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Brunswick Corporation (NYSE:BC)

Q2 2011 Earnings Call

July 28, 2011, 11:00 am ET

Executives

Bruce Byots - VP, Corporate & IR

Dusty McCoy - Chairman & CEO

Peter Hamilton - SVP&CFO

Analysts

Ed Aaron - RBC Capital Markets

Jimmy Baker - B. Riley & Company

James Hardiman - Longbow Research

Tim Conder - Wells Fargo

Rommel Dionisio - Wedbush Securities

Joe Hovorka - Raymond James

Operator

Good morning, and welcome to Brunswick Corporation’s 2011 second 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 would 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 could 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 these documents are available on our website at brunswick.com.

At this point, I would like to turn the call over to Dusty.

Dusty McCoy

Thank you Bruce, good morning everyone. By now I am sure you had the opportunity to review our second quarter earnings release. Our strong performance in the second quarter reflected higher marine wholesale shipments compared to the prior year.

Our boat and engine segments continued to perform well across most of their product offerings. In addition, Life Fitness experienced strong revenue and earnings growth, and consistent with the previous five quarters, our consolidated results continue to demonstrate strong operating leverage.

Our results in the quarter reflect revenue growth of 8% and net earnings of $0.75 per share including a $0.02 per share benefit from special tax items. This compares to net earnings of $0.15 per share in the prior year which included $0.26 per share of restructuring charges and a $0.02 per share of expense from special tax items.

Operating earnings excluding restructuring exit impairment charges were $108 million in the quarter, an improvement of $28 million as compared to the prior year period. Our GAAP operating margin was just under 10%. This represents our highest second quarter consolidated operating margin since 2005.

In addition to higher sales levels, our earnings benefited from increased fixed cost absorption, improved operating efficiencies, lower restructuring charges and company-wide cost reductions.

Partially, offsetting these items were higher material costs and variable compensation expense. SG&A remained relatively consistent, benefiting in the quarter from lower bad debt expenses. SG&A decreased as a percentage of net sales.

Our cash and marketable securities totaled $677 million and net debt at quarter end was $110 million. Peter will comment in his remarks on the key drivers of our strong cash flow during the first half as well as provide you with a perspective on our 2011 targets, supporting our objective of generating substantial free cash flow for the remainder of the year.

Let’s review the preliminary second quarter US Marine industry data. The second quarter data is based on 89% of April’s, 78% of May’s and 66% of June’s marketing reporting. Fiberglass sterndrive and inboard unit demand fell by 8%. This compares to declines of 18% in the first quarter of 2011 and 29% in the second quarter of 2010. For the first six months of 2011 unit demand fell by 12%.

Outboard fiberglass boat retail unit demand increased 3% in the second quarter. This compares to declines of 3% in the first quarter of 2011 and 13% in the second quarter of 2010. If this preliminary number remains positive, it would be the first increase in this category since the fourth quarter of 2006. For the first six months of 2011 unit demand increased by 1%.

Aluminum product demand increased by 7% in the quarter. This compares to an increase of 6% in the first quarter of 2011 and a 5% increase in the second quarter of 2010. For the first six months of 2011, unit demand increased by 7%. After taking into account the different changes in unit volumes, preliminary total industry unit demand was up 1% in the second quarter. This compares to a 3% decline in the first quarter of 2011 and a 7% decline in the second quarter of 2010.

For the six months ended June 30 2011, total industry unit demand is down less than 1% over the same period last year. The total industry demand includes the categories noted above as well as certain length and categories included in the NMMA definition of the total fire boat industry. But it does exclude jet boats.

Thus far in 2011, the overall US marine market has been somewhat choppy. As demonstrated by the variability of month to month demand trends, as well as state-by-state relative strength and weakness. However, as you can see from the data, the year thus far appears to be consistent with our plan for a flat 2011 retail market. On the international front, our engine segment sales outside the US increased by 6% for the quarter compared to the second quarter of 2010.

Our boat sales outside the US increased by 14% during the same period. Looking at our growth in emerging marine markets outside the US, Latin America continues to show strength versus prior year across both the engine and boat segments. Growth is particularly strong in Brazil, but the Mexico is also starting to show signs of improving demand although from a very depressed level.

We expect the growth trend to continue in Brazil as we accelerate development of our distribution structure and address Brazil’s fast growing market. Market conditions across Asia also continue to be robust, particularly in China with healthy commercial and government segment strength as well as acceleration of recreational marine market development.

Growth in developed marine markets is varied, with sales volume continuing to improve in France, Germany and the Netherlands. On the opposite side, Nordic markets are proving slower to recover due to higher interest rates and overall low consumer confidence in the region. The UK and Italy are subdued, but stable in spite of overall poor macroeconomic fundamentals.

Markets in the southern countries as Spain, Greece and Portugal remain depressed. Canada, our second largest non-US marine market experienced the strongest growth rate of any of our developed marine particularly in boat segment. Markets in Australia and New Zealand have only recovered slightly from the catastrophic natural disasters in the first quarter.

In summary, similar to the US market, regional strengths and weaknesses have been demonstrated throughout the global marketplace. But the Brunswick marine business is driving growth via share gains and by market growth in those countries that are experiencing improving conditions.

During the first half, marine Brunswick’s retail boat sales growth was greater than that experienced in the overall market. This reflects our stated objective of improving our market share in the various categories in which we compete. Our recreational fiberglass brands achieved market share gains in most categories.

Our aluminum brands also gained share, although at lower percentages than on the fiberglass side. As a result of increasing retail demand with our dealers, we made the appropriate increases to our wholesale unit shipments levels. Higher shipments combined with slightly lower discounts, partially offset by the effect of a higher mix of smaller boat, led to a boat segment sales increase of 10% in the second quarter and 13% for the first half.

Let’s take a minute and take a look at our dealer pipeline, which we believe are at the levels for current market conditions. In addition, the amount each product in our pipeline remains a healthy levels. We’re maintaining our pipeline at minimum stocking levels appropriate for the market. Our pipeline is at 10% versus the second quarter of 2010 when the pipeline was too low, as we ramped up production in the first half of 2002. Our pipelines for fiberglass boats under 24 feet and aluminum product are up over last year second quarter. Our pipeline for product 24 feet and larger is down. In fact, our pipelines for boats over 24 feet in length is at record low levels.

Our goal in managing our pipeline is to work with our dealers to have retail sales for wholesale sales, all maintaining and among dealer inventory levels, which permit dealers to meet seasonal demands and gain market shares. In light of our market share gaining and the strength of the aluminum fish boat and pontoon segments the pipeline is in the correct position.

Our pipeline management plan will continue to reflect quarterly changes in the inventory levels resulting from seasonal demand factors and our dealers view of minimum stocking levels in light of on-going retail demand. Our third quarter pipeline inventory should continue to contract as we wind down the model in Europe [inaudible] during the selling season.

As a summary for the boat group, higher sale, increased fix cost absorption, fix cost reductions and lowering structuring charges led to the segment’s first quarterly operating profits, this is the second quarter 2007. A great reflection of the progress we making in our boat segment categories.

In our engine business global production in the quarter was higher than year ago levels. We experienced strong growth in sales in domestic outboard business, reflecting market share gains. We saw increases in parts and accessories operations, which led to the segments overall sales growth of 7%. Revenue growth in Mercury sterndrive engine business was flat compared to year ago levels.

Although sterndrive boat retail demand experienced overall declines in the quarter, Mercury was able to maintain consistent ales level as result of market share gains in its gas sterndrive product categories. Mercury saw a top line growth the combined effect of cost reductions, increased fixed cost absorption and improved operating efficiencies helped drive improvements in the second quarter operating earnings.

During the quarter the segment’s operating leverage was negatively affected by product mix, higher variable compensation cost as well as an increase in research and development spending. I will take a few minutes to give you a brief update on our engine production in Japan as well as to discuss Mercury global supply status pertaining to various parts and sources from the area that was affected by the earthquakes that occurred in March and June.

Mercury engine and parts production in North America and Asia have continued to operate without any disruptions. Mercury small outboard engines are produced in Japan through a joint venture with the Tohatsu Corporation in a facility that was not damaged by the earthquakes. This facility was shut down for only a week in April. Currently, all of this affected suppliers have implemented countermeasures and are now delivering production parts without interruptions.

In summary, we continue to believe Mercury is well positioned to continue to beat market demand for all of its outboard and sterndrive engines.

Based on somewhat limited public information, it is our belief that other outboard manufacturers in Japan are experiencing production recoveries. But certain product categories are being more affected than others. And we further anticipate industry supply to continue to return to normal as we proceed through the year.

Now let’s take a look at our two recreational segments. Life Fitness continues to perform exceptionally well. Sales were up 15% as compared to last year second quarter. During the first half revenues increased by greater than 20%, slightly less than $300 million, which represents the second highest first half in its history.

Segment operating earnings in the quarter grew by about $10 million, resulting in more than $40 million in earnings in the first half, a record for Life Fitness. In addition to the benefits from increased unit volumes, a more favorable product mix, increased fixed cost absorption and improved [body] experience contributed to the higher level of profits.

Sales in Bowling & Billiard were up slightly in the quarter. This increase represents the bowling segments first quarterly revenue growth since the second quarter of 2008. Same-store retail bowling revenues were up below single digits. Our bowling product sales were down slightly versus the previous year.

The segment’s operating earnings were about $4 million higher than last year’s levels due to improved operating efficiencies, the absence of a prior facility write down and lower bad debt expense.

I will now turn the call over to Peter, for a closer look at our financials, and then I’ll give you an update on our perspective for the remainder of 2011.

Peter Hamilton

Thanks Dusty. I do want to begin by clarifying a portion of the balance sheet schedule included as part of our press release this morning.

Total inventory in this schedule is properly stated at $527.3 million flat with year end 2010. However, the schedule overstates our finished goods balance and understates our work-in-process balance by approximately $110 million. We are in the process of correcting the schedule on wire and our 10K will obviously contain the correct information. I will move now to an overview of certain items included in our second quarter P&L and we will also comment on certain forward-looking data points.

Let me start with restructuring, exit and impairment charges, which actually reflected a net gain of approximately $300,000 in the quarter. Ongoing restructuring actions at our Marine operations and the charges pertaining to them of approximately $5 million were more than offset by gains associated with the sale of the few of our idle marine properties. Our current estimate for full year restructuring charges is between $6 million and $10 million.

Net interest expense, which includes interest expense, interest income and debt extinguishment losses was 21 million in the quarter, a decrease of $6 million versus the same period in 2010.

During the first quarter of 2011, we recorded a debt extinguishment loss of about 900,000 on debt retirements of 25 million. These debt retirements included a portion of the 2013, 2016 and 2027 notes. A debt extinguishment loss of 4.1 million was recorded in the second quarter of 2010. In addition to 44 million of debt retirements completed in the first half of 2011, we have thus for retired 23 million of debt in the third quarter resulting in a debt extinguishment loss of approximately $6 million.

Including the impact of debt retirement action we’ve taken to-date we expect net interest expense for the remainder of the year to be approximately 20 million per quarter excluding any losses on debt extinguishment. However, it is likely that additional debt extinguishment losses will be incurred over the remainder of year as the company continues this efforts to reduced debt levels.

During the quarter foreign currency had a modestly positive effect on 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 effect the currency exchange rate fluctuations have on year-over-year earnings comparisons. Changes in foreign currency also had a favorable effect on our sales in the quarter.

In the second quarter, we recorded tax provision 17.6 million, which primarily relates to earning from foreign operations. In the second quarter 2010, we recorded provision of 15.2 million. Now as a quick reminder due to companies three years of cumulative book losses in various tax in jurisdictions, GAAP requires of the realization related to deferred tax assets be considered. Consequently we continue to adjust our deferred tax valuation allowance, resulting in effectively no recorded federal tax benefit or provision associated with our losses or income from our US operations. Our 2011 tax expense will therefore continue to be comprised primarily of foreign and state income taxes.

Higher pretax income was the primary factor causing the increase in tax expense during the second quarter. Our effective tax rate for the first half including special tax items was approximately 24%. This rate is lower than our previous tax rate guidance due to the recognition of favorable tax adjustments.

We anticipate recorded favorable tax adjustments by year-end for matters that have not yet been concluded in certain foreign jurisdictions which will more than offset the impact of a modest increase in earnings from our foreign operations this year. So as a result and given our current earnings guidance range, we continue to expect our overall 2011 tax provision to be less than our 2010 tax provision.

Now let’s turn to a review of our tax – of our cash flow statement. Cash provided by operations in the first half was $81 million. Some of the key items in this section of the cash flow statement include adjustments to earnings for non-cash charges such as depreciation and amortization of 54 million. Our current estimate for D&A in 2011 is approximately 105 million.

Pension expense resulting from our defined benefit pension plans totaled approximately 16 million in the first half compared to 19 million in the prior year. In the first six months, the company made cash contributions to its defined benefit pension plans of approximately 21 million. The 5 million out-flow in the cash flow statement in 2011 reflects the amount by which cash contributions made during this period exceeded pension expense.

We expect our full year pension expense to be approximately 32 million which is a decrease of 7 million from 2010. This reflects the benefit of higher asset levels, plant contributions and lower interest cost associated with plant liabilities.

For the full year, the company plans on making cash contributions to its defined benefit pension plans of at least 60 million to 65 million, however, these contributions could increase as the company continues to assess its risk of funding alternatives.

Changes in our primary working capital accounts or a use of cash in the first half year and totaled approximately 109 million. And by category, accounts and notes receivable increased by 122 million, which is largely the result of seasonally strong second quarter sales. Accrued expenses decreased by 23 million and partially offsetting these uses of cash was an increase in accounts payable of 37 million. Inventories, as I mentioned was essentially flat.

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. And given the seasonality of sales in our marine businesses, we anticipate the liquidation of working capital in the second half and essentially reductions in receivables to have a positive impact on cash flow.

Capital expenditures for the first half were 32 million. Our 2011 plan continues to reflect approximately 80 million in capital expenditures. This increase versus 2010 reflects expenditures to develop new products in anticipation of improving market conditions and to fund our marine manufacturing plant consolidation activities. Partially offsetting our capital expenditures was 16 million in proceeds from the sale of property, plant and equipment in our marine segment.

During the first half of 2011 cash flow statement includes about 46 million of net investments made in short and long-term marketable securities. This is part of the program initiated in the fourth quarter 2010 to expand the company’s cash investment program to include marketable securities with the maturity beyond 90 days. The new program is designed to increase earnings on the portion of company’s cash reserves.

The investments have maturities of two years and less and include high grade corporate commercial paper and government securities. The purchases and sales of these marketable securities do not affect our calculation of free cash flow.

So the summary, during the first half we generated 73 million in free cash flow and after using approximately 50 million to retire debt our cash and marketable securities in the first half increased by about 20 million ending with a balance as Dusty said at $677 million.

Supplementing our cash and marketable securities balances is the net available borrowing capacity from our revolver of approximately 229 million which when combined with our cash and marketable securities provides us with total available liquidity of 906 million. When comparing year-over-year free cash flow amounts and cash balances to the first half, I would remind you of the 109 million federal tax refund that we received in the first quarter of 2010.

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

Peter Hamilton

Thanks Peter. I’ll conclude our call today by reviewing our 2011 outlook. As you can see from our first half performance, we continue to remain disciplined to generate substantial free cash flow, perform better than the market and demonstrate outstanding operating leverage.

As I said in my opening comments our plan for a flat 2011 marine market is unfolding generally as we discussed with you in January and April. It also continues to be our view that smaller boats as in 2010 will continue to outperform larger boats. Under our view the marine market demand has not changed, we are now planning for a higher single digit consolidated Brunswick revenue growth. This increase in our targeted top-line growth is based on our ongoing efforts as relative seamless experience thus far to improve market share in all of our business segments.

Our 2011 net income should also benefit from our previously announced marine plant consolidations, as well as some of the items Peter has already discussed with you; lower restructuring cost, along with reduced net interest, pension and depreciation expenses as well as the lower tax provision.

Our forecasted third quarter SG&A will continue to reflect comparable levels of operating expenses that were accrued in the previous two quarters, with the exception of a gain on sale of a distribution facility recorded in the first quarter and the bad debt reduction experienced in the second quarter. Also, I would like to remind you that the SG&A in the third quarter 2010 included a favorable adjustment to variable compensation expense.

After taking all these factors into consideration, we currently expect our 2011 earnings per share to be in the range of $0.60 per share to $0.75 per share. As a result of seasonal factors that affect our marine businesses as well as the potential for further debt retirement activity, we currently expect our second half results to be a net loss.

The performance thus far in 2011 combined with the results we delivered in 2010 reflects all the hard work of our employees, our leading dealer network and our suppliers. Our strong brands, outstanding product quality and a premier distribution network have enabled us to grow our businesses in part – for the most part as a matter of relatively flat marine market and a very challenging economy.

We remain confident that the recovery of global marine markets will be consistent with improving economic conditions overtime. We are focused on growth without economic recovery and we are well positioned for continued growth. We will maintain our focus on market share gains, but we have significant other organic growth opportunities and have begun to prioritize resource and fund these opportunities.

In addition to market share gains in these organic growth opportunities, we continue to monitor our fundamental marine industry dynamic coming into play which provides additional opportunity.

The average age of boats has increased by about five years since 1997. Our internal analysis indicate an average age of about 21 years in 2010. We believe the increase is primarily due to a higher mix of motor boats reflecting the ageing of boats sold during the 70s and 80s when new boats have also averaged 400,000 boats a year.

It is also likely that some of the increase can be attributed to owners holding on to their boats longer due to recent economic downturn. Our analysis also indicated that boats built during the peak retail years of the late 80s which are now becoming 25 years old are reaching an age when obsolescence or scrappage should start to increase which could have a favorable impact on the boat sales.

And finally, sustainable growth can be derived from our recreational businesses. In particular, Life Fitness continues to strength its position in the commercial fitness equipment marketplace. We believe it will benefit from equipment replacement and facility expansion, opportunities in new health club market venues as well as participation trends and demographics that should benefit both of our recreational businesses.

And as we continue to focus on organic revenue growth including specific regional opportunities throughout the global marketplace, we will concurrently and opportunistically target debt reduction and pursue the full funding and eventual de-risking of our frozen defined benefit pension plans.

Thanks for listening and now we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Ed Aaron - RBC Capital Markets

I guess I wanted to talk with the full year guidance change and its sound like a portion of it’s operating and a portion of it’s non-operating. Can you maybe just help breakdown between those two things by giving us a sense of a change in your restructuring expense outlook and tax rate outlook and how much those two things combined account for the increase in full year EPS guidance.

Peter Hamilton

Ed, its Peter. A we look at our guidance increase, we see about $0.05 a share of it associated with restructuring reduction which is not a reduction as I said in expense, but we have had offsets from gains and about $0.03 a share generally from a reduced view of taxes. So maybe $0.08 of the $0.25 spread in the top end of the range would be associated with what we would call non-operating points.

Ed Aaron - RBC Capital Markets

The tax comparison versus our kind of model for this quarter was a much bigger benefit than that. So that I guess that would have seen to imply maybe even a higher tax rate in the back half than what we and perhaps others have been modeling for, is that the right way to read it?

Peter Hamilton

Well the reason we have said are 24% year-to-date and we had previously said we would be operating 32%. So we are down from 32% and the 24% rate is going to be more representative.

Ed Aaron - RBC Capital Markets

Okay. And then Dusty just to get a little bit more perspective on the marketing, I wanted to ask you specifically about kind of the trade up segment, because that's obviously where there's been the most pressure you know the decline is moderated in Q2 which is encouraging, but it doesn't seem to be a whole lot of signs of life there and when I look at kind of that part of the market it seems like a lot of those customers are kind of in a similar financial position with respect to their boats and to the extent that they are still under water. And we just kind of step to me that we could at some point see a real step change in that market, in that segment’s growth rate. But there's not a whole lot of visibility in our end as to when that might happen and I just love to get a little bit of perspective from you on that segment of the market in particular.

Dusty McCoy

I think you accurately described what our feeling is. There's a real opportunity for a step change and we don't know when it’s going to happen, Ed. My own view is that we need a couple of things to come into play. Let's say three things, one of which I believe has occurred, two which are still to come.

The one which has occurred is the general decline in availability of (inaudible) boats. Now, I think the next two things that need to happen for us is first that we need the value of homes in the housing market to improve because some portion of these buyers because you believe that, the statistics that 30% of homeowners are underwater on their mortgage. Some percentage of those, that maybe a lot percentage would also be applicable to people who own boats. Until they can work their way through that, they’re not going to be willing to take any risk on our trade of a boat or go upside down in any way on a trade.

And then the next name that has to happen for us is unemployment does need to improve because again, if we think real unemployment, not stated unemployment is nearing 20%. Some portion of those folks are also boat owners and if we extrapolate the same percentage in the boat ownership, those folks are also not in a position to take risk on a trade. And until the economy improves, dealers, and I applaud them for this for not willing to take any risk on trades. So all this in my judgment is on a rise and beginning to get better as the economy improves, but we’re not seeing it yet.

Ed Aaron - RBC Capital Markets

Fair enough. The only thing I’d kind of add is that it’s a confusing industry to cover sometimes because the changes, you know, the unit trends and the dollar trends can be a lot different. So to that extent, it would be helpful to the extent if you can to may be give us some disclosure where possible about the underlying drivers of your business in terms of units versus dollars and small boats versus big boats, I don’t know. How much of that you can give, but any help there would be great.

Dusty McCoy

That surely is something that we can work on. We have a good view of it.

Operator

Your next question comes from the line of Jimmy Baker from B. Riley and Company. Please proceed.

Jimmy Baker - B. Riley & Company

You know first I was hoping we could actually touch on the unsung hero of your business segment, the Fitness group. Another quarter of strong growth there and impressive operating leverage. Can you maybe drill down a little on what channels and geographies are driving the growth and may be comment on its sustainability and what you see as a potential kind of multi-year growth rate for that business?

Dusty McCoy

Let me answer the last part first. We think multi-year growth can be double digits. What’s happening right now is first as we look at the commercial market where we are very strong and we go to the clubs, there is a growing trend for club separating into highend and what I would call cheaper, quicker lower end, so you may not have the showers and a bunch of attendants there, we can get in and out of club and exercise well. And those club owners look for great equipment that has a long life and performs well and we are certainly serving that market well and capturing a big chunk of it.

We are seeing what we call the vertical segment which includes hotels et cetera continue to do well and in fact improving and we are capturing a nice part of that market. And then global sales on this business are 53% of their total sales and global sales are doing very well. So, this is a business, that with a great product, an absolutely fabulous sales force and distribution mechanism that is attacking the market all over the world, wherever there is some opportunities and it shouldn’t feel like they are missing many opportunities right now. They are doing a great job. And we think demographic, cultural and other issues that we look at in the future business bode very well for this business.

Jimmy Baker - B. Riley & Company

And Dusty, could you maybe talk about your strategy in the boat group model year 2012, you know, obviously the market has been away nixing away from you for sometime now towards the smaller outboard products. I mean, do you feel like if you have the right innovative products, you could draw some demand back to sterndrives or do you need to just kind of go with the market, bolster your entry level line up and attack it that way.

Dusty McCoy

We are not satisfied at all which is sitting and going with the market. And in fact, we are working on some innovative product and you will begin to see that for the Fort Lauderdale Miami Boat Show, Jimmy.

Jimmy Baker - B. Riley & Company

Okay. I mean it’s great to see the boat group positive at the operating line, you know, kind of across industry volumes. But assuming a flat mix, what type of industry-wide unit sales do you think we would need to be at for the boat group to breakeven on an annual basis, maybe 155,000 units, is that about where you are at.

Dusty McCoy

We can breakeven lower than that. We’ve been relatively open about this and we will go ahead and state it. Fundamentally, our sterndrive and inboard businesses and our outboard business are profitable. We have a couple of brands that are going through significant difficulty caused by other global conditions, the state of our product in the market place or perhaps even how people are looking at certain segments.

We are working very hard to fix those businesses and if we don’t believe we can get them fixed then we need to take some other action. But we don’t need the market once we take care of those issues, to be at a 155 to 160 to be profitable on our boat business, we can be profitable , once we fix those issues and want to be clear at lower levels.

Jimmy Baker - B. Riley & Company

That’s helpful. And you know as the marine industry stabilizes and you continue to see an improvement in your business, do we start to see some improvement in the efficiency of the Cap structure by reviewing some of the cash on the balance sheet for debt pay down?

Dusty McCoy

Absolutely, and I think that’s what we signaled here in this call as you look at second half. We will be opportunistically and this got to be the right deal for us looking at transactions that are come in the door for us, take care of debt and what we are signaling is if we do, do some of that, we will have debt extinguishment cost that will impact our earnings in the second half and we factored the potential for that into our guidance.

Jimmy Baker - B. Riley & Company

Okay, great. And just lastly could you, may be give the weeks of dealer inventory at the end of the quarter?

Dusty McCoy

31.5.

Operator

Your next question comes from the line of James Hardiman from Longbow Research. Please proceed.

James Hardiman - Longbow Research

Hi good morning and thanks for taking my call and congratulations on another really strong quarter. A couple of questions, I was hoping you could and it sounds like you are not going to quantify sort of the market share but I was hoping just may be qualitatively you can have us wrap our brains around the magnitude of the market share gain that you are seeing in the boat business especially in light of [re-max] reporting same-store sales this morning up 33% and the comment that new boat sales are up even more than that. Now, obviously there are lot of reason why they might be outperforming the rest of your dealer base geography begin one big reason but they are, I think 20% of business or some where in that neighborhood. So can you sort of walk us through maybe the magnitude of the type of market share gains that you are seeing?

Dusty McCoy

I lay awake last night, I wondered how the heck I was going to answer this question.

James Hardiman - Longbow Research

So did I.

Dusty McCoy

First, a new one to how wide our dealer network which is getting these market share gains for us and sort of your line and bring Max who has done an absolutely outstanding job with the brands of ours so they carry all across United States. But all of our dealers are happy to get these share gains.

James Hardiman - Longbow Research

I think it has…

Dusty McCoy

I’ll say this depending upon how one measures the market, the segment we’re competing are in NMMA category. In the second quarter we captured more than a [four] point across the entire of market share and as we look at the year-to-date something less than 1% and we were going to just keep driving for the rest of year. Is that helpful to you?

James Hardiman - Longbow Research

It is, I believe I guess the other number you then need is through what the generally market share is and if you looking at mid-teens sort of market share you picked up a point that would be about 6% to 7% of our performance versus the industry, is that generally how I should think about things, I mean I guess depending on..

Dusty McCoy

Your math is pretty good.

James Hardiman - Longbow Research

Okay, accurate. And then sort of along those same lines although I think you did a great job of answering that question. You talked in the first quarter about how you shipped a little bit more into the channel versus what shipped out from a seasonal perspective in that but second quarter would be the reverse of that, was that still the case in the second quarter, boat sales looked like they were up pretty nicely but can you just sort of speak to the ship in versus ship out in the second quarter.

Dusty McCoy

Yeah we shipped a little more than we shipped out and then again as I tried to call out James it was all small boats. Fiberglass boats under 24 feet and aluminum boats and for the larger stuff they go the other way and in fact our pipelines are at record low levels and there are three things going on here that I don't want to make sure how like. Buried down in the numbers and this is a statistic we have given that I am going to cut at one more level. You know, I have said across the industry we believe that dealer count had been taken down through this downturn by about 30% but then our store front count was flat.

But remember we cut about 30% of our brand out during this time and therefore our store front count has actually gone up in our continuing brands. So as we've added dealers and these continuing brands we needed to stock those dealers up. So there are at minimum stocking levels and what they believe is consistent with the marketplace and there has been some portion of this increase in our pipeline and the increase is that is increase dealers in what we’re calling internally are continuing brands. That’s number one.

And number two, the growth in the market has been in small boats and we were fairly open in 2010 that we lost share in 2010 for two reasons. First, we believe there were folks that we have done in that and just counting their rate of boats and we’re not going to chase those discounts. Secondly, we were fairly open that we didn’t ramp up at the dealer network with alike and the market which has given us this opportunity early in ‘10 and therefore our dealers were a bit hurt in the smaller boat sales where the customer comes in ready to do the transactions and there needs to be a boat there.

So as we worked through the minimum dealer, the minimum stocking levels with our dealers has become apparent to us as we’re gaining share, the market has flattened we stop the decline in this market it had been prior to this year. We needed in our dealer account, we needed more boats, and with our dealers and initiatives this small boats. So that’s what we’ve been doing. It’s responding to dealer goals. And overtime, obviously this has always got to work out, wholesales got to equal retail but they’re going to answers around season and we see the market or our position in the market change.

James Hardiman - Longbow Research

Very helpful and then sort of this last question, our market share and I’ll get back in the queue. Can you just speak, it sounds like you’ve done a phenomenal job so far this year, can you just speak to may be the sustainability of those market share gains, both this year and beyond sort of what initiatives do you have here in the Q that will allow you to gain longer term market share and how much market share is there to get back to the historical levels? Is that a big opportunity in, in of itself? Thanks.

Dusty McCoy

First, I do want the job that we are lining on. We are talking about the boat market share but remember boat sales in 2010 were hardly 25% of our sales. Our engine sales were 50% of our sales and over on the engine side we have seen really nice steady improvement in market share in our outboard business boats highly competitive then in our sterndrive business it has been even a bit more impressive even though the sterndrive market is down more than we’ve been able to say its flat in our sterndrive gasoline business. And that is driven by the fact that there is a large competitor there and it is certain gasoline (inaudible) with 4.3 liters et cetera.

But our engine business across the globe and particularly in the United States has been steadily gaining share now for several quarter and that is real important piece of our revenue increases and our market share gains. And it is still important to understand the Life Fitness is a little harder to measure and its harder to find statistics there, but we clearly believe as we see new clouds opening, our association with the vertical market and the number of units there and that business is also taking share.

As we step back, we tried to communicate that we are going to do wonderfully as the market improves. But now we are not going to sit around and wait for the market to improve and we got to start generating growth. The first thing we could do is get focused on market share because we have leading brands and leading products and leading distribution network. We just have to get going. We will continue there but we also believe and I mentioned in my concluding comments, there are several many numerous or any word you just want to describe it. Organic growth opportunities is available to this company and we are hard it work now on positioning ourselves to go capture them.

I don’t think we can get from market share alone, get our sales back to previous session levels, that there would be some impossible market share. So, we are just continuing to dig away in a market that we have but as importantly and overtime more importantly, we are going to be looking at other organic growth opportunities.

Operator

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

Tim Conder - Wells Fargo

Dusty, seeing on the market share gain opportunity, first of all, you are alluding to gain share versus a competitor Volvo that’s walked away from a couple pieces of the gas market. When does that anniversary largely, I guess that’s the first part of the question and then in outboard, if you could kind of give us a little more color, granularity, how much do you think gaining share was maybe due to a little bit of shortage of availability from competitors with the disruptions in Japan versus you said before and your alluding to here, also I believe that you really haven’t taken on some of your outboard competitors and especially some other geographic market. So just some color on those market share gains?

Dusty McCoy

Clearly some of the share gains we got was inability of some of the Japanese suppliers to getting them into the market. Tim, I can’t with accurate belief tell you what percentage of our market share gain has been caused by that. But even before that we were seeing a share gain globally.

Tim Conder - Wells Fargo

Okay.

Dusty McCoy

But I do want to be clear. Some portion of that, that we have got here towards the end of first quarter and certainly in the second quarter, has been assisted. We have had a little wind on our back because of the Japanese problem.

As we look globally the one thing that as we put people on the ground all around the globe and establish real working offices with our employees and begin to work more closely with distribution network, as there has been kind of awakening on our part of additional commercial and government opportunities, especially in the outboard business and we have been hard at work capturing those. And we are continuing to understand those markets on a global basis and are getting more focus on them and for those providers, an interesting opportunity.

We also, I think, are doing a real good job of getting a little more than our first year of fast emerging markets, Brazil as an example. We have been in those markets for a long time. We have been focused on recreation and as recreation of some of these markets have improved our longstanding nature and many of these markets has given us a real opportunity to do a little better. So we see lots of opportunity, we just got to stay after it and continue to put the right people in the right place and work with the right distribution. I didn’t quite…

Tim Conder - Wells Fargo

And then, I am sorry.

Dusty McCoy

I didn’t quite understand the question on this sterndrives gravity and can you help me with that.

Tim Conder - Wells Fargo

Yes, so your comments there were all out-board correct?

Dusty McCoy

That’s correct.

Tim Conder - Wells Fargo

Okay. And then on the sterndrives, the question is you know clearly you are gaining share again from global because and walking away some part of the market. When is that, when does that sort of fully anniversary I mean you were able to pick up share because they walked away is that or you pretty well done with gaining share due to that here in the first half of the year or should that continue to the balance of your investment?

Dusty McCoy

I think that there will be at least some more to gain because while we have credits and they can continue to build some of the non-catalyzed product, I don’t think that they’ll be doing it in three way, I think its four, three and a couple of others. So they still got to build for and use up all the credits so we’ve not gotten on the share, we’ll be able to get yes.

Tim Conder - Wells Fargo

Okay. Okay. And then before I think you throw it out in response to another earlier question on the breakeven level post fixing you said some brands potentially or not being able to and changing them. Can you just again remind us of that, is that around 130, 135,000 units for the industry?

Dusty McCoy

Yeah, that has been on the company, on a Brunswick basis, but yes, 130, 132, 135 pick a number, this company can be breakeven.

Tim Conder - Wells Fargo

Okay. Okay. And then, and I apologize if I missed this in other call, right before you ran over tad bit. The cadence of your retail sales across the quarter April through and then maybe through July here, can you just sort of give us an update there as to how that trended especially in the developed markets?

Dusty McCoy

No, no. With any number or any view that I would be comfortable talking about July, but April was a nice month, May was not a nice month and June was a nice month. And I alluded to that in my comments that even within quarters it’s been fairly lumpy. But the second quarter overall, two out of three were good.

Tim Conder - Wells Fargo

Okay. Okay. And then from a more of a let’s call it a congressional standpoint a lot of fluid pieces in watching in these days, but there has been some proposals to eliminate the second home mortgage interest deduction and rates of both, yet not are these are literally homes. Can you talk about anything current where that stand from your standpoint and the potential impact more so for the industry or Brunswick in particular, how are you looking at that planning for that, should that come about?

Dusty McCoy

First, I have no good information and about which I can update you on the present status. It will obviously have an impact, but our view is that it will not materially impact us.

Tim Conder - Wells Fargo

Okay. Okay. And just a little bit more color as to why are you taking that view exactly?

Dusty McCoy

Just looking at the profile of our buyers.

Tim Conder - Wells Fargo

Okay. Okay. Okay. And then, and general dealers continue to remain cautious and talks about some areas are a little too much inventory in the channel of the larger boat or that is you’re a little bit under; how is your receptivity over the quarter here, has it gotten a little bit better the willingness to take inventory or not and then how do you feel about that?

Dusty McCoy

I want to make sure that on the first part of our statement before we go to the questions, I have kind of the view that we have too much inventory anywhere and that leads me then to answer your question. Generally, if you mop over comments from our dealer network is that they need a few more boats.

Tim Conder - Wells Fargo

Okay.

Dusty McCoy

And we just work with them on a day-to-day basis around that and one of the great things our manufacturing footprint now it gives us the opportunity to do as we can, I don’t want say turn on down, but we can turn and have a football field where before it took us that miles and like production judgment and we’re getting pretty good at that.

Operator

Your next question comes from the line of Rommel Dionisio from Wedbush Securities. Please proceed.

Rommel Dionisio - Wedbush Securities

Yeah, thank you. Dusty I wonder if you can just comment briefly on used boat pricing, some of the trends you’re seeing both at the lower on the aluminum, the boat and may be compare that with the higher and fiberglass, larger fiberglass boats?

Dusty McCoy

Stabilized, not to free downturn level, but certainly not continuing to fall and generally since the beginning of the downturn where they dipped dramatically have probably risen and are now stabilized.

Rommel Dionisio - Wedbush Securities

Okay. And one last question, with regards to dealer health, I imagine that the Bayliner, and the Cypress Cay you know those dealer brands are doing pretty well – dealers of those brands are doing pretty well, but what about your Hatteras, your Meridian. I mean, obviously this has been several years now for the continued difficulty on the higher and larger fiberglass boats and are you seeing the attrition or might you expect to see some attrition among dealers of those higher end-brands?

Dusty McCoy

If we do with Meridian first; Meridian is generally and fundamentally sold through the Sea Ray distribution network and therefore there is absolutely no issue with the dealer network for Meridian. Our largest dealer for the Hatteras brand is MarineMax and obviously they are doing quite well. We have had some smaller dealers, we work to position them so that they no longer need to stock the big expenses of Hatteras product, but they continue to act as dealers for us in all of the good markets. So we are comfortable with their position.

Operator

Your next question comes from the line of Joe Hovorka from Raymond James. Please proceed.

Joe Hovorka - Raymond James

Thanks guys. Just a couple of quick questions, I think you said that weeks inventory was 31.5, but earlier you said it was at 10%?

Dusty McCoy

Yes.

Joe Hovorka - Raymond James

And did -- a year ago and I think it was 27, did that change?

Dusty McCoy

Did the 27 change?

Joe Hovorka - Raymond James

Yeah. I know we have done some adjustments for brands going at now.

Dusty McCoy

I am looking out some real quick, Joe.

Joe Hovorka - Raymond James

Its 31.5 from 27 about….

Dusty McCoy

31.1 versus 27.1, I think the exact number.

Joe Hovorka - Raymond James

Got it, okay. Just wanted to confirm nothing changed, yeah could you state what your retail was up in the quarter?

Dusty McCoy

Our retail was up in the quarter?

Peter Hamilton

Yeah. I know you kind of gave the industry numbers broken out by each of the segments. But how much was your retail up in 2Q?

Peter Hamilton

It was up 7%.

Joe Hovorka - Raymond James

Okay. And was there a geographical…

Dusty McCoy

And then I want to answer that that’s in units.

Joe Hovorka - Raymond James

That’s a units okay.

Dusty McCoy

Not globally, yeah. As Peter just reminded me, it’s a good point.

Joe Hovorka - Raymond James

That’s global?

Dusty McCoy

Yes.

Peter Hamilton

Okay. Was very any variance of geographically in the states; one region stronger than the other, all regions out there any reason…..

Dusty McCoy

I got you. It’s almost night and day on a regional basis in United States. If we look across outboards, we see states like Minnesota, Michigan, Ohio, we all know eventually Arkansas, Louisiana all but we can also look at a whole various states that are down. When we look at the sterndrive inboard market you know the West Coast is really, really down. It is but – it’s an absolutely difficult market in every place out there. We have some great dealers who have done a very good of improving market share, but these are really tough markets. On and we see places like Florida and Michigan where things are getting better and when we are positioned with our data network to take advantage of that.

Joe Hovorka - Raymond James

Okay. That’s all I have, thanks guys.

Dusty McCoy

Thank you Joe.

Operator

At this time, I would like to turn the call back to Dusty McCoy for closing or concluding remarks.

Dusty McCoy

Thanks everyone for being on the call. As always, we appreciate the great questions. I want to make sure that I have got a – I have wobbled around a couple of questions I want to make sure I am very precise in my answer. At today’s market and we said we’re thinking marine market is flat, it’s going to be flat and that’s 130,000 some probably on the hard side of 130,000.

And we’re obviously much better than breakeven in all the guidance we’ve been giving. And after we fix the brands that we’re working hard on and are having difficulty right now. The boat segment in our view will be breakeven at the markets that we’re at today. I just want to make sure I clarified all that because I wandered around it a couple of times.

Thank you for attending our call. Thanks for the great questions and we’re going to go back to work and if you have more detailed questions obviously Bruce is always available to everyone. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation you may now disconnect. Have a great day.

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Source: Brunswick Corporation CEO Discusses Q2 2011 Results -- Earnings Call Transcript
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