Briggs & Stratton Management Discusses Q2 2014 Results - Earnings Call Transcript

Jan.23.14 | About: Briggs & (BGG)

Briggs & Stratton (NYSE:BGG)

Q2 2014 Earnings Call

January 23, 2014 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

Joshua Borstein - Longbow Research LLC

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

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

Robert A. Kosowsky - Sidoti & Company, LLC

Jake Thomson - Odey Asset Management LLP

Adam J. Peck - Heartland Advisors, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the 2014 Second Quarter Earnings Release Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the call over to your host for today, Mr. Dave Rodgers. Sir, you may begin.

David J. Rodgers

Thanks, Bennett. Good morning, and welcome to the Briggs & Stratton Fiscal 2014 Second Quarter 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. 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 and 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. Also, a phone replay will be available within a few hours of the completion of this call.

Now here's Todd.

Todd J. Teske

Good morning, everyone, and thank you for joining us today. As we announced in our release earlier today, our sales for the second quarter of fiscal 2014 were approximately $417 million, a decrease from last year of 5% or $22 million.

During our second quarter, we continued to see signs of an improving lawn and garden market with year-over-year gains in retail sales through our dealer network, as well as for engines that power walk and ride lawnmowers. We also continued to see strong sales of pressure washers and engines that power them in the fall and winter seasons.

In addition, our international sales of engines and products increased 8% over the prior year, led by increases in the Latin America region, driven by our acquisition of Branco Power Products in December of 2012.

The increases in most parts of our business were not enough in the quarter to offset decreased sales of engines and generators related to last year's storms. Last year's second fiscal quarter saw channel replenishment from Hurricane Isaac, which hit in August of 2012, and Superstorm Sandy, which landed in November of 2012. We did see activity in the quarter related to winter ice storms. However, these are typically smaller in magnitude than hurricane activity. We estimate that the year-over-year impact of fewer storms on our business decreased sales in the quarter by over $50 million and approximately $0.12 per diluted share.

Our net income for the second quarter was approximately $700,000 or about $0.01 per diluted share, an improvement over last year's net loss in the quarter of approximately $600,000 or $0.02 per diluted share. After excluding the impact of restructuring costs in both years, our adjusted net income in fiscal 2014 was $2.3 million or $0.05 per diluted share, which was slightly lower than the adjusted net income in fiscal 2013 of $3.7 million or $0.07 per diluted share.

As I noted earlier, aside from storm-related activities, we are seeing the benefits of sales improving in certain developed markets, and we are beginning to see the benefits of investments that we've made to grow our international business.

Compared with last year's second quarter, we have also expanded adjusted margins in both the Engines and the Products businesses as we continue to focus on reducing cost, being more efficient in our operations and bringing new products with higher margin potential to market. In particular, adjusted margins in the Products business improved by 2.4%, while bringing down inventory levels and introducing new and innovative products to expand future margins.

I'll cover more later regarding many new products coming out this spring, but first, Dave will provide more details about the second quarter financial results. Dave?

David J. Rodgers

Thanks, Todd. Engine segment sales for the second quarter were approximately $266 million, a decrease of $8 million or 3% from the prior year. Total units shipped decreased 3% in the quarter to approximately 1.9 million units. Shipments to OEMs for lawn and garden products and pressure washers increased over the prior year second quarter, while intercompany engine shipments of our own products group for use in generators decreased.

For the second quarter, the Engine segment had operating income of $8.3 million, a decrease of $700,000 from $9 million in the second quarter of last year. This year's second quarter included restructuring charges of $2.1 million related to additional planned cost to execute the previously announced restructuring actions. Excluding the impact of restructuring charges in both years, Engine segment adjusted income from operations in the second quarter of fiscal 2014 was $10.3 million, a decrease of $3 million from $13.3 million in fiscal 2013.

The adjusted operating earnings were impacted by the lower sales volumes of 3% in the quarter. However, the adjusted gross margin rates improved to 21% from 20.8% in the prior year. The adjusted gross margin rate benefited from a higher sales mix of higher margin service parts and margin contributed from the Branco acquisition.

In addition, the rate benefited from a higher production mix of large engines, which absorbed more manufacturing overhead. Partially offsetting the improved gross margin rates were lower absorption rates and a 10% decrease in total engines produced in the quarter compared to last year and approximately 50 basis points for unfavorable foreign currency rates driven by the Australian dollar and the Brazilian real. Total engines produced in the quarter were approximately 2.1 million units compared to 2.3 million units in the prior year.

ESG&A spending in the Engine segment increased $1.7 million over the prior year, primarily due to increased expenses related to the Branco acquisition, partially offset by lower retirement plan expenses of $800,000.

Within the Products segments, sales for the second fiscal quarter were approximately $171 million, a decrease of $26 million or 13% from the prior year. Compared with last year, we saw increased sales of lawn and garden products, pressure washers and snow throwers for the North American market. The Products segment sales also benefited from the addition of the Branco acquisition and a modest recovery in Australian lawn and garden equipment sales. These gains were more than offset by decreases in volumes of portable and standby generators.

In addition, snow throwers sales for the European market were down compared to the prior year, as channel inventories were elevated coming out of last winter and there has been relatively little snowfall to date in Western Europe. Branco sales and margins have been performing as expected, even though we have seen some negative impacts of the Brazilian real weakening.

Fewer inventories heading into spring appeared to be in good shape relative to the last few years. Brisk retail sales of lawn and garden equipment into the fall and a more active snowfall season in the U.S. has allowed dealers to reduce inventories compared to prior years. On the whole, this will give dealers to ability to purchase more of the new models that we introduced last year, as well as additional new models this year without the need to liquidate a significant amount of inventory first. In addition, snow inventory in our dealer channel has been reduced, setting up for an improved selling period during the next preseason stocking period.

The Products segment had a loss from operations of $4.3 million in the second quarter, an improvement of $2.5 million from the $6.8 million loss from operations in the second quarter of last year. The Products segment incurred restructuring charges of approximately $250,000 in the second fiscal quarter.

Excluding restructuring charges in both years, the adjusted loss from operations in the second quarter of fiscal 2014 was $4 million, an improvement of $0.5 million compared to last year. The second quarter adjusted gross margin rate for the Products segment was 13%, which compares to last year's second quarter rate of 10.6%, an improvement of 240 basis points. Approximately 170 basis points of the improvement was related to favorable mix of products sold through the dealer channel and the favorable margin impact of the Branco acquisition. Lower total production costs benefited margins by 170 basis points as we continue to see incremental savings from our restructuring programs and the lean manufacturing focus within our products plants. Offsetting these gains by approximately 100 basis points were the unfavorable foreign currency movements compared to last year related to the Australian and Canadian dollars, as well as the Brazilian real.

ESG&A expenses for the Products business were $26.2 million, an increase of $800,000 from the second quarter of fiscal 2013. The increase was primarily related to the acquisition of Branco. In April 2012, we announced a series of restructuring plans to reduce cost and streamline our operations. As in previous quarterly updates, we are pleased with the progress we have made on the actions from both a cost and a savings standpoint. When we announced the plans, our goals were to save $30 million to $35 million in fiscal 2013 and an additional $5 million to $10 million in fiscal 2014. As of the end of our second quarter, the restructuring activities are largely complete.

In summary, the total savings achieved in fiscal 2013 were $37.2 million. Thus far, in fiscal 2014, we saved an incremental $1.1 million, putting us in line with our total savings projections.

Turning to our balance sheet. Net debt at the end of the second fiscal quarter was approximately $127 million, a decrease of approximately $102 million from 1 year ago. Last 12 months, operating cash flows of $191 million has benefited from reductions of approximately $122 million of total receivables and inventories as we've worked to reduce the levels of working capital in the business.

In addition, over the last -- over the past 12 months, we've made $13 million in required contributions to our defined benefit pension plan and repurchased over $32 million of outstanding common shares. As of the end of the quarter, we did not have any amounts drawn on our $500 million revolving line of credit.

Cash used in operating activities year-to-date was $45 million, primarily related to seasonal build of inventory levels. Year-to-date depreciation and amortization of $28 million outpaced capital expenditures of $18 million. We did continue our share repurchase activity in the quarter, repurchasing an additional $11.4 million worth of shares outstanding.

LTM average funded debt and LTM EBITDA, as defined by our credit agreements, were $235 million and $132 million, respectively, resulting in an average leverage ratio of 1.78x, which is well within our debt covenants of 3.5x.

We also announced yesterday that the board authorized the purchase of up to an additional $50 million of common shares with an expiration of June 30, 2016. As of the end of the second fiscal quarter, we had approximately $9 million remaining under the prior authorization. So including the new additional authorization, we have a total of $59 million remaining as of the end of the second fiscal quarter.

That concludes my comments on the second quarter financial results. Now I'll turn it back over to Todd.

Todd J. Teske

Thanks, Dave. As we typically do in this January earnings call, I want to provide you with our outlook for the upcoming lawn and garden season and an update on our engine placement for the spring.

But before I do that, I'd like to spend just a few minutes updating you on our activities in support of our strategy to grow the Engines business, expand margins across our businesses and expand and diversify internationally.

With respect to growing our Engines business, we have discussed in the past the opportunity we have to grow our share in the higher-margin commercial engine market. In the past couple of months, we've hired 2 key individuals with strong industry credentials to help us grow our commercial engine business. We welcome Randy Lockyear, who most recently was national sales manager for North America and Australian engines sales at Kawasaki, and Rick Wendt, who was most recently national OEM sales manager for Honda, as 2 key additions to our commercial sales team.

Randy is our Senior Director of Commercial Sales and is overseeing North America sales of both -- of our branded Vanguard engine, commercial engines. Rick is our Director of Commercial Sales and is focusing on the light construction and the utility commercial engine business.

Over the past few years, we've invested in the commercial engine space by adding key products and innovation to our commercial engine portfolio. Now we have added 2 professionals who are extremely knowledgeable industry veterans to help us grow our sales. We are excited to have them on our team and look forward to their leadership within this growing category.

Also, as we have discussed, we're focusing on expanding our margins and expanding geographically through strategic acquisitions. We've now owned Branco just over a year. I had a chance to visit our team in Brazil and continue to be impressed with our people, our product offering and our dealers in Brazil.

As Dave said, we're already seeing the positive impacts of Branco margins within our results, even with the volatility of the currency. In addition, we're beginning to work through the list of opportunities to cross-sell our products within Brazil and throughout Latin America. Even with growth rates slowing in the Brazilian economy, we still believe that Brazil and Latin America is a great growth opportunity for us moving forward. We will continue to look for strategic acquisitions throughout Latin America, as well as other emerging regions of the world.

Expanding our margins in both engines and products segments is a key focus of our strategy. Back in late 2010, we made a number of organization changes that included changes to how we structured our R&D department and how we allocated our resources to develop products that solve the problems of our customers in order to make their tasks easier.

In fiscal 2013, we introduced the E Series engine that brought cleaner, quieter and more powerful -- more power in a smaller, lighter weight engine to the market. In addition, our Products group launched 40 new products in North America.

For the upcoming spring, we are bringing a number of new and innovative products to the market in both our Engines and Products businesses. There are several that I would like to highlight this morning. Within the Engines segment, we've several new products coming out this year, many of which are truly innovative industry firsts. One innovation is for the homeowner who never seems to have enough garage space. We redesigned an engine to allow a mower to be stored on end, reducing the amount of floor space required by 70% without the worry of gasoline or oil leaks. In addition, routine maintenance tasks such as changing the cutting blade or cleaning the underside of the deck will be easier. These engines will be featured in Toro walk-behind mowers identified as Mow 'n' Stow engine technology.

Secondly, consumers consistently tell us that they want their equipment to start easily. Our patented Ready Start technology, which has been available for several years on our smaller engines for the walk-behind mowers, will now be available this spring on Husqvarna tractors and zero-turn riding mowers. Ready Start technology allows for push button starting without the need for choking a cold engine, leading to a better user experience.

Finally, automotive-style starting for your tractor. Consumers have also shared with us their desire to have a quieter mower. In response, we've developed an engine with Quiet Power Technology, or as we have trademarked it, QPT. Our QPT engine working in concert with a specially designed blade has the power of a typical engine but lowers the noise of the mower by as much as 80%. The sound difference is truly significant.

The early feedback to this technology has been extremely encouraging, and we are looking forward to more consumer reaction in the spring. This new technology will be available on 2 Craftsman models at Sears in the U.S. and Canada this spring.

Within commercial engines, we're launching 2 new technologies this spring. We're introducing our electronic fuel injection on our new Vanguard-branded mid-sized twin cylinder commercial engines this year. This technology only -- not only provides a more efficient engine with fuel savings, but also allows improved starting and engine response. In addition, we've introduced our new 810cc Vanguard commercial engine that complements our successful BIG BLOCK in a smaller, lighter package. It has been specifically engineered for commercial cutting applications on zero-turn mowers. This engine was built for optimum power, efficiency and the durability and reliability that commercial cutters expect, and the customer reaction so far has been fantastic.

Our Products group has several new product introductions for the 2014 spring season to build upon the 40 that weren't introduced last year. In the pressure washer category, we'll be launching the Briggs & Stratton Powerflow +, the only pressure washer on the market that delivers both high pressure and high flow cleaning capabilities. This unique pump design allows users to meet all their outdoor cleaning needs, from deep cleaning to extended reach, to power soaping, to faster rinsing, all in one product. The force behind Powerflow + is the Briggs & Stratton designed patent-pending pump with 2 separate cleaning modes, high pressure and high flow. Models will be introduced in both electric and gas-powered options, including a push button start, gas-powered version available nationally at Lowe's and several other regional retail partners along with e-tailers.

Also, this spring, Briggs & Stratton will be introducing Craftsman pressure washers with grip-and-go technology. This allows the consumer to start and stop the pressure washer engine simply with a squeeze of the trigger on the handle, making it easy and convenient to start for the consumer without having to walk back to the unit, which increases fuel efficiency and reduces noise.

Additionally, the lawn and garden business will be introducing several new models of tractor and zero-turn models for spring 2014.

In our residential products, Snapper brand highlights include the new entry-level ST Series lawn tractor for our dealers and available at WalMart and a new prosumer-targeted zero-turn for our dealers, the 550Z, starting at $4,999. Snapper also introduces new handheld product line, including gas trimmers, a backpack leaf blower and a hedge trimmer this spring, available both at our dealers and WalMart. Both Snapper and Simplicity tractors and ZTRs will also have new fabricated deck options that provide added durability and a commercial-grade quality for the user backed by a limited lifetime warranty. These new products come on the heels of the new Snapper rear-engine rider and Simplicity tractors with suspension that were introduced last year and will benefit from a full year of distribution with the dealers in 2014.

Within the commercial mowing part of the business, Ferris dealers will be able to offer their customers new ways to experience suspension with the new IS 2100Z lineup. Six models are being introduced, featuring a variety of engine and deck options. In addition, Snapper-Pro will introduce 4 new models of the S125xt commercial zero-turn. Also, within the commercial business, Ferris offers the option of a liquid propane-powered ZTR with the Briggs & Stratton engine specifically designed for propane on its 3100Z product. Propane ZTRs run at higher fuel efficiency, result in lower maintenance cost and produce less smog-forming emissions than traditional engines.

These are just a few of the new products that we're coming out with this year. You can see the investments we made in new product innovations just beginning to come to market in order to drive higher sales and margins in the future.

Regarding the upcoming lawn and garden season, I'd like to provide an update on engine placement. We believe that over the past year, our share of engines was flat to slightly up for the U.S. lawn and garden market. Looking forward, we believe that our placement for the upcoming spring has improved and should lead to market share gains, in particular, within our larger engines that are used on riding equipment.

With respect to our outlook for the remainder of our fiscal year, we are adjusting our sales and net income projections for the lack of storm activity that has been seen in -- that we have seen in the recently ended hurricane season and the impact of negative foreign currency fluctuations that may not recover prior to the end of the fiscal year.

We are currently projecting our fiscal year 2014 net income to be in the range of $48 million to $57 million, or $1 to $1.18 per diluted share prior to the impact of any share repurchase activity or costs related to our cost [ph] restructuring programs. We are projecting net sales to be in the range of $1.88 billion to $2 billion. We currently anticipate the U.S. lawn and garden market being higher by 4% to 6% compared to last year.

With respect to the next 2 fiscal quarters, it is important to keep in mind that last year, we had some refilling of channel inventories for generators after Hurricane Sandy. The impact was not as large as the second quarter, but nonetheless will not recur again this year due to no significant storm activity thus far.

Also, we believe that after working through higher channel inventories during the course of last season, channel participants will build normal levels of preseason inventories, but will manage inventories very closely in order to minimize their investment in working capital. We anticipate that this may have an impact on moving sales from our third fiscal quarter to our fourth fiscal quarter, in particular for our Engines segment, which in turn will cause us to move production to the fourth quarter as well since we will continue to be diligent in managing our inventory -- our inventories to retail demand. This means that production, and thus higher margins due to higher fixed cost absorption, would be more impactful in the fourth quarter.

We do project gross margin improvements in both our -- both of our segments in the third and fourth fiscal quarters compared to last year, with more of the improvement being in the fourth quarter rather than the third quarter.

I'd like to reiterate what I've said in the past, that because of our flexible manufacturing here in the U.S., we do have the ability to respond quickly to increases in consumer demand. For the full year, we estimate consolidated operating margins to be in the range of 4.5% to 4.8%. The effective tax rate for the year is anticipated to be 31% to 34%. Lastly, we anticipate that capital expenditures in fiscal 2013 (sic) [ 2014] will be in the range of $50 million to $55 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of David MacGregor of Longbow Research.

Joshua Borstein - Longbow Research LLC

This is Josh Borstein in for David MacGregor. Just starting off in Australia with that part of the business. I know there's been a heat wave there. I was just curious if that's impacted the business in any way and what Australia looks like maybe in 3Q. Are you still anticipating mid-single-digit growth for the year?

Todd J. Teske

Josh, this is Todd. You're looking at a heat wave, and yes, there has been a heat wave down -- especially down in Melbourne for those of you that are Australian Open fans for tennis. You can't help but see the news. That isn't necessarily untypical, if you will. Usually, you get those sorts of situations done in the Melbourne area. We do anticipate for the year to be kind of mid to a little upper mid-single-digit growth in Australia. So we've seen -- it's actually been okay down there.

Joshua Borstein - Longbow Research LLC

Okay. And then on the Branco acquisition, you talked about the revenue and EBIT margins of the business when you purchased it. What's the next milestone for Branco, which we would be watching for?

Todd J. Teske

Well, when you take a look at what we're trying to do with Branco, it really is -- well, let me back up Josh. First thing we needed to do was make sure that we had the business integrated in and we wanted to make sure that we integrated the team down there in with our team across the company. Because what you'll see us do going forward and we've done some of this now but we're now starting to accelerate it, is we've looked at taking our -- the products that we have that Branco doesn't have, if you will, and taking those to the channel, so it's kind of a maybe a bit of a dual brand strategy. If you think about it, Branco and Briggs going through the channel, we have different positionings for each of the brand. So it's products that Branco historically hasn't had, taking those through the Branco channel. At the same time, what we're looking to do is to take the Branco product and take it to other parts of Latin America and potentially other parts of the world. And it's taken us a little bit of time simply because we want to make sure we get it right, that the products that they have that have gone through Brazil, that we got those things specced properly to make sure that they're the right products for other parts of the world as well. So that's what I pay attention to in terms of how successful this acquisition will be 2 and 3 and 4 years down the road.

Joshua Borstein - Longbow Research LLC

And then just last one for me. I know you recently hired 2 industry veterans for the commercial power team. What are your expectations for that part of the business with the changes you now have in place?

Todd J. Teske

Well, my expectations are that we're going to continue to penetrate some of those key markets within the commercial business. And it's not just commercial lawn and garden -- commercial cutting, we're also looking at going after a number of different areas that, historically, we either haven't had the product and now we do have the product, a competitive product, if you will, but now we also have someone who has great relationships within the -- within some of these industries. And we think now bringing the product together with folks who have great industry relationships and people that can truly sell the value proposition that we bring to market, my expectations are that we will continue to make very good headway in that commercial engine business.

Operator

Our next question comes from the line of Peter Lisnic of Robert W. Baird.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

First question, I guess, a clarification. When we look at the storm impact that you quantified in the press release, the $55 million, is that a clean 2Q versus 2Q comp? I'm just wondering if there was any impact that would have been in the first quarter relative to last year's first quarter.

David J. Rodgers

Yes, there was a little bit in the first quarter but the larger portion of it, Josh (sic) [Peter], was in our 2Q. And it's not really clean. It's an estimated number. It's really difficult to parse out the base business, if you will, from storm business. But if you take a look at all-in second quarter last year compared to this year and the reduced storm activity, that's our best estimate of the impact year-over-year in 2Q.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. So if I rip off that impact, it looks like operating results would have been a little bit better. There's some structural improvement that you're seeing in the business. If we just kind of exclude that impact, can you maybe give us a sense as to where that -- where the structural improvements are? Is it just we're running through the cost savings from the restructuring plan? Is there -- I mean, you mentioned better mix. Just wondering how you were able to generate that improvement x storms.

David J. Rodgers

Well, I think it's improvement in several different areas of our business. We're starting to see the benefit on the top line of our engines that go into the lawn and garden market in several of our developed markets, notably in Australia, as Todd talked about, as well as in North America. The other thing that we consistently do each year is work on cost reduction programs in our manufacturing facilities, and we do that in both the Engines business and the Products business. And so yes, we are seeing the anticipated impacts, the favorable impacts of the restructuring programs, but we continue to work the cost side of the equation in both the products and the engine plants.

Todd J. Teske

Let me just -- this is Todd, let me just add a little bit to that as well. So if you look at kind of the ebbing and flowing that's gone on over the last couple of years, you go back a couple of years, you had a drought and you have more -- you have inventory in the channel, then you have a late spring, I mean, there's just been a lot of things, at least here in the U.S., that have kind of masked, if you will, some of the restructuring savings that we've been able to achieve. We can see them internally, but then all of a sudden when production is down as much as it was over the last couple of years, you just don't get that absorption. And so from the outside, you look at it and you go, where is it? But we see it internally and now what's happening is, we're starting to see the market last year picked up. It's up between 3 and 9, depending on the category. And we saw a good sell-through through the fall. And so I'm encouraged now as we kind of get into the spring season, although at 2 below when I woke up this morning, I'm still waiting. But it is one of those things where we are seeing the impact of the restructuring coming through, and we're starting to see some improvements not only in the U.S. but in other places. Now having said that, I'll tell you Europe continues to be a bit of a challenge in terms of growth. I think it's kind of -- it seems to have flattened out. But for example, this year, there's been like no snow over there. And so when you go through that, there's been very few snow throwers that have been sold. And so we'll see how that bodes for the upcoming spring, which is why in Europe, we're kind of looking at a flattish type of outlook. But again, in a nutshell, I think what you are seeing is the restructuring and you're seeing a lot of the good activities our team has been doing. A lot of hard work has gone into these numbers and we anticipate they'll continue.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. So just if I can ask one last question on the weather impact, for those of us who are model challenged at least. You mentioned some impact of filling inventory last year in the third quarter. Can you give us an order of magnitude of impact on the weather comp in the first quarter -- or I'm sorry, in the third quarter of '14 versus third quarter of '13?

David J. Rodgers

Yes, I think it's going be -- it's tough to say because we don't know the full impact of what ice storms could bring, Pete. But I think it could be anywhere between a $15 million and $30 million number on the top line. And from an operating earnings standpoint, you're probably looking at somewhere around $4 million to $5 million, maybe $6 million.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay, all right, perfect. And then just switching topics, one quick one. If you look at what's going on, on the lawn and garden side, inventory positions at OEMs, some of those color comments that you gave us, how are you looking or thinking about the production outlook for your business this year relative to last year? Is it -- are we looking at production numbers that could be around flat on the engine side year-over-year, maybe a little increase? How are we thinking about that in the related absorption impact?

David J. Rodgers

Yes, we think that for the full year, the engine production numbers will be higher to support the market increases that we see in our largest market, which is the United States. Having said that from an inventory standpoint, by the time we get to the end of the year, again, I'd still like to see some improvement in our inventory levels and we're in fairly good shape to do that. If you take a look at our engine inventories to date -- or at the end of the second quarter compared to where we were last year, we're down almost 500,000 units. And so we are doing a better job of managing the working capital investment that we have in the business. And when you look at the channel participants, they are also trying to do that as well with the big picture trying to be chase the retail demand that's out there, and we have a flexible manufacturing model that enables us to do that quite well. So I think that we're in a good position at this point in time during the year. You'll see the margins, as Todd said, tick up in both the third and fourth quarter, but we're going to chase that season a little bit so that we don't end up with too much inventory in the channel. And as a result, you'll see that on a year-over-year basis, you'll see more benefit in 4Q compared to 3Q.

Todd J. Teske

Yes, Pete, let me just add onto that just a little bit because we -- obviously, we want to communicate to you guys that we are seeing potentially the shift from 3Q to 4Q. And as Dave pointed out, yes, everybody is trying to manage their inventories, which makes a lot of, I think, all the sense in the world and we're trying to manage them as well. When you look at it and you look -- kind of look at just the overall industry, there's been some capacity that's been taken out, whether it be we've taken out capacity both in the engine and products side and there's other participants who've taken it out on the OEM, on the equipment side. But when you look at the level of capacity that's been taken out, it allows for a lot of flexibility right now to be able to produce a lot closer to the season. So if you go back historically, where a lot of us would be building fairly heavily in Q3, you're seeing capacity utilization be much lower today, if you will. I'm not talking, to a certain extent, us, but I'm talking really the industry overall, which allows people then to have the capacity to go ahead and chase the season, as Dave pointed out, which is why we're seeing this potential shift from Q3 to Q4 fiscal.

Operator

Our next question comes from the line of Sam Darkatsh from Raymond James.

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

I want to piggyback on Pete's last question there. You're talking about the move from Q3 to Q4 from an OEM ordering standpoint as they manage their inventories. Any sense, either Todd or Dave, to quantify that or help ballpark that impact for us as to what the scale of that shift might be -- might look like?

David J. Rodgers

Yes, I think that on a year-over-year basis, and in the Engines business I'm talking now, that you're going to see that the volumes may be similar to what they were last year. When you think about last year, what was happening, you had a, call it, we're coming out of the drought from the prior year but still people stock inventories to be ready for spring to normal levels, didn't have a very early spring. So again, the plan is that we have normal weather, of course. But I do think that from a production and an inventory in the channel standpoint, that it'll be relatively flat to last year and that you'll see more of the upside in the fourth quarter because of the reasons that Todd outlined and that we discussed earlier.

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

Okay, got it. And so then that -- by that math, or at least by inference, what you're saying is if there's more than 10% industry growth potential in the season, you would produce engines to meet that? Or would that largely come out of inventory in Q4, knowing that you want to get your inventories in line?

David J. Rodgers

We'd have to produce a lot of that, Sam. And as Todd said, that we have the ability to do that and react quickly for our customers.

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

Okay, last question. This is more of a housekeeping question. But I -- you took the lower end of your guidance down, Dave, a couple of million dollars from FX, but your sales guidance at the low end and your EBIT margin guidance at the low end was unchanged. So I was confused as to how the FX impact manifested itself within the line items and within guidance.

David J. Rodgers

It's primarily in the cost of sales and the margins. You get the impact largely in the margins. It gets -- you may have some benefits actually within ESG&A. But on a net basis, it's down. As you said, it's not all that much. But again, there's not much we can do to recover it. The other thing, as Todd said, that we didn't highlight all that much is that there's been, on a year-over-year basis, relatively little snow to speak of and that's nicked us for a little bit as well. And again, I don't know that we'll be able to make that up per se in the second half of the year.

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

So the low-end margin would have come down but not enough to change the 4.5%, so it might have been a rounding issue. Is that how to read it?

David J. Rodgers

Right. It is, it's that small.

Operator

Our next question comes from the line of Robert Kosowsky of Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Just curious on the commercial engine side. How big is that? Or what percent of your engines do you think go into the commercial market right now? And what do you see the opportunity being over the next 5 to 10 years?

Todd J. Teske

Rob, we really never break out the difference between commercial and consumer engines. What I will tell you is that, just to give you a sense, our market share in commercial engines overall is substantially, substantially lower than in the consumer engine business. And so as we look at it, we see great opportunities for growth. We've got decent market share when you look at pockets, but I don't want to look at pockets. I don't want to look at the commercial engine business overall. And so when you look at it, there's some very, very nice growth opportunities for us over the next couple of years.

Robert A. Kosowsky - Sidoti & Company, LLC

Are there any major kind of CapEx initiatives you need to do to facilitate the growth in this business? Because I understand they're probably bigger engines, a little bit more complex, maybe different capital stock needed. And any kind of milestones you can give us in that regard?

Todd J. Teske

Yes -- no, we did have some CapEx down in our Auburn, Alabama plant because this new engine, this new 810cc engine I talked about, Vanguard engine, is the first engine we're producing here in the U.S. Otherwise, a lot of those engines come from Japan. And so at this point, a lot of the CapEx is already baked in. If we do have CapEx going forward, I don't anticipate it to be significant numbers. For example, if you look at -- when we introduced the E Series engine, we told you that it was, over a couple of year period, over $30 million. It's not anything to that degree. So as you guys think about it from a modeling standpoint, it may be some incremental, but it's not going to be significant.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay, that's helpful. And then also, what was the positive impact of U.S. snow blower sales? Because I imagine it was a much better year than it was a year ago?

Todd J. Teske

Yes, it's interesting because I get that question from a lot of people. And when you look at kind of the snow season, the biggest impact is going to be next year, and the reason for that is when you kind of look at the snow last year, came very late, came in February and March. And as you know, Rob, when you get snow that late, it doesn't always move a whole lot of snow throwers. So coming out of the year, this past year, there was inventory in the channel, albeit when you look at the industry numbers, it appears as though snow was up on a year-over-year basis. But what these storms did was they cleared out inventories and they are still clearing out inventories to a certain extent. There's a few in the industry who have decided, maybe 1 or 2, who've decided to continue to produce, but here we go again, we're getting into February. And if you have any kind of major storms, people will probably wait till next year. So when you look at -- it was a decent year from the standpoint of it kind of went through the expectations and it went through kind of what we had anticipated for production and things like that. But now when you get to this upcoming season, in the fall, when it comes to pipeline fill and things like that, that's historically where you start to see a good snow season manifest itself.

David J. Rodgers

Maybe just to add on to that a little bit, Rob. Keep in mind for Briggs & Stratton, okay, snow was not a huge part of our business. When looking at our Engine business, it's typically less than 4%, 5% of our global engine volume. Again, we highlighted it last year because the numbers, from an industry perspective in both the United States and Europe, were off so significantly that it does have an impact on our global business. But it's not the large part of our business in the Engines business. Secondly, when looking at our Products business, since we've exited the production and sale of those units to the big box mass retailers in the United States, we are now selling only through our dealers and so we are a small portion of that market.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay, that's helpful. But it's fair to say, though, it's probably up pretty sizably, at least on the engine side, this year versus last year?

David J. Rodgers

I don't think that's a fair commentary. I think that it is up but the bigger impact, as Todd said, that we've seen is that the inventory that was existing in the channel has been what's being liquidated through retail.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then one final question on the, not to beat a dead horse, but on the shift of the season March to the June quarter, so if you look at it this way, if you're a retailer and you're usually -- or OEs, you're usually buying 100 engines through the end of March. What amount are they buying this year? Is it going to be down by 10%, 15%? Any kind of way to dimensionalize it from that extent of how much they're trying to elongate the cycle?

Todd J. Teske

I know what you're trying to get at. It's hard because it's really -- because we don't see their inventories, it's hard to kind of work your way through it. Because at the end of the day, Rob, I would tell you that -- tell me what a normal year is anymore because we go through drought, we go through late season and everything else, we anticipate that there will be more normal, if you will, preseason builds that are going to go on. The question that we have so the bottom isn't going to completely fall out of this thing, don't misunderstand that, but as we get into kind of March and the second half of March, I've been around this industry long enough where I've seen it where people say, "Boy, we get a ramp because we -- it's starting to -- we're starting to see the impacts in the South." And all of a sudden the last 2 weeks or the last 3 weeks of March, you've got a -- you're working like crazy trying to get a product out the door. And I've also seen it where people said, "We're going to wait and see." And we're going to wait and see it for the first 2 weeks of April and then you're working like crazy the latter half of April. All we're trying to communicate to you guys is that we're anticipating kind of a more normalized preseason build, but when it comes to early season, we're just being -- everyone's being very cautious.

Operator

Our next question comes from the line of Jake Thomson of Odey.

Jake Thomson - Odey Asset Management LLP

Todd, I just got a couple of questions to frame the effects, citing all these weather-related and volatile impacts. Could you remind me what's your year-on-year volume growth or decline in the third quarter?

David J. Rodgers

In the third quarter?

Jake Thomson - Odey Asset Management LLP

Yes, say what kind of -- how easy are the comps that we'll be cycling?

David J. Rodgers

Talking about last year third quarter.

Todd J. Teske

Yes, so you got to step back and you got to look at a couple of things. First off, there is the impact of the hurricanes, which makes for a more difficult comp because last year, when Hurricane Sandy hit in November, obviously, there was a lot of activity that was going on in Q3. So that's one thing that lends itself to a more difficult comp. Then, as you look at -- from a bit of an easier comp, if you will, if you think about coming out of the 12 droughts, there was inventories in the channel, and therefore, in terms of lawn and garden equipment. And so if you look at then what happened a year ago, a lot of folks were really throttling back and controlling inventories along the way. So that was a little bit maybe an easier comp, but what we're telling you is that be careful of that easier comp because of the fact that people are going to -- we think people are going to continue to kind of be very cautious as it relates to inventory and produce much closer to the season.

David J. Rodgers

Jake, this is Dave. Our outlook on this year really hasn't changed at all. And we actually think that with -- again, what we've seen in terms of housing improving, albeit off still some pretty low levels, that it will have a positive impact on the lawn and garden market for this year.

Jake Thomson - Odey Asset Management LLP

I think I missed your opening comments about year-on-year volume increases in engines for the second quarter just reported.

David J. Rodgers

So you're looking for, for the second quarter, the total unit volume?

Jake Thomson - Odey Asset Management LLP

Yes, an increase.

Todd J. Teske

Yes, on units shipped in 2Q, total units shipped decreased 3% to about 1 million units. So we actually in 2Q, we had a 3% unit decline in engines.

David J. Rodgers

Now for lawn and garden products and pressure washers, the shipments were up, but the shipments for engines that go into generators was down because of the reduced storm activity that's being done.

Jake Thomson - Odey Asset Management LLP

What was the increase in the lawn and garden engine shipments?

David J. Rodgers

We don't break out the engines by specific market. But it's very -- it's been very much in line with the market projections that we have for this year.

Jake Thomson - Odey Asset Management LLP

Okay, okay, fantastic. And I have 1 last question for you. Could you perhaps try and frame what kind of market share wins you've made in the large engine segments? And what kind of tailwind that might give you in terms of a sort of price and a margin perspective as we get into the second half of your fiscal year?

David J. Rodgers

Well, as the stores are set in the spring, you'll be able to see, and I can provide you with information that's available out in the retail stores, you'll be able to see where we've gained engine placement on tractors and ZTRs out in the market on a year-over-year basis. That will have the impact of increasing our share because we're on units that we were not on last year and there was a competitive engine on. We don't know exactly what that share increase will be, but we do anticipate that it will have a fairly decent increase in our engine share on the riding mowers for this year. And then just to reiterate on the walk mowers, we think that our share will be very consistent with respect -- or compared to last year.

Jake Thomson - Odey Asset Management LLP

Excuse me for asking the obvious, but bigger engine equals better margins, right?

David J. Rodgers

Well, on a rate basis, they're comparable. But on a dollar basis, they are obviously higher dollars in terms of ASPs and gross margin dollars.

Operator

Our next question comes from the line of Adam Peck of Heartland Funds.

Adam J. Peck - Heartland Advisors, Inc.

So everything you've discussed today, x storms, sounds very good margins, are going in the right direction, inventory across the board, sounds like it's improving. Your new product introductions are probably at a decades-high peak. So when you compare where we are today versus the same time last year qualitatively, does the business feel better?

Todd J. Teske

Substantially.

Adam J. Peck - Heartland Advisors, Inc.

So it's just interesting that it feels substantially better and the stock is lower today than it was a year ago. So we definitely applaud you and the board for increasing the buyback. It seems like a great opportunity.

Todd J. Teske

It's interesting because, Adam, you look over the last few years -- I appreciate those comments. You look at over the last couple of years, as I said before, and I think there's just some things that have gone on in the business that have masked some of the improvements. And for as much as we don't like to talk about the fact that we're impacted by weather, we are. Now as we execute the strategy and work our way through some of these emerging markets, that will help with the volatility. But the fact is, is that we will have volatility in the business because of the weather. So that's both good and bad. Obviously, you have hurricanes, which then ultimately result in some very good things for the business but then you can't count on those every year. And really, when you look at it, this is a discussion we just had at the board meeting yesterday, and that is when you look at kind of how the business feels, it feels a lot better because we now have some great innovation coming out. We've had good stuff in the past. I'm really excited about this upcoming year. We've kind of worked our way -- the drought always has an impact when you have -- at least history has proven that the drought always has an impact on 2 years: the year that you have the drought and then the year after the drought. We're now 2 years -- or we'll be 2 years removed from the drought, and so yes. And so at the end of the day, from a share buyback perspective, as we've always said, our priorities, we look to reinvest in the base business. We look for acquisitions and ways to ultimately grow the business, which is what we're looking at and what we've, to a certain extent, been able to do and will continue to do. And then we'll also look to return money to the shareholders, if we have excess capital. And as we looked at it and looked at kind of where we're at these days, it felt right to continue to do a share repurchase. We do smaller share repurchases, authorizations because what I don't like to do is I don't want to put a big one out there and have it just linger. I'd rather do smaller ones and reevaluate periodically and the board obviously agrees with that.

Adam J. Peck - Heartland Advisors, Inc.

Great. And then on the balance sheet, fantastic improvement. Is there anything left to squeeze out of AR inventory?

Todd J. Teske

We'll continue to work inventories. AR is going to be a little bit of a function of timing of shipments and things like that. We continue to monitor AR very closely. On the inventory side, we will continue to work diligently to keep it low and take it potentially even lower. You have seen a lot of the big impacts though. So I'm not sure that the impacts will be quite as dramatic as they have been in the past. But suffice to say that we've got some very good flexibility within our manufacturing operations to be able to react, which helps us then on the working capital side.

Adam J. Peck - Heartland Advisors, Inc.

Okay. And then last question. On the commercial engine side, could you size the market opportunity there versus the current business?

David J. Rodgers

Yes. I don't know if I have the total commercial market opportunity. I think the important point, as Todd said, is that we have a lot of runway there given that our share has historically been underrepresented compared to what our consumer engine share is. So if you think about -- there's different pieces of that market. There's commercial cutting, which we've actually been growing our share in over the last several years. We've been also working to improve our share in utility vehicles. And where we have probably the largest opportunity is within the construction equipment space where Honda has historically been the market leader within that segment. And so we look at it, quite honestly, Adam, as all potential upside for us moving forward. And we think that we're positioned very well to take advantage of that given that we've developed some additional engines to fill out our product line with engines that meet the expectations of a true commercial user moving forward, and as we discussed earlier, with hiring these 2 individuals to lead that effort out in the market, positions us very well.

Todd J. Teske

Adam, we understand how big some of these markets are. The issue is -- the issue comes back to there's an addressable market that we can go after, and then within that addressable market, where are the pockets that we can get some things moving in a good way because there's some areas of the world, for example. I mean, we're not just talking about the U.S., we're talking about going to other places of the world, whether it be through a U.S. OEM or a European OEM who is also on other places of the world like China and other places. So it's a difficult question to answer only because there are certain things that we will focus on. But suffice to say that we like to talk about -- we love talking about our market share position in the consumer engine market in U.S. and in Europe. But when you ultimately step back and look at the broader engine market, there are lots of opportunities out there for us that we're looking to take advantage of through this and most of them are commercial. And so that's why we've been able to do some pretty good things here in the U.S. on commercial cutting, both with OEMs and our own business. And we'll look for ways to do things in Latin America and potentially through other places of the world where there's a lot of construction spending and a lot of construction going on.

Operator

And with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

David J. Rodgers

Great. Thank you, everybody, for joining us today. We look forward to speaking with you again in April for our Third Fiscal Quarter Earnings Conference Call. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

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