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Briggs & Stratton Corporation (NYSE:BGG)

F3Q10 Earnings Call

April 22, 2010; 10:00am ET

Executive

Todd Teske - Chief Executive Officer

James Brenn - Chief Financial Officer

Dave Rogers - Vice President of Finance

Analysts

Mark Rookie - Longbow Research

Sam Darkatsh - Raymond James

Annette Borland - Personal Securities

Craig Kennison - Robert W. Baird

James Bank - Sidoti & Company

Mike Hamilton - RBC

John Barlow - Weiss

Brad Safalow - PAA Research

Dax Vlassis - Gates Capital Management

Operator

Welcome to the Briggs & Stratton third quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to turn the call over to your host James Brenn.

James Brenn

Good morning everyone. As introduced, I am Jim Brenn, CFO; and with me today is Todd Teske, our Chief Executive Officer; and Dave Rogers, our Vice President of Finance.

Today’s presentation and our answers to your questions will include forward-looking statements. The statements will be based on our current assessment of the markets we operate in and actual results could differ materially from any stated or implied projections due to changes in one or more other factors as described in our filings with the SEC.

This conference call will be made available on our website approximately two hours after the end of the call, and a phone replay will also be available within a few hours of the completion.

Now here’s Todd to comment on our third quarter results and outlook for the rest of the year.

Todd Teske

Thanks for joining us this morning. As you saw in this morning’s press release, we reported third quarter consolidated net sales of $695 million, an increase of 3% from the net sales in the third quarter of last year. Third quarter consolidated net income was $24 million, a decrease of approximately $1 million from the prior year. However, as pointed out in the press release, the current year’s result includes a pretax charge of $31 million to recognize a previously announced litigation settlement.

Adjusting the consolidated net income for the litigation settlement results an adjusted net income of $43 million, an improvement over last year’s third quarter results of approximately $17 million and is a better indication of the improvement achieved in operations on a year-over-year basis. I’ll discuss the improvements in my following comments on our operating segments.

Engine segment sales for the third quarter were $499 million, $19 million more than last year, and basically accounted for the majority of the consolidated net sales increase. In engine unit volume increase that was primarily the reason for the sales improvement, it appears to be the result of units being moved from our second fiscal quarter, into the second half of the fiscal year.

We discussed this timing shift in January when we believed that OEMs and retailers had tightened inventory controls and appeared ready to chase demand in the spring selling season. Through nine months engine units are approximately 500,000 less than they were last year for the same period. We believe that full year shipments will end up 350,000 to 450,000 units less than fiscal 2009.

The single largest factor contributing to the full year decline is almost 200,000 fewer engines for portable generators due to a lack of hurricanes in fiscal 2010. Softer demand from European OEMs caused by inventory over hangs from 2009 is the next largest factor contributing approximately another 100,000 units to the projected decline.

As of today the lawn and garden market in the US appears to be very active. Because of this year’s weather pattern the spring retail season is starting almost simultaneously in both the southern and northern markets. This weather pattern, combined with our earlier decisions to chase the season has resulted in retailers moving orders forward to address the surge in retail demand. However, at this time it is unclear whether the market is growing more than was originally anticipated, or we are simply seeing a change in the timing of demand.

Third quarter income from operations for the engine segment was reported as $44 million, a decrease from the $47 million for the same period a year ago. As pointed out in the press release, adjusted income from operations is $74 million without the litigation expense that was recognized in the third quarter. This adjusted income from operations improvement over the prior year reflects lower commodity costs, the impact over ongoing cost reduction programs in the manufacturing area, and lower utility warranty and transportation costs.

Certain commodity costs are increasing, but we have hedged a significant portion of our commodity purchases through the reminder of the fiscal year, and we should continue to see the year-over-year benefit of our cost reduction programs, and the improvement in certain variable cost categories.

Power product segments net sales for the third quarter was $245 million, slightly less than the $250 million experienced in the same period a year ago, while our replenishment of portable generators from storm related events was the major factor in the lower revenues. While we experienced a higher unit volume of shipments in other power product categories, the mix of shipments was skewed to products with average selling prices that were lower than those for portable generators.

Our shipments of premium and commercial lawn and garden equipment that is sold through our new organization was also softer than last year’s third quarter, as some dealers chose to forego opportunities to get volume discounts, as they appeared to remain cautious about their inventories ahead of the spring retain season.

The power products segment had an operating loss for the third quarter of $7 million, approximately $4 million worse than the loss from the operations for the same period a year ago. The greater operating loss between years was primarily the result of lower utilization of our production facilities for portable generators.

In the third quarter this year, we are in the process of transferring portable generator manufacturing and assembly from our Jefferson Wisconsin operation, that we previous had announced we were closing.

Portable generator inventories have been built up in the second quarter in anticipation of the move, and those inventories were sufficient to address the demand for portable generators. Consequently almost no portable generator production occurred in the third quarter. The transfer of all production from Jefferson to our other plants is essentially complete, and we expect the full year’s savings to be realized in fiscal 2011.

Now let me comment on our outlook for the reminder of the fiscal year. Our GAAP projections for 2010 are in the range of $24 million to $31 million. Adjusting the net income projection for the litigation expense, you will see that we are keeping the top end of our net income projection the same as previously reported in January 2010; however, we have raised the bottom end of our forecast.

We’ve been able to remove the bottom end of the earnings forecast up because we are now comfortable with the planned cost reduction projections and certain lower expenses can be projected to come in as planned. We also have more clarity on our estimated engine shipments, now that we’ve seen the first nine months of activity. We have not moved the upper end of the forecast up.

We know that the market has been active in the first weeks of April, but it remains uncertain that there is a market recovery different than the one already built into our forecast. It is possible that the recent increases in demand from the nearly simultaneous start to retail, in both the Northern and Southern markets, due to weather they have led to a condensing of demand over the last past few weeks. Therefore given the uncertainty that remains in the market, we are not adjusting the upper end of our forecast.

Now we’d like to open up the call for questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from Mark Rookie from Longbow Research.

Mark Rookie - Longbow Research

Hi guys, congratulations on the quarter. On your commentary related to the retailers moving orders forward, how recent is that development?

James Brenn

Well when you look at what’s transpired, the season has gotten somewhat condensed, and I would tell you we started seeing it over the last two to three weeks.

Mark Rookie - Longbow Research

Okay, that’s perfect. Then on the commodity cost, you had cited I think you’re hedged through the end of this year. I think you have some decent hedging on the aluminum through part of next year as well. I mean, is there any kind of sense of when you might start facing some head win on the commodities, and then just a general sense of what kind of pricing opportunity you may have to offset that going forward kind of into next year?

James Brenn

Well when you look at when we’ll start to see it, I mean we tried to hedge some of our purchases into 2011, but it had been very difficult before the commodity cost increases to a get huge portion of them hedged.

So we started to see it maybe coming out of the first quarter into the second, but realistically when you look at it, we look at it for the whole fiscal year, and we’re going to go out and we’re in the process of beginning quotes on engines and other products if you will. On the engine side of the business we feel we need to go out and get 2% to 3% price increases.

Mark Rookie - Longbow Research

Okay, perfect. As it relates to the cost saving initiatives, I know that some of that happened in this year and there was some offset this year, and next year there will still be a decent incremental impact. Is there any change on kind of what kind of incremental impact that could have on the operating line next year from the benefits standpoint?

James Brenn

Mark this is Jim. I still believe this is probably in the $11 million range.

Mark Rookie - Longbow Research

Okay, perfect; and just lastly. I think on the last call there was some discussion about this accrual coming into play in to the back half of this year. Did that come into play at all or is there a change in that at all?

James Brenn

There is no change in that. We won’t make that evaluation until after we’ve closed off the fourth quarter and we’ll make that adjustment if we’re going to make that all at the end of the fourth quarter.

Mark Rookie - Longbow Research

Perfect. That’s all I got. Thank you.

Operator

Thank you. Our next question comes from Sam Darkatsh from Raymond James.

Sam Darkatsh - Raymond James

Good morning Todd, Jim, David and Jim and Dave congratulations on your new role as well.

James Brenn

Thank you.

David DeBaets

Thank you.

Sam Darkatsh - Raymond James

A couple of questions here. First off, and this is the follow-up question Todd on the prior question. You said you needed about 2% to 3% pricing to offset prospective material inflation if things are as they are. A few years ago when you raised prices, there was a mix shift downwards as the OEMs tried to go lower horsepower. What has changed in the industry dynamics that gives you confidence that you can get through pricing now or perhaps in the years passed you haven’t been able to as much?

Todd Teske

Well Sam what we’ve done over the last few years is we’ve been able to -- when the commodities have gone up we’ve actually gone out and we’ve done it in a couple of different ways. A few years ago we did it based on surcharges and things like that, and were indexed. Other times we have gone out and just gone for straight price increases, because we pretty much knew what the commodity cost increases were going to be going forward. So I would tell you, over the last few years we’ve been successful doing that, simply because the competition faces the same issues.

Sam Darkatsh - Raymond James

I guess I’m getting it as, do you anticipate that there may be a negative hit to mix if you raised prices or is that shadow able to absorb those kinds of prices without a corresponding hit to mix?

Todd Teske

It’s really tough to tell Sam, because I mean we’re not even partly through -- I mean we’re only partly through, we’re not even half way through the current selling season. It’s hard to predict what’s going to happen next year, because there is so many different factors that go into that, including where overall economic conditions are, and things like housing and how people feel about it with the dictionary income and everything else. So it’s really difficult to try and figure out where the mix is going to be next year when we haven’t even been through this year.

Sam Darkatsh - Raymond James

Fair point. The other questions I have, your fourth quarter expectations looks like sales up about 15%. What’s the implication for sell-in versus sell-through and then also production on a year-on-year basis in the fourth quarter?

Todd Teske

Well I would tell you that when you look at inventories, we would anticipate as we went into the season, the inventories were really low throughout the channel here in the US. Europe is a whole different story, but here in the US we would certainly expect that as sell-through occurs, it will result in orders coming back through.

Now I think what we are seeing and what we are a little concerned about is that, there is some anticipation of some pretty good sell through perhaps in the reminder of April into May, and at some of the OEMs, then we’re taking the engines a little bit earlier in anticipation of certain demand that could be coming.

So that’s why as we look at it we said that just part of this has been condensed into the last few weeks here, and we’re not willing to take the top end up. It’s not the question you asked but that’s really what happens. You’re depending on the sell through as we ripple through June; we think that if it’s good obviously we’ll do well, because of the inventories where they are.

Jim you want to comment on the implications of that fourth quarter production as we roll through?

James Brenn

Yes, I think our fourth quarter production Sam is going to be slightly better than it was a year ago in the engine business. I would tell you that it’s probably still going to be down in the power products part of the business, in particular the part of the generators, but a lot of the sales increase that you see embedded in the fourth quarter is the anticipation that the yard part of the business is going to do better, lawn and garden, and so their production loss will be up a little bit in the fourth quarter.

Sam Darkatsh - Raymond James

So, let me rephrase the question then. So sales up 15, what’s the implications on the end markets if your sales are up 15. Would the end markets be up maybe 10? I’m just trying to get a sense of the delta that’s incorporated within your expectation.

James Brenn

I think it’s also a little tough question. I think as we look at it today, our mass business, the stuff that is going through the major retailers will probably be up in the 5% to 8% range, the way it looks right now.

But I will tell you, we see something entirely different for the premium and the commercial product that goes with the organization. Again, they were very slow to order this year, and they are trying to respond now to what’s coming through the door, but we think that that’s going to lag a little bit because of the high price points around that product as opposed to the stuff that’s moving through the major retailers.

Sam Darkatsh – Raymond James

Okay, then I have another dumb question here then. The production is expected to be up in the fourth quarter. So why would margins be soft as your guiding, I guess your guiding for down margins on a year-on-year basis, on an operating basis, despite sales being up in the mid teens. Can help reconcile that for me? Is it a mix issue or…

James Brenn

Our fourth quartered historically Sam it drops off. Basically the type of benefits that we had in the third quarter is when we are running full out, we are running seven days a week and overtime in that period and we just started to cut that in the fourth quarter naturally. I mean it could be a good fourth quarter, but we don’t have to be running the plants quite as hard, and so you loose some of the absorption as you go into the fourth quarter.

Sam Darkatsh – Raymond James

Right, I am looking on a year-on-year basis. The seasonal affects would work themselves through. You did a 3.7% operating margin in Q4 last year, and it looks like your guidance is somewhere between a high 2% and high 3% for Q4, which I am trying to figure out how that happens if you have higher sales and higher production on a year-on-year basis. What’s the offset to that? Is it mix; is it material cost inflation, I was trying to get a sense of what the offset is?

James Brenn

It could be some material cost inflation there. I think as Todd said, we never get a 100% hedge. Aluminum is up significantly from where it was on the hedge position, so there is a little bit of that. There could be some additional expenses, so we are just anticipating like in the warranty from a timing perspective. As we sell more we recognize more warrant expense. So it could be a couple of factors like that.

Sam Darkatsh – Raymond James

And last question; according to my notes, it looks like your inventories at quarter end were considerably below where you may have thought they would have been three months or so ago, by $100 million or so delta. Is that true, and if so what was the genesis of that, what was the reasoning behind there?

James Brenn

Well, I think it’s actually where we expected it to be. We think that for the full year we will probably have a working capital decrease, probably in the $35 million to $45 million range, and its because we are trying to control our inventories. We are definitely working to having may be 100,000 to 200,000 fewer engines on hand, while we are still carrying a generator inventory that we had a year ago because of no storms.

In the move that we’ve made to go self with things like pressure washers for example, that inventory is moving very well and we have targets throughout the organization to lower inventory significantly year-over-year, so we don’t have as much working capital invested in the business.

Sam Darkatsh – Raymond James

Thank you.

Operator

Thank you. Our next question comes from Annette Borland from Personal Securities.

Annette Borland – Personal Securities

Good morning. Most of my questions have been answered. I just have one quick one here on what is the retail inventory of generators look like at this point?

James Brenn

It’s actually above where we would expected to be. The retailers historically going into a storm reason, as close as we can tell our usually carrying about 60,000 to 80,000 and there were houses that are our product, and I would tell you that’s exactly where the writing rate now ahead of the season.

So not much is altered in terms of generator inventories, because it wasn’t even as much of a robust storm season, winter storm season as it was a year ago. But I would tell you that we are about where we want to be as we going to the June timeframe.

Annette Borland – Personal Securities

So you are basically set up for a normal storm season?

James Brenn

We hope so. No, we are.

Annette Borland – Personal Securities

Okay. What about pressure washer inventory in retail?

James Brenn

Pressure washers has been one of the real high spots. I think in product that we’ve seen ship out this year; it seems whether it’s a lot of pollen down south or whatever at the end, the advertising that the major retailers have put into it. That product has moved very, very well, and there is a lot of demand for it. So I would tell that our inventories are probably a little bit lower than they normally are this time of year and the sell through retail is very good.

Annette Borland – Personal Securities

Okay. And just to make one clarification on the guidance. I guess from what I hear when you are talking about the lawn and garden market, it’s active now. So you basically are assuming -- you don’t know whether it just timing or a stronger market. What is the effective if you actually get both. I mean are we looking at significantly higher than 15% sales growth in the fourth quarter?

James Brenn

You would have better sales growth in the fourth quarter if in fact it became the perfect season that goes longer and stronger into the May and June time frame, that’s correct.

Annette Borland – Personal Securities

Okay, is it too early to talk about production rates where you guys are thinking for next fiscal year?

James Brenn

I do know that next fiscal year -- I think it’s been three years in a row now where we have tried to trim our engine inventories down to lower levels by the time we get down to the end of the year, and at least at this particular point in time I would tell you that we will probably be closer to producing what we sell next year, which would give us a benefit on production in 2011, but its too soon, because in terms of the absolute number, because you need to know where the season finishes at.

Annette Borland – Personal Securities

Okay Jim, best of luck to you and congratulations to Dave. Thank you.

Operator

Our next question comes from Craig Kennison from Robert W. Baird.

Craig Kennison – Robert W. Baird

Good morning. Thanks for taking my questions, and Jim and Dave also congratulations. Just a follow up on the inventory questions, we know that retailers are trying to keep it lean, but our OEM is starting to build a little inventory Todd, is that what I heard you say?

Todd Teske

Yes, basically when you look at it, obviously because they delayed a lot of their bills into what would be our fiscal third quarter. They are also chasing the season, but they also had to start building but they built later than they otherwise would have built, and so what’s happening is our shipments got pushed into the third quarter.

Craig Kennison – Robert W. Baird

Thank you. And then in terms of the Chinese landscape, could you just give us an update on the competitive landscape in China. I know you’ve taken share in this last cycle, but how are cost differentials appearing currently?

Todd Teske

Well, Craig we obviously look at and we keep a very close eye on what’s happening with the competitors over in China, with anybody new that’s coming into the market and we continue to see a lot of the same people that have been there before. We also keep a very close eye on the underlying costs as it relates to us versus them, and I would tell you that not much has changed.

Given the fact that the Chinese government has decided several months ago to get back to kind of the export bent if you will, to try and get their economy going, and when they stopped changing if you will, the RMB relative to the dollar, and they froze it basically at 6.8, things kind of were frozen at that point in time.

I would tell you that we would expect if in fact the Chinese government decides to flow their currency further, that obviously that will just cause the delta between where we are and our Chinese competition to further narrow.

Craig Kennison – Robert W. Baird

On a per unit bases Jim, do you have a sense for what it costs to ship a unit from China today.

James Brenn

Our estimate is in the $5 or $6 range, but it’s varied. I think as fuel prices went up, it became a little higher than that. I think they retreated a little bit but we still estimate in the $5 to $6 range.

Craig Kennison – Robert W. Baird

And is that close to equal to what you think the differential end cost is relative to the Chinese engine.

James Brenn

We believe that that is close to the differential, delays the differential, and so we think that the lower wage rates, they have more time in the product than we do plus automation, but we would tell you that we believed that the transportation cost offset any labor vanish.

Craig Kennison – Robert W. Baird

And then finally Todd, could you just address sort of philosophically your view of market share verses margin. Clearly you’ve taken share during the down turn as others have not done as well as you, but would you be willing to conceive some share in order to protect some of your pricing goals.

Todd Teske

Greg, the way that we look at is we’ll obviously look at it from a margin perspective, and when you look at kind of where we’ve been interims of the market decline, obviously to be able to keep a very trained work force in place, we went after an awful lot of volume, and I would tell you going forward, there will be an evaluation.

We’ve already done an evaluation as to what the trade offs needs to be between margin expansion if you will due to price, and ultimately where the marker share is, and we will continue to play that balancing act if you will going forward, but the idea is not to price the product to retain market share, but rather to make sure that we are maximizing margins for the enterprise as a whole.

Craig Kennison – Robert W. Baird

Thanks, and best of luck.

Todd Teske

Thanks.

Operator

Our next question comes from James Bank from Sidoti & Company.

James Bank - Sidoti & Company

Good morning. Question on the generators. I think I’m just little surprised with not only the swing in the quarter, but also the weight that it had, and I guess really being the crux or life products under performed.

So really two things; one, if there is sort of a pent up demand in lawn and garden equipment, because the retailers are still keeping inventory tight to their chest, that should swing to the fourth quarter, but then historically was the third quarter always (1) a strong quarter for generators; and then (2) under my own impression I thought that with all the snow fall, and the power outages really from the east cost all the way through Chicago, we might have seen a little bit more of a reorder for those generators. I was hopping you could clarify that for me?

Todd Teske

Yes James, historically when you look at it, its usually kind of our first fiscal quarter, that’s the really big quarter for generators, simply because its hurricane season. What happens once you roll into kind of the wintertime and then early spring; late fall winter early sparing, it all becomes a function of ice storms and snowstorms and things like that.

Over the last couple of years what’s happened is ’09 was a fairy robust ice storm season, and so it really becomes a little difficulty, but our fiscal third quarter is not the biggest generator quarter that we would have, its typically the first quarter with the hurricanes.

James Brenn

James it can be the third quarter a little bit to the extent that we are trying to replenish off of the hurricane season from a reproduction standpoint, but that did not happen in fiscal ’10, that happened in ’09. So that’s where the production comes in. It does have a pretty significant impact because obviously when you look at the engines and then the end product margins, overall that can create some very nice gross margin for us.

James Bank - Sidoti & Company

Okay, and my other questions I believe had been answered, except on the last conference call if I could just say, I probably say you guys are still a little bit cautious on lawn and garden, and your defense was early in the fiscal year. Would you say that third quarter performed inline with what your expectations were back then? I think it was in mid January, or February I believe.

James Brenn

I would tell you; yes the third quarter is playing a little better than what our expectations had been.

James Bank - Sidoti & Company

Okay, so your inference that the fourth quarter top line should be relatively strong, given your full year guidance is down only 6%. The redo on that is certainly that lawn and garden should recover in the fourth quarter.

James Brenn

Yes.

James Bank - Sidoti & Company

Okay. Thank you very much, that’s all I have; and Jim congratulations, and good luck on your retirement.

James Brenn

Thanks James.

Operator

Our next question comes from Brad Safalow from PAA Research.

Brad Safalow - PAA Research

Hi. Thanks for taking my questions. Just very quickly, on the snow through inventory at the end of the winter season, can you guys comment on what that looks like and there was a lot of snow in the north east, but the dealers we talked to, depending on where they are located in the country, it’s a bit of a different answer. Can you comment overall what that looks like.

James Brenn

Yes, I would tell you overall we like to think bout North America kind of as a whole, and I’ll break that down. When you look at the US, generally in the US inventories are fairly low coming out of the season. What happens is, the late season, snowfall that happens, usually sometimes we’ll clear out inventories. Certainly it does not result in any reorders for us, simply because its late in the season and no one wants to carry the inventory in the next season.

So in the US I would tell you, other than maybe certain pockets of the country, by and large US inventory are relatively low. Up in Canada when you look at the inventories up there, they are a little bit more than one would like coming out the season, because the Canadian snowfall was not nearly as robust at otherwise it would be.

So when you look at it kind of overall, Canada has maybe over an abundance of inventory, the US has an under abandons of inventory and so as we roll in the next year its going to depend on where the snowfall continues. There will be some replenishment in the US and then it will depend on where the snowfall happens.

Brad Safalow - PAA Research

And then just a final point on the variance you are seeing in, what we call the major retail channel versus the dealer channel. Is it fair to say tat the residential demand has been strong and commercial demand has been week and that’s kind of what you are seeing as manifestation of those two separate channels?

James Brenn

I’d qualify that little bit. I think that consumer stuff is certainly moving along pretty nicely, but to consumers the major retailers is at primarily lower price points that you will see in a dealer. The dealer has a more fully featured product in some cases and has a tendency to be selling at a higher price points and so what we really see is reluctant I think or at least some hesitancy on the dealers to call this a good season and therefore they didn’t do a lot of reordering ahead of the season.

We are seeing a little bit more activity now, but our concern would be that we’ll see the bulk of the activity at the major retailers rather than the dealers.

Brad Safalow - PAA Research

And for the dealers, is your sense that the inventory and the channel on the higher price commercial items, or even higher price residential rented products is that as lean as you as what you saw may be heading into the season?

James Brenn

Actually it’s leaner that it was last year. I think for the tired consecutive year that the dealer organizations have bought less from us. We see it in our floor plan inventory basically, and this is the third year in a row now where they have taken inventory out of their system.

Brad Safalow - PAA Research

Okay. That’s exactly what I wanted to know. Thank you.

Operator

Our next question comes from Mike Hamilton from RBC.

James Brenn

Good morning Michael

Mike Hamilton – RBC

Congratulations. I was wondering if you could give your thinking on how you would like to fund out the senior notes?

James Brenn

We have a very large make-hole on those senior notes and they are due in March of 2011, so we are currently evaluating that, we have a $500 million revolve that’s not do until 2012, so I have a back stop in place, but I would tell you that we will probably start to negotiate seriously as we get into the October, November timeframe.

We think that there is adequate access to capital from talking to the banks and we are not that concerned at this particular point and time that interest rates will run up and causes us to move any earlier than a little bit later in this calendar year.

Mike Hamilton – RBC

Do you have a particular timing involved in term of how long you’d like to term that debt out?

James Brenn

I think the discussions that we’ve had with people at this point and time, if we go with bonds, public bonds you’re talking seven to eight years in some cases 10 years at a higher interest rate. So we would have to take a look at it, again we are in the process of evaluating even the vehicle that we would use to refund that long-term debt.

Mike Hamilton – RBC

Coming back around, it was somewhat addressed earlier on the snow season. Anything that we should be thinking about on timing and production levels, what kind of manufacturing levels and what you thinking about for the season?

Todd Teske

I would tell you, like it is for the US side it will be pretty much as we had anticipated. We have actually picked up couple of skews up in Canada, but again with where their inventory levels are I wouldn’t tell you that that would be a significant bump for this next year.

Mike Hamilton – RBC

Okay thank you very much. That’s it from me.

Operator

Our next question comes from John Barlow - Weiss.

John Barlow – Weiss

Hi, congratulations on a great quarter. I just wanted to ask what kind of demand trends you saw in Europe during the quarter, and if you could also talk about how the inventory situation differs in Europe relative to the U.S in both the OEM and the retail levels? Thank you.

Todd Teske

Yes, I would tell you in Europe, the weather started out cooperating and then all of sudden got cold and that really had a dampening affect here, as of late on demand over in Europe. Yes, they seem to be lagging to US from the economic conditions and that sort of thing.

In terms of inventories, obviously given that demand was off a bit, we see inventories being a little higher than maybe anyone would otherwise like to see them. It just depends on how the remainder of the season brakes then, to determine where we are going to end up.

John Barlow – Weiss

And have you looked, have you spoken with your European customers in terms of days inventory. Is there anything you can quantify for us?

James Brenn

We have obviously spoken with the customers, but there is nothing that we can quantify in terms of days outstanding or anything like that.

John Barlow – Weiss

Okay. Thank you.

Operator

Our next question comes from Dax Vlassis from Gates Capital Management.

Dax Vlassis – Gates Capital Management

Yes, your capital expenditure seemed to be trending well below where you had guided previously. Where do you think those will come in this year, and has there been some delay in capital projects?

James Brenn

Actually I think that we are headed to probably around the $15 million level, which is where we had forecast. We did from a cash conservancy prospective, try to get people to move these things as late into the fiscal year as they could. I think that you’ll find for next year we probably intend on spending about $67 million next year. We are introducing a fair amount of new product and need the tooling for that next year, so you will see the CapEx probably at a more approximate depreciation, probably for 2011 and 2012.

Dax Vlassis – Gates Capital Management

Okay. And do you have any estimates as far as your free cash flow for this fiscal year or cash flow for smaller CapEx.

James Brenn

Yes, I think in effect it would probably be close to $100 million for CapEx.

Dax Vlassis – Gates Capital Management

So $150 million cash flow from ops minus $50 million CapEx.

James Brenn

Yes.

Dax Vlassis – Gates Capital Management

Okay, great. Thank you very much.

Operator

Thank you. I am showing no further questions at this time.

James Brenn

Okay, well with that we’d like to thank everyone for participating and certain of us will talk with you in August. Take care.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the conference.

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Source: Briggs & Stratton Corporation F3Q10 (Qtr End 03/31/2010) Earnings Call Transcript
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