, 31, remembering that the industry was around 203,000--

Alexander Fedoro - Sun Hung Kai Capital

And so when you step back and with all the detail you gave -- I know it's really hard to -- I guess you guys are planning internally and you really can't -- you don't have a view on the industry. Where do you think there can be an upside surprise?

Dusty McCoy

What the industry's going to do?

Alexander Fedoro - Sun Hung Kai Capital

Well the industry, and then I guess, Brunswick. Where is it that you think you could perhaps be somewhat conservative?

Dusty McCoy

We could be being conservative in the second half of 2010.

Alexander Fedoro - Sun Hung Kai Capital

Okay. And that's just based on the easier comparisons or some type of pick up that you could see materializing?

Peter Hamilton

If we're concerned, we have said this way. In our planning, it will be in the second half -- in 2010, it'll be in the second half of 2010. Because if the economy is going to begin to improve, it seems to me, Alex, it's going to take the second half (inaudible).

Alexander Fedoro - Sun Hung Kai Capital

Right. And is that typically an improvement in the economy that should have a pretty strong change for you guys.

Dusty McCoy

I would not call it strong because again, we're going to be -- we're going to do the right thing in the ramping up off our plants and the manufacturing of products, and how much we sell at wholesale. I would think 2011 could be the year in which a lot of things start to happen for us.

Alexander Fedoro - Sun Hung Kai Capital

Okay, okay. Great. I appreciate the answers. I hope I didn't make you repeat too much. Thank you.

Peter Hamilton

No, not at all, not a problem.

Alexander Fedoro - Sun Hung Kai Capital

And congratulations on the execution. I'm sure everyone feels the same who's on the call.

Dusty McCoy

Thank you very much. I appreciate it.

Alexander Fedoro - Sun Hung Kai Capital

You're welcome.

Operator

And this concludes the Q&A portion of today's call. I'd like to turn the presentation over to Mr. Dusty McCoy for closing remarks.

Dusty McCoy

Thank you very much, operator. Thanks everyone for, number one, joining the call; number two, following us; three, all the great questions. Hopefully, we've given all of you enough to get a view of the company, where we're going, and what our potential is. We continue to be quite buoyed internally at Brunswick. We had the world play out generally as the way we thought it would play out. We performed generally the way we -- I guess the high standards we've set for our performance. And we're quite comfortable that we're very well positioned for 2010 and beyond. So we thank you for your time, your attention, and your interest.

And we made an offer to a lot of folks to come and see at the Miami boat show. There, we'll be doing a bit more detailed presentations, but that'll also be webcast and will be up on the Web for those who can't make it down to sunny Miami. So we look forward to talking to you next -- at that time. Thank you.

Operator

This concludes the presentation. You may now disconnect.

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