Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Brunswick Corporation (NYSE:BC)

Q4 2010 Earnings Call

January 27, 2011 11:00 am ET

Executives

Bruce Byots - VP, Investor and Corporate Relations

Dusty McCoy - Chairman and CEO

Peter Hamilton - SVP and CFO

Analysts

Ed Aaron - RBC Capital Market

James Hardiman - Longbow Research

Richard Whiting - Broadview Advisors

Joe Hovorka - Raymond James

John Harloe - Barrow Hanley

Laura Starr - Nuveen Asset Management

Operator

Good morning and welcome to the Brunswick Corporation 2010 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode, until the question-and-answer period. Today's meeting will be recorded, if you have any objections you may disconnect at this time.

I would now like to introduce Bruce Byots, Vice President of Corporate and Investor Relations. Please proceed.

Bruce Byots

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

Before we begin with our prepared remarks, I'd like to remind everyone that during this call, our comments will include certain forward-looking statements about future results.

Please keep in my mind that our actual results will differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. I would now like to turn the call over to Dusty McCoy

Dusty McCoy

Thanks, Bruce and good morning, everyone. By now I hope everyone has had the opportunity to review our fourth quarter earnings release. 2010 was an important transitional year for us. We continue to make significant strides in rationalizing our manufacturing footprint and executing against strategies that allowed us to operate our businesses more efficiently. These actions enabled us to demonstrate strong levels of operating earnings leverage in 2010 putting us in an excellent position to return to profitability in 2011.

Our full year 2010 results reflect revenue growth of 23% and a loss of $1.25 per share, including $0.70 of restructuring charges and $0.03 per share of charges from special tax items. This compares to the 2009 loss of $6.63 per share which included a $1.95 per share restructuring charges and $1.09 per share from special tax items.

Our full-year operating earnings, excluding restructuring, exit and impairment charges were $79 million, an improvement of $477 million as compared to the loss experienced in prior year period. Our operating margin, ex-restructuring charges was 2.3% in 2010, representing our highest annual consolidated and operating margins since 2007, when U.S. marine retail boat market was twice the size it was in 2010.

In the fourth quarter, a quarter in which less than 10% of annual marine industry retail sales occurred, we reported a net loss of $1.17 per share on a sales increase of 11%. The quarterly EPS includes $0.21 per share restructuring charges and a $0.02 per share charge for special tax items.

Our quarterly operating loss, excluding restructuring, exit and impairment charges were $56 million, an improvement of $63 million as compared to a loss experienced in the prior-year period. Increases in wholesale unit shipments in both our Marine Engine and Boat segments, combined with double-digit growth in our Fitness segment were the main drivers of our 11% top-line growth. Our volume growth generated improvements in fixed cost absorption in our Marine and Fitness businesses.

Also contributing to the significant reduction in our fourth quarter operating loss were approximately $10 million of lower discounts required to facilitate retail boat sales and about $14 million of reduced bad debt provisions, primarily in the Engine segment.

Lower pension expense in the fourth quarter of approximately $15 million also had a favorable effect on the Marine Engine and Bowling & Billiard segments as well as on corporate expenses. A portion of the reduction in pension expense along with lower bad debt experience were the main factors that lowered our fourth quarter’s SG&A by 13% compared with 2009.

Our cash and marketable securities increased by nearly $130 million from yearend 2009 and net debt decreased by $150 million. Peter will comment in his remarks on the key factors affecting our improved cash position as well as provide you with a perspective on our 2011 cash flow targets supporting our objective of generating positive free cash flow.

Let’s review the preliminary fourth quarter U.S. Marine Industry data. Fiberglass sterndrive, inboard boat unit demand fell by 43%. This compares to declines of 38% in the third quarter of 2010 and 24% in the fourth quarter of 2009.

Outboard fiberglass boat retail unit demand fell 14% in the fourth quarter. This compares to declines of 23% in the third quarter of 2010 and 9% in the fourth quarter of 2009.

Aluminum product demand increased by 2% in the quarter. This compares to a decrease of 2% in the third quarter of 2010 and a 19% decline in the fourth quarter of 2009. After taking into account the different unit volumes, preliminary total industry unit demand declined approximately 10% in the fourth quarter. This compares to a 17% decline in the third quarter.

For the full year of 2010, total industry demand declined by 14% bringing the US industry retail powerboat units down to approximately 132,000 units.

Let me provide you with some additional commentary regarding the 2010 data.

Aluminum demand in the last three quarters of 2010 did stabilize and looks flat, when compared to 2009. The pontoon market actually experienced a solid increase in units sold in 2010, and although our higher price fiberglass boats have yet to experience similar trends, we believe the magnitude of their declines was affected by the pronounced discounting that occurred in 2009, but which was not replicated in 2010.

I'll comment on our early perspectives for 2011 marine retail demand in my outlook. On the international front, our engine segment sales outside the U.S. increased by 15% for the quarter, compared to the fourth quarter of 2009. Our boat sales outside the U.S. increased by 8% during the same period. We’re pleased with our growth in marine markets outside the U.S.

Demand in key-emerging markets continues to improve. The Q4 volume in China, Brazil, Russia and the Middle-East all up substantially. Demand in Europe vary by country, with France, Germany & Finland showing market improvement. On the other hand demand across Southern European remains extremely weak, specifically in those countries most affected by the solvent debt crisis. We continue to see signs of a modest demand recovery in the Nordic region in the coming season. Demand in the Australian and New Zealand markets remain steady.

U.S. retail boat finance markets continues to show signs of improvement. Lending conditions are much healthier than a year ago which is evidenced by improvements in closure rates on boat loans. Lending capacity continued to increase in the fourth quarter. In addition, interest rates continue at historic low levels particularly for the high quality customers.

Now, let’s look at our dealer pipeline. Compared to 2009, our fourth quarter ending pipeline reflected about 300 fewer units or a 2% reduction. Our ending top-line of approximately 15,000 units is equal to our previously stated targeted year end imbalance.

Because this reduction is less than the decrease in retail market the quarter ended with a about 31 weeks of product in the pipeline on a trailing 12 months retail sales basis, compared to 27 weeks at the end of 2009. We adjust production and our sales shipments in order to meet our dealers required stocking levels.

To maintain appropriate levels, we increased our fourth quarter boat production versus the very low 2009 levels and increased shipments of boat star dealers by about 5% versus last year. For the full year, we increased our boat production by about 80% compared to 2009 levels and increased shipments of boat star dealers by approximately 45% versus 2009.

Throughout the year the level of waste product in the industry has been reduced and now closely reflects more normal levels. During most of 2010, however, the market continued to be influenced by retail discounting. The combined impact of the increased wholesale unit shipment levels and lower discounts in the quarter and the year led to our boat segment sales increase of 7% in the fourth quarter and 48% for the full year.

Our fourth quarter growth rate was less than anticipated, primarily as a result of a shortfall on larger boat sales which was driven by our efforts to manage field inventories. Our dealers made excellent progress in improving the health of the floor plan financing metrics in 2010. Total domestic floor plan loans outstanding declined 24% as compared to year-end 2009 levels.

The mix of aged versus new product in the fourth quarter also continued to move in a favorable direction and it's at healthy levels. Outstanding floor plan loans on domestic inventory aged greater than 12 months was reduced by 70% as compared to year-end 2009.

In our Engine business, the global production in the fourth quarter and full-year was significantly higher than year-ago levels. In the fourth quarter, all of Mercury's main operations once again experienced strong increases in sales. A review of the mix of businesses within Mercury will give you a more detail view of what drove the Marine Engine segment 17% growth in fourth quarter revenues.

Our Domestic Parts and Accessories business, which in the quarter represented about 21% of the segment's revenues, was up approximately 10%. The growth experienced in this business continues to demonstrate the strength of overall boating participation.

International sales which represented about 51% of the segments revenues in the fourth quarter increased by 15%. The combined revenue growth of these two sub-segments, which account for almost three fourths of the overall engine segment in the fourth quarter was about 14%.

The revenue growth rate of our U.S. Engine Operations was slightly higher. Mercury's strong top-line growth, which was weighted more heavily toward the outboard engines business combined with lower bad debt and pension expenses, incentives associated with Mercury's plant consolidation activity, fixed cost reductions and improved operating efficiencies helped drive an even stronger improvement in Q4 operating results.

Now let's take a look at our two recreational segments. Life Fitness continued to perform exceptionally well. Sales were up 11% as compared to last year’s fourth quarter. Domestic, commercial and consumer equipment sales increases were the main contributors for revenue growth during the quarter.

Segment operating earnings grew by about $4 million or 19%. In addition to benefits from increased unit volumes, increased fixed cost absorption contributed to the higher level of profits.

Sales in Bowling and Billiards declined 3% in the quarter. Thanks to our retail Bowling revenues were flat, while bowling products experienced a decline in sales. The segment's operating earnings were slightly above breakeven levels for the quarter and experienced a decline of approximately $2 million compared to prior year. This decline reflects lower sales in the effect of the write-down of vacant property.

Now, I'll turn the call over to Peter for a closer look at our financials and then I’ll come back to give you an update on our prospective on 2011.

Peter Hamilton

Thanks Dusty. I would like to begin with an overview of certain items included in our fourth quarter P&L, and will also comment on certain forward-looking data points.

Let me start with restructuring exit and impairment charges, which were $18.5 million or $0.21 a share in the quarter. For the full year charges were $62.3 million, or $0.70 per share. The fourth quarter charges primarily reflect actions of a Marine operations, including those related to consolidation of production of our Cabo Yacht brand into our existing Hatteras manufacturing facility and the plant consolidation actions at Mercury.

Since the consolidation activities at Hatteras and Mercury will continue beyond 2010, we will continue to incur restructuring charges in 2011 with the full year estimates of $15 million.

Net interest expense was $22 million in the quarter decrease of $3 million versus the same period in 2009. During the fourth quarter of 2010, we recorded a debt extinguishment loss of approximately $200,000 on a retirement of approximately $1.4 million of 11.75%, 2013 notes, which were retired in the premium versus their book value. This compares to a debt extinguishment loss of $13 million in the fourth quarter 2009. The total principal amount of the 11.75% notes retired during 2010 was $36 million. As we look forward, absent any additional retirement of debt, we expect net interest expense to be approximately $22 million for the quarter in 2011.

During the quarter, foreign currency had a negligible effect on our operating earnings as compared to the prior year, which reflected a mix of favorable and unfavorable exchange rate movements. This includes the impact of hedging activity, which helps to moderate the impact that currency exchange rate fluctuations have on our year-to-year earnings comparisons. Changes in foreign currency had a slightly unfavorable effect on our sales growth in the quarter.

In the fourth quarter, we recorded a tax probation of $5.1 million, which primarily relates to earning from our foreign operations. In the fourth quarter of 2009, we recorded a $108 million tax benefit which reflected our ability carry back domestic tax losses for five years, the years in which we paid taxes.

Now, as a quick reminder, due to the company's three years of a cumulative book losses in various taxing jurisdiction that requires the realization of the related deferred assets be considered uncertain. Consequently, we continue to adjust our deferred tax valuation allowance resulting effectively no recorded federal tax benefit or provisions associated with our losses or our income.

Our 2011 tax expense will therefore continue to be comprised primarily of foreign and state income taxes. Because we anticipate modestly increased earnings for our foreign operations in 2011, the overall 2011 tax provisions should be somewhat higher than in 2010.

One final comment on our income statement. For 2011, our diluted shares outstanding -- pardon me -- for 2010, our diluted shares outstanding did not include dilutive impact of any common stock equivalents and consequently diluted shares outstanding equaled basic shares outstanding. This treatment of common stock equivalents is required by GAAP when net losses are reported.

In 2011, we anticipate reporting net income and we'll need to include the impact of common stock equivalents in determining diluted shares outstanding. At the current stock price, this could add an incremental 3 million shares to diluted shares outstanding in 2011.

Now, let’s turn to review of our cash flow statement, which supports our ongoing objective of maintaining strong liquidity by generating positive free cash flow. Beginning with cash from operations. Cash flows from operating activities were $13 million in the fourth quarter and when added to the first nine months totaled $205 million to the full year. As a reminder, the first quarter benefited from a $109 million federal tax refund.

Some other key items in this section, the cash flow statement include adjustments to earnings for non-cash charges such as depreciation and amortization, which was $129 million for 2010.

Our current estimate for D&A in 2011 is approximately a $105 million. Pension expense resulting from our defined benefit plans totaled approximately $10 million in the fourth quarter compared to $25 million in the prior year. For the full-year, pension expense was $39 million compared to $96 million in 2009. This decline primarily stems from decisions in 2008 and 2009 to freeze benefits in the company's two largest plants.

And in the fourth quarter, the company made cash contributions to its defined benefit plans of approximately $20 million, bringing the year-to-date total to $37 million. We entered 2010 with an under-funded position of $474 million versus an under-funded position of $462 million at the end of 2009.

The primary factor that caused the increase in the under-funded position was a decrease in the discount rate used to value plan liabilities. This was mostly offset by favorable investment returns and contributions.

We expect our pension expense in 2011 to be approximately $32 million which is an improvement of $7 million from 2010. This improvement reflects a benefit of higher asset levels, contributions and lower interest cost associated with planned liabilities.

For 2011, the company plans on making cash contributions to its defined benefit pension plans of approximately $60 million.

Changes in our primary working capital accounts were a source of cash in 2010 and totaled approximately $14 million. This is an improvement from our previously stated goal of ending the year at approximately breakeven levels.

Accounts payable and accrued expenses increased by $54 million. Prepaid expenses decreased by $7 million. Accounts and notes receivable decreased by $2 million and partially offsetting these positive factors with an increase in inventories of $49 million primarily in the Marine Engine segment.

I would point out however the inventory turns for the company action improved from 3.2 to 4.1 over the year. For 2011, our working capital performance will primarily be a function of our revenue assumptions. We currently believe the range should be between flat to a modest usage of cash.

As in 2010, given the seasonality of our Marine businesses, we would anticipate using cash to fund working capital in the first quarter of the year and then generate cash from the liquidation of working capital in the subsequent three quarters.

Capital expenditures for the full year were $57 million, our 2011 plan reflects an increase of $23 million resulting in the total of approximately $80 million. This increase reflects expenditures to develop new products in anticipation of improving market conditions and to fund our Marine consolidation activities.

During the fourth quarter of 2010, the company expanded its cash investment program to include marketable securities for the maturity beyond 90 days. Consequently, the cash flow statement includes a $106 million of expenditures for investments made in short and long-term marketable securities. The new program is designed to increase earnings on a portion of the company’s cash reserves. The investments have maturities of two years or less and include high-grade corporate commercial paper and government securities.

As the company reports free cash flow, it will exclude the purchases in sales of these marketable securities and it will also include these securities in its calculation of liquidity.

So in summary during 2010 we generated about a $163 million in free cash flow. For 2011 we were again planning to generate positive free cash flow. Our total cash and marketable securities investments increased by approximately a $130 million from yearend 2009 with a balance of $657 million at the end of 2010.

Supplementing our cash and marketable securities balances is the net available borrowing capacity from our two ABL facilities of approximately $162 million which when combined with our cash and marketable securities provides us with a total available liquidity of $819 million, more than $200 million higher than at the end of 2009.

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

Dusty McCoy

Thanks Peter. I’ll conclude by reviewing our 2011 outlook. As in 2010, we will continue in 2011 to remain disciplined to generate positive free cash flow. Perform better than the market and demonstrate outstanding operating leverage.

We stated many times in 2010, our objective to return to profitability in 2011 subject to state of economic and marine market conditions. And although our visibility into these conditions remains limited; we plan for Brunswick to return positive earnings in 2011, beginning in the first quarter. We believe the significant decline in the industry marine retail demand has bottomed in 2010. But at this early point in the marine market season we are unable to determine if 2011 marine retail demand will remain consistent with 2010 or improve. But also remains a bit unclear to us at this point in time is the specific timing of when such a improvement will occur in 2011 and how each boat category will perform versus 2011 levels.

Our current view is that smaller boats as they did in 2010 will continue to outperform larger ones. Lacking a clear view of marine demand we are planning for modest consolidated revenue growth for the company and our marine segments, wholesale shipments and productions will closely match retail demand on an annual basis. Therefore the level of 2011 revenue and earnings growth will be significantly affected by marine retail demand.

Our marine growth will also be a function of our ability to gain market share, product mix and our success in pursing specific regional opportunities throughout the global marketplace. Our current manufacturing footprint and cost structure should allow us to report strong future earnings leverage.

Without considering the effects of changes to our fixed manufacturing cost structure, our operating expense, our leverage on incremental revenues should approximate 30%. So for every $100 increase in revenue we should be able to increase our operating earnings by $30, absent changes in our fixed cost.

Our last four quarters of strong operating earnings leverage give us confidence in our ability to continue to demonstrate this performance. Our 2011 net income should also benefit from our previously announced marine plant consolidations as well as from the items Peter already discussed with you.

Lower restructuring costs and reduced net interest, pension and depreciation expenses partially offset by a modest increase in our tax provisions. From a P&L line perspective, we expect our SG&A will be slightly higher than 2010 levels. After taking all these factors into considerations, we expect our 2011 earnings per share to be in the range of $0.05 per share to $0.40 per share on a GAAP basis.

At the time of our next earnings release, we still have better view of Marine retail demand for 2011 and we will provide an updated outlook at that time. Before we take your questions, I do want to take up to mention a couple of topics that we have planned to discuss on our annual investor event that will be held at the Miami International Boat Show on February 17.

One topic we would highlight at this year's event is the strength of our distribution system which is the most respected in the industry. In fact, a leading marine publication Boating Industry recently ranked the top 100 dealers in North America. 52 of the top 100 were sailors of Brunswick Boat brand and 82 of them handled Mercury Engines. We think our dealer network is a true competitive advantage for all of us and we will elaborate on this during our presentations.

At the event, we will discuss our outstanding products from our leading brands. I would say, recently, we have been re-shipping certain best-in-class awards. Specifically, in London, our Sealine F42 model earned the coveted best Flybridge Motor Boat under 55 feet. Also, Quicksilver's active 675 Open were the three models introduced by this brand from the year 2011 won Powerboat Of The Year at the Düsseldorf Show which is still going on until this weekend.

Mercury Marine recently was named favorite outboard manufacturer and favorite sterndrive manufacturer by Powerboat's Magazine readers in that publications first ever Readers Choice Award this November. Powerboat Magazine readers also named our cruiser their favorite sterndrive manufacturer in the magazine's inaugural Readers Choice Awards earlier this summer.

During the recently completed fourth quarter, the quality of Brunswick's Bowling products and services was again confirmed by a selection by the PBA, the Professional Bowlers Association. They continued us as the exclusive line maintenance in capital equipment supplier. The renewal of this long standing partnership is affirmation of Brunswick's industry leading status in bowling.

And the outstanding performance of Life Fitness is driven by its continued introduction of popular new products. Its Signature Series Cable Motion Dual Adjustable Pulley now for 15-inch LCD console with 60 video demonstrations of that product ranging from setup to performance. And we recently introduced Facebook compatibility to its virtual trainer website to allow exercisers to better connect with others, find greater motivation and improve the effectiveness of their workouts. Throughout Brunswick, product innovation remains a critical priority.

Thank you and we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Ed Aaron representing RBC Capital Markets. Please proceed.

Ed Aaron - RBC Capital Markets

Great, and thanks. Good morning, everybody.

Dusty McCoy

Hi, Ed.

Ed Aaron - RBC Capital Markets

So, Dusty, correct me if I just into false conclusions about your view of industry retail sales 2011, but you seem to have developed a bit more confidence that bottom compare to what you what your thoughts seem to be a few months ago. Is that a fair statement? And if so, would that be a reflection of just your perception of the macro environment, or is it because of some trends that you are seeing within the business?

Dusty McCoy

Well, first, I hope I have stated clearly enough that we do believe we hit bottom in 2011, and the real issues then, I mean, '10. The real issue for 2011 is that we're going to bounce along the bottom, or we're going to continue to see some improvement. Ed, we are looking at primarily three things. First, we never have said boat shows are good indicator of future sales, and boat shows are up and we say that when boat shows are up or down.

But what’s more important is we are hearing from our dealers have boat shows and from the showing floors, the traffic has increased and the level of discussion; the quality of the questions and the true interest in potential buying in town of people coming to boat shows and going to showing floors is significantly different than it has been in past years. That’s first thing.

Second thing, as we look at macroeconomic conditions, they are clearly improving, and lift are clearly improving macroeconomic condition. We believe of which the a lot of pent-up demand for new boats will gradually begin to come to fore.

We've seen used boat had declined significantly less than new boats. The number of used boats available has declined significantly, the level of discounting of new boats has declined significantly and ultimately this pent up demand will turn to new product and we think we’ll begun to feel that in 2011.

And then lastly, we've done as well as the entire industry a lot of work with the dealer network, and I believe fundamentally the dealer network throughout the industry is healthier than it’s been in the last three years.

Dealers have available floor-plan financing capacity and they are now beginning to focus on meeting consumer needs rather than survival. So, when we had always, so we think we've seen the bottom. The question is when is the upturn going to really kick in, but I'm tickled to death that we found the bottom, because this gives us now lots of opportunities, which we haven’t had for a while.

Ed Aaron - RBC Capital Markets

Okay. It's a very thorough answer, so thanks for that. Just one quick follow-up just in elaborating on Q4 retail sales. It looked to us like to get that minus 10% number for the industry in the quarter, there was a pretty big bump up in the month of December. Is that consistent with what you see?

Dusty McCoy

No. I don't think so. I think December was fundamentally consistent to me, but with the rest of the quarter. So, we must be looking at different numbers. The real help in bringing the client to minus 10 versus minus 17 as aluminum product in general and in particular pontoon, and as we are looking the boat shows the interest level for pontoon.

And as we are looking at boat shows, the interest levels for pontoon continues to be up quite dramatically in shows.

Ed Aaron - RBC Capital Markets

Great. Thank you.

Dusty McCoy

You’re welcome.

Operator

And our next question comes from the line of James Hardiman, representing Longbow Research. Please proceed.

James Hardiman - Longbow Research

Good morning. Thanks for taking my call. I was hoping you could give us some sort of color around the leverage of your business. Obviously, you've given us the 30% leverage number. But in the past, and I am sure and know you get this question since you've been in the past, but you've given us sort of earnings levels based on different industry assumptions.

Do you care to that again, and conversely, I guess is it safe to say, I mean, you've talked about, I think the industry is going to be flat in 2011. The lower end of your guidance is $0.05. Are those two scenarios equivalent to one another? And if so, sort of the $0.40 high end of your guidance, what sort of the best case from an industry standpoint?

Dusty McCoy

First, I want to make one slight correction in case I have miss communicated in that. We're not really saying our views that the market is going to be flat. We are saying our view is that the market has hit bottom and it is unclear whether it will bounce along that bottom or begin to improve.

So, then to take that to the nickel, clearly, we believe that we can earn a nickel in a flat market. And we believe that nickel represents any reasonable set of circumstances that could be flawless both through 2011 and we are pretty comfortable with that.

In terms of our earnings potential going forward, we've talked about, least to say, we thought we could do well at 150, well now I think we’re saying, we’re going to hang in there, we think quite respectively, respectively with the market of 132,000 -- 133,000 -- 135,000 units. We then I think have been saying at 170, our margin percentage would equal or exceed what the market, what we were able to obtain in the markets of 300,000 units and at 200 margin dollars would equal or exceed what we were able to obtain from markets of 300.

And those are all still in place and we haven’t done a ton of work on updating those numbers. My suspicion is the units might move down a little because we’ve moved down our ability to make money at lower unit level of gains, but we haven’t done anymore math on that in a while.

James Hardiman - Longbow Research

Okay. That makes sense and drilling down a little bit further to the point that you made about fourth quarter coming in a little bit worse than you expected in the Boat segment. I think you were looking for high teens to low 20s and it came in at 7%. With that said the industry did about what you expected and I think you commented on in the prepared remarks that that was the results of -- the industry overall did what you expected but the mix of the industry was tilted against you so to speak, the higher end boats that you guys really have a significant mix of, didn’t do as well.

As I look to 2011, what industry mix assumptions, should I be making. I guess in other words if the industry are flat in 2011, but fiberglass, inboard were still down 20%. Could you make your guidance or you’re assuming that fiberglass is going to comeback as well?

Dusty McCoy

First looking at fourth quarter, here the way you deduced what we’ve said in numbers is exactly correct and one of the reasons we didn’t sell as many large boats as we’ve initially planned is we’ve been very intent on working with the dealers, to keep our minimum stocking levels positioned well so that they can do well going into 2011, so we just backed out wholesale sales.

As we look at mix in 2011, fundamentally our judgment is that the 2011mix will not be a lot different than the 2010 mix when the year ends at wholesale sales. So if you look at 2010 mix, aluminum has done well and we’re seeing improvement in smaller fiberglass products, but when the dust settles, we think the overall mix should be about the same from a dollar perspective

James Hardiman - Longbow Research

And so does that imply that if the mix is the same, then the growth rates are the same right, so does that imply that the fiberglass, the growth rate in fiberglass is comparable to the growth rate in aluminum in 2010 and 2011 I should say? Or am I thinking about that the wrong way?

Dusty McCoy

No I think you’re thinking about it correctly and the growth rate will be better for smaller fiberglass in our margins.

James Hardiman - Longbow Research

Okay that makes sense and then I guess the last question, you talked about your minimum stocking levels and I guess that’s about 15,000 boats, but inventory actually built a little bit in 2011 at least towards the end of the year because retail wasn’t great in certain types of boats. Do that then mean that there is going to be any sort of drag if 15,000 boats is your minimum level and you begin to, growth resumes, is there a little bit of a drag while you sort of get that inventory, I don’t want to say the inventory is high because that’s clearly not the case, but is there any sort of drag as a result of getting ahead on weeks of inventory basis of where you were previously?

Dusty McCoy

First just to make sure James, you and I are speaking from the same basis, the number of units actually declined. And what went up was the trailing 12 months retail and of course retail was down.

Interestingly, we will have to watch going forward with the 15,000 units in the pipeline is enough to meet dealer stocking levels. We are getting some pressure from some dealers that were -- we may not have enough boats out there for the year. So, the import of that thing is we have no worry about the number of units out there being a drag on the ability to accelerate if the markets began to improve.

James Hardiman - Longbow Research

Excellent, very helpful, as usual. Thanks guys.

Dusty McCoy

Thank you, James.

Operator

And your next question comes from the line of Carla Casella representing JPMorgan. Please proceed.

Unidentified Analyst

Hi, this is [Minnie Fioni] here for Carla. Can you talk about whether you bought back any debt in the quarter?

Peter Hamilton

The question was debt reduction in the quarter?

Unidentified Analyst

Yes, debt

Peter Hamilton

Yes, we’re actually looking at the full year, we reduced our debt by buying back 2011 and 2013 notes by $36 million. At the same time we had some increases in debt associated with the planned consolidation activities at Mercury and the state incentives that were a part of that whole program. So, that our debt actually went from at the end of 2009, $850 million to $830 million at the end of 2010.

Unidentified Analyst

Thank you. And now that you believe the boat industry is beginning to stabilize, what is your view on your strong cash balance? Do you still feel you will need to keep $500 million cash on hand?

Peter Hamilton

Yes, we have as you said, a very strong cash balance. We will continue to maintain that. There would be a substantial call on that cash balance as a result of the seasonal first quarter working capital needs, which we will experience in 2011 as we had in other years. And we will continue.

So, we will use our cash balances to deal with that temporary outflow of cash in the first quarter. And we will also use our cash balances to selectively buyback predominantly our 2013 which is our closest in that. And of course, as I said in my remarks, we are increasing our capital investing and so those would be the main falls on our going on cash balances in 2011. We continue to maintain a very, very conservative balance sheet, a very, very conservative cash position until we start to see some significant improvement in the boat retail market.

Unidentified Analyst

Thank you.

Peter Hamilton

Welcome.

Operator

And our next question comes from the line of Richard Whiting representing Broadview Advisors. Please proceed.

Richard Whiting - Broadview Advisors

Thank you. Dusty, of the 132,000 units, that was the industry volume last year?

Dusty McCoy

Yeah, sure.

Richard Whiting - Broadview Advisors

How many units would have been Brunswick's share that -- what was your market share, if you can give that?

Dusty McCoy

I can’t. I'm sitting here debating. Well, I want to, I just assume not but –

Richard Whiting - Broadview Advisors

Would it be fair to say that you are gaining share. There have been some marginal manufacturers have gone by the wayside.

Dusty McCoy

No. In fact, we lost a little share in 2010 and Richard, we have said we felt we would lose a little share. And that’s driven by a couple of things. First, no manufacturer has really -- no brand has really gone by the wayside. We did retire some brands and a couple of other folks retire something, when we get all the brands retire, it’s a less than ten, and there remains well over a thousand brands selling boats in this market.

And then as we sell brands get into trouble and these would go through bankruptcies, restructurings or reorganizations, then a lot of people who have made investments in those situations need to get volume moving and get their plans aloud.

Though we’ve seen a bunch of deals, if you will coming to the marketplace for the dealer networks as people try to get up and running and we expected that that would happen and therefore we did suffer not a significant but enough that we felt it, market share loss in 2010 and so in 2011 with our great dealer network one of our priorities now its begin to rebuild that share.

Richard Whiting - Broadview Advisors

So would it be fair to say then, as you look at your strategy for dealers incentives, customer incentives in 2011, on the one hand you can balance a leaner dealer inventory and less distressed merchandise which would tend to make you -- would lead to a decline in incentives but you have to balance that against sort of what’s coming out of the other manufacturers who are probably more volume oriented and probably incentivizing the market to keep volume up.

Dusty McCoy

That’s an absolute fair statement but I will say, we believe that our incentives in the boat business will drop slightly under 10% of gross sales. We’ve run in 2009, Richard, at about 25%, and was around 11 and we think 11-- 2011, will go little bit under 10.

Richard Whiting - Broadview Advisors

Excellent. Thank you, Dusty

Dusty McCoy

You’re welcome.

Operator

And our next question comes from the line of Joe Hovorka representing Raymond James. Please proceed.

Joe Hovorka - Raymond James

Question on the bottom in the boat market, I am struggling with this a little bit. If look at your -- you get the category for fiberglass and when we obviously that’s more weighted towards fiberglass, if I weigh that roughly what your percent of revenue is, it doesn’t look like there has been any improvement. In fact as you go to the year, it looks like things have weakened. I struggle how you translate that to a one to a bottom and two to a flatter and better industry in 2011.

Dusty McCoy

Well, our sales in at times don’t bear complete relationship with what’s going on in the industry, but clearly the industry was going down and we’ve been focused as we worked our way through this to get in the minimum stocking levels, correct, Joe. So, the real question begins to become for all of us in the industry as we cleaned out inventory, we made the dealer network healthy, we've got new product coming in the market. We got consumers who I believe have had pent up demands beginning to show up again, as all of this together going to cause some market to flatten. So my comments there were directed to the market and following our sales versus the market in 2010 probably wasn’t the right thing to do. So, that’s wholesale versus retail comparison.

Joe Hovorka - Raymond James

Thanks. But where -- I guess, I’m trying to figure out because obviously you are getting much closer or tied in 2011, right? Retail goes up, wholesale goes up and the ops that will probably occur also in ’11. That’s if you catch up in '10, and when I look at the, like I said, in weighting the numbers it looks like we ended the year down about 21.5%, we exited the year down just a shade under 30. And that’s where I struggle seeing how those numbers suggest the bottom for one.

Dusty McCoy

That would not be our view. We think we exited the year down about 14.

Joe Hovorka - Raymond James

But that’s …

Dusty McCoy

That’s the industry.

Joe Hovorka - Raymond James

Right, but what I am saying I am weighting it for instance the fiberglass obviously is much more important to you than aluminum is and fiberglass sterndrive is more important than fiberglass onboard. So the fact that aluminum is up 2% in the fourth quarter is good, I guess its more good for the industry than it is for Brunswick, if that makes sense, right? Because it’s a lower percent of your sales than it is for the industry.

Dusty McCoy

Yes. But then I guess, Joe, as a general statement, that’s true.

Joe Hovorka - Raymond James

Right. So, when I look at it -- when I take those industry segments and weight them from where Brunswick participates, as fiberglass turns out to be your biggest sport, it doesn’t look like there has been any improvement. In fact, it looks like it's actually weakened a bit.

Dusty McCoy

And I think that’s clearly the case in 2010.

Joe Hovorka - Raymond James

Right?

Dusty McCoy

But, now, we are -- so what you are questioning, Joe, is our look forward, and with our outlook forward is in any way rational?

Joe Hovorka - Raymond James

Well, yeah. I am just trying to understand how we go from, lets say, minus 25% or minus 30% to a flatter or slightly up, with the flip of a switch. We turn the calendar from '10 to '11 and the trend completely changes. I am not saying your view is wrong. I am just trying to saying how to get there.

Dusty McCoy

And the only thing I can go back to answer I gave in, to begin the question part of this call, Joe, in this, our view of being out in the market place and working with our dealer network, working the shows, understanding new boat dynamics and understanding the overhang of old inventory, and the consistent demand and we are pretty comfortable and we've hit the bottom.

Now, on a quarter-by-quarter basis, I want to be clear. We may not see it exactly, for instance, in the first quarter. Could see it in the second quarter, could see in the third quarter, I am bit unclear right now on timing. But I am also pretty comfortable that when the year ends, 2011 will then be flat.

Joe Hovorka - Raymond James

Okay. Very good. Thanks guys.

Dusty McCoy

You are welcome.

Operator

And our next question comes from the line of John Harloe representing Barrow Hanley. Please proceed.

John Harloe - Barrow Hanley

Well, first thing, I want to congratulate you for goodness whole to the point where we are now. That was a hell of a clear.

Dusty McCoy

Well, thank you and it was a fund ride.

John Harloe - Barrow Hanley

Well, let's not do it again.

Dusty McCoy

I'm not up to it, John.

John Harloe - Barrow Hanley

I'm not either. I saw a new story the other day of a private equity money in Hinckley, which I was just curious whether this is the beginning of the trend of some different kind of consolidation or the financial engineering of the business are seeing to date, or whether it's just sort of a one-off transaction?

Did I lose you?

Operator

Thank you for your patience, your conference will resume momentarily. Once again thank you for your patience and please continue to standby.

Dusty McCoy

We are back, Brunswick. John, I hope you're still on the line.

John Harloe - Barrow Hanley

Yeah. What did you do? Pull the lever on the trap door and let me through?

Dusty McCoy

Well, this is the second time I have done this. I was going to -- I hit the volume button and I hit the on and off button. So, I am not as technologically challenged as I appear to be, but I sure came across that way today. So, can you go back again?

Peter Hamilton

I am sorry we missed your question, John.

John Harloe - Barrow Hanley

Okay. My question was the private equity money has found itself into the Hinckley Boat Company, and I was curious whether something is beginning or whether it's just not one-off kind of deal or whether it's private equity money that's going around trying to recapitalize and take advantage of -- whenever in the industry.

Dusty McCoy

I think its real, Platinum ended up with a good portion of the Gemar assets. And as we go through several of the other smaller companies, and I won't go through their names. A lot of them now have private equity either complete or partial ownership. So a lot of private equity folks have thought that it's a good place to come.

John Harloe - Barrow Hanley

Do you think the changes have competitive decisions are made -- forward and may in those companies, but it might be so small it really doesn't effect the way the business, competition is applied in the future. I was thinking that private equity is little smarter owner -- little more disciplined. That once occurred in the past, might be wrong.

Dusty McCoy

Could be. I’ll tell you. A lot of owners of boats companies and they are great customers at Mercury, are really clever business people and perform exceptionally well in the market, John.

So, our view is that we are likely not to see any change. And more importantly, we will just have to stay very focus on our strategy and keep doing what we know how to do.

John Harloe - Barrow Hanley

Okay. Thanks.

Dusty McCoy

You are welcome.

Operator

And our next question comes from the line of Laura Starr, representing Nuveen Asset Management. Please proceed.

Laura Starr - Nuveen Asset Management

Yes, I got roughing up with other calls being drops. So, I don’t know if you have answered this question. Did you get the breakdown for the Europe, international versus domestic sales? And can you talk a little bit more about international opportunities -- improving global economy?

Dusty McCoy

So, for the year 2010, 41% of our sales came from outside the United States and that’s versus 42, Laura and in 2009. If we went by segment, we continued in 2010 with more than half of our Life Fitness segment sales to be outside the U.S. and then Mercury Marine and the 44%, 45% or 46%. The lowest would be Bowling and Billiards. There is, in Marine -- real growth opportunity outside the United States, but we need to be very careful as we said expectations.

We do very well in Canada and we do very well in Europe and we do very well in Australia and these are mature markets. So, there is share growth and some relative market growth in those markets. But on a percentage basis, the percentage of growth will not be dramatic.

And growing markets, for instance, Brazil, Argentina, Mexico, the Middle-East, Russia and other such markets. The percentage of growth should be dramatic as we continue to stay better focused there, but the overall size of the growth and its impact on our Marine business will accumulate overtime and will not be dramatic write-off.

Laura Starr - Nuveen Asset Management

Is that the same picture for Mercury or is the growth there faster?

Dusty McCoy

I think it’s the same picture from Mercury with an opportunity for a little faster growth in the business and perhaps the Boat business, yes.

Laura Starr - Nuveen Asset Management

That’s all I had.

Dusty McCoy

Okay, thanks Laura.

Laura Starr - Nuveen Asset Management

Okay.

Operator

With no further questions in the queue, I would now like to turn the call back over to Dusty McCoy for closing remarks. You may proceed.

Dusty McCoy

I thank everyone for participating, I know for many of you today was a very busy earnings call day. So we appreciate you interest in Brunswick. If you have further questions, please contact us. We’ll do our best to answer all your questions. I think we’re going to be attending many conferences this year, perhaps more than normal and I think for many of you who are our shareholders, we have got meeting schedule with you over the spring. So we look forward to the continuing dialog and watching this Marine market. Thank you very much.

Operator

Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Brunswick CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts