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Brunswick Corporation (NYSE:BC)

Q3 2011 Earnings Conference Call

October 27, 2011 11:00 ET

Executives

Bruce Byots – Vice President, Corporate and Investor Relations

Dusty McCoy – Chairman and Chief Executive Officer

Peter Hamilton – Chief Financial Officer

Analysts

Ed Aaron – RBC Capital Markets

Jimmy Baker – B. Riley & Company

Tim Conder – Wells Fargo Securities

Laura Starr – Nuveen Asset Management

Carla Casella – JPMorgan

Operator

Operator

Good morning, and welcome to the Brunswick Corporation’s 2011 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode, until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time.

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

Bruce Byots – Vice President, Corporate and Investor Relations

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 in today’s press release. All of these documents are available on our website at brunswick.com.

And now I’d like to turn the call over to Dusty McCoy.

Dusty McCoy – Chairman and Chief Executive Officer

Thanks Bruce and good morning everyone. By now I hope you’ve had the opportunity to review our third quarter earnings release. I know a lot of folks have been releasing today.

Our quarterly results continued to reflect solid performance across all of our business segments. Third quarter nine-month operating earnings achieved our highest level since 2006. This outstanding performance by our four business segments was accomplished despite some very difficult economic conditions.

Consistent with the previous six quarters, our consolidated results continued to demonstrate strong operating leverage. As we highlighted on our second quarter call, our SG&A expenses in the third quarter of 2010 included a favorable adjustment to variable compensation expense. If we exclude variable compensation expense from our 2011 and 2010 results, our operating leverage for the quarter would be in our 2011 targeted annual range of 30% to 40%.

Our results in the quarter reflected year-over-year revenue of 8% and net earnings of $0.05 per share, including $0.14 of restructuring charges, $0.13 from losses on debt retirement, and a $0.01 expense from special tax items. Excluding these three items, our diluted earnings per share would have been $0.33. This compares to net loss of $0.08 per share in the prior year, which included $0.14 of restructuring charges and a $0.01 charge from losses on debt retirements. Again, excluding these items 2010 third quarter diluted earnings per share would have been $0.07.

Operating earnings excluding restructuring, exit, and impairment charges, were $49 million in the quarter, an improvement of $11 million as compared to the prior year period. If we exclude variable compensation expense from our 2011 and 2010 results, our operating earnings increased by about $24 million in the quarter. In addition to higher sales levels, our earnings benefited from companywide cost reductions, improved operating efficiencies and increased fixed cost absorption. Partially offsetting these items was the previously mentioned higher variable compensation expense.

Our cash and marketable securities totaled $547 million and our total debt outstanding at quarter end was $703 million. This is our lowest debt level since the first quarter of 2004. And you can see that lay down in the supplemental chart, I think we labeled it chart number one to our earnings release.

Peter will comment in his remarks on the key drivers of our strong cash flow in the first nine months as well as provide you with a perspective on our 2011 targets, supporting our objective of generating free cash flow for the year.

Now, let’s take a look at our operating segments starting with the marine engine segment. From a geographic perspective, Mercury’s non-U.S. revenues increased by 12% in the quarter with all major markets experiencing growth and with relative strength demonstrated in Europe and Asia-Pacific.

Our Europe’s growth in the quarter was healthy. Results do continue to vary widely across the region. Revenues in Russia were extremely strong and revenues in core markets such as Germany, France, Italy, and Holland also increased at a healthy rate. However, the markets in southern and northern Europe continued to be quite weak. Asian demand was very robust in the quarter put along by strong macroeconomic growth led by China. Asia’s growth is more than offsetting subdued market conditions in Australia and New Zealand.

Overall, Mercury continues to experience growth outside the U.S. due to sales into commercial and government segments, low re-power activity, and healthy demand for service bars and accessories in all market segments. U.S. revenues increased by 8%. In the aggregate, the segment experienced top line growth of 9% for the quarter and 10% for the nine months.

From a product category perspective, sales on our outboard engine business continued to experience growth reflecting in improving aluminum and fiber glass outboard boat marketplace as well as from market share gains. We believe the overall impact of Japan’s catastrophic events earlier this year and the resulting supply issues were for the most part not a material factor in the overall competitive landscape during the quarter.

Available engine production at Mercury in the quarter was higher than year ago levels. Mercury’s parts and accessories businesses continued to report solid increases in revenues. Sales declined in the sterndrive engine business compared to year ago levels. However, Mercury is able to offset some of the declines experienced in the overall sterndrive boat market with market share gains. Mercury’s top line growth with combined effect of cost reductions in improved operating efficiencies all had a positive impact on third quarter operating earnings. However, during the quarter, these positive earnings and the factors were more than offset by an unfavorable shift in product mix, higher material and variable compensation costs, and restructuring charges, as well as increase in R&D spending.

In our boat segment, revenues were equal to the amount reported in the prior year’s quarter. This comparison was affected by the divestitures of two fiberglass brands. Sealine completed on August 31 of this year and Triton completed on July 29, 2010. if we exclude the sales of both brand in the segment’s results in 2010 and 2011, revenues were up 3% in the third quarter and 14% for the nine months.

We have attached the summary of the U.S. powerboat industry demand statistics provided by statistical surveys incorporated. As you can see from the data, the U.S. retail market – marine market for 2011 is on totally and generally as we’d expected with the aluminum fiberglass outboard boat market experiencing solid growth while the fiberglass sterndrive boat markets continue to decline, albeit in a more moderate phase versus the prior year. I mentioned this document is attached to our press release I think the LIBOR is chart two.

On the international front also adjusting for divestitures our boat segment sales outside the U.S. decreased by about 11% for the quarter compared to the third quarter of 2010. Canada, now our largest non-U.S. built market experienced strong growth. Asia-Pacific also experienced growth in the quarter led by China which offset liking markets in Australia and New Zealand due to weakening conditions in those markets.

European fiberglass boat sales softened due to lower consumer confidence levels resulting for macroeconomic concerns across the region. In the first nine months of 2011, Brunswick’s retail boat sales growth was greater than that experience by the overall market. This performance reflects our stated objective of improving our market share in the best categories in which we compete.

Our recreational fiberglass plans achieved market share gains in most categories, our aluminum brands also gained share although, it was at lower percentages than on the fiberglass side. In summary as a result of increasing retail amended our dealers we made the appropriate increases to our wholesale unit shipment levels. The result in higher U.S. shipments come down to a slightly lower discounts partially offset by low international shipments in the effect of a higher mix of smaller boat sales let the boat segments adjusted in sales growth of 3% in the third quarter.

We continue to make our top-line, the stocking levels are appropriate for the market. our top-line is up 8% versus the third quarter of 2010. The quarter ended with a 26 weeks of product non-hand on a trailing 12 month retail basis, which is comparable to the weeks on hand at the end of the third quarter and 2010. Our top-lines for fiberglass both under 24 feet and aluminum product are up over last year’s third quarter while our pipelines for fiberglass product 24 feet in larger is down and remains a record low levels.

Increased fixed cost abruption and cost reduction is led to lower operating losses for the both segment in the quarter. Now let’s look at our two recreation segments. Life fitness completed another outstanding quarter. Sales were up 14% as compared to last year’s third quarter. During the first nine months, revenues increased by 20%, U.S. commercial revenues continue to be strong during the quarter with sales growth experienced in all major distribution channels.

International sales were down modestly in the quarter resulting from lower orders from Europe. Segment operating earnings in the quarter grew by about $6 million resulting in about $65 million in earnings in the first three quarters, a record for life fitness. In addition to the benefits from increased unit volumes, a more favorable product mix contributed the higher level of profits.

Sales in bowling and billiards were up 7% in the quarter. This increase represents the bowling segment second consecutive quarter with growth and revenue. Our bowling products business experienced strong domestic growth with same store retail bowling – while same store retail bowling revenues were flat versus the prior year. The segment’s operating remarks were about – earnings were about $2 million higher than last year’s levels due to higher sales and improved operating efficiencies.

Now, 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 perspective on the remainder of 2011.

Peter Hamilton – Senior Vice President and Chief Financial Officer

Thanks Dusty. I’d like to begin with an overview of certain items included in our third quarter P&L and also comment on certain forward looking data points. Let me start with restructuring exit impairment charges, which were $13.2 million or $0.14 in the quarter. The majority of the charges retained the previously announced sale of our C-line brand as well as ongoing actions in the marine operations. Our current estimate for full year restructuring charges is between $20 million and $25 million.

Net interest expense which includes interest expense, interest income and debt extinguishment losses was $30 million in the quarter, an increase of $7 million versus the same period in 2010, primarily due to higher debt extinguishment losses.

During the third quarter, we reduced debt by $84 million and have completed a $127 million of debt retirements in the first nine months of 2011. In addition, we thus far returned approximately $8 million of debt in the fourth quarter resulting in additional debt extinguishment losses of approximately $1.5 million.

Now including the impact of debt retirement actions we have taken to-date, we anticipate net interest expense for the fourth quarter to be approximately $70 million excluding any losses on debt extinguishment. However it is likely that additional extinguishment losses will be incurred during the remainder of the year and into 2012 as the company continues its efforts to reduce debt levels.

During the quarter foreign currency had a negligible 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 fluctuation tab on year-over-year earnings comparisons. Changes in foreign currency did have a favorable effect on our sales in the quarter.

Our effective tax rate for the first nine months of 2011 was approximately 23%. This rate is lower than our previous tax rate guidance due to the benefits of certain incremental reductions in the tax provision. As a result of the decrease in the effective tax rate, our tax provision in the third quarter was zero. In the third quarter of 2010 we recorded provision of $5.3 million.

As a quick reminder due to the companies three years of cumulative book loses in various tax and jurisdiction that requires that the realization of the related deferred tax assets be considered uncertain. Consequently we continue to adjust our differed tax valuation allowance resulting in effectively no recorded federal tax benefit or provision associated with our losses of income from US operations.

Our 2011 tax expense will therefore continue to be comprised primarily of foreign and state income taxes. Given our current earnings guidance range, we expect our overall 2011 tax provision to be less than our 2010 tax provision.

Now let’s turn to a review of our cash flow statement. Cash provided by operations in the first nine months 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 $79 million. Our current estimate for D&A in 2011 is approximately $105 million.

Pension expense resulting from our defined benefit plans totaled approximately $24 million in the first nine months compared to $29 million in the prior year. In the first three quarters, the company made cash contribution to its defined benefit pension plans of approximately $42 million in total. The $18 million outflow 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, planned contributions and lower interest costs associated with plan liabilities. Over the full year the company plans on making cash contributions to its defined pension plans in the range of $75 million to $85 million.

Changes in our primary working capital accounts excluding the impact of divestitures resulted in a use of cash in the first nine months of the year and totaled approximately $130 million. By category accounts and notes receivable increased by $63 million, inventories increased by $22 million and crude expenses decreased by $58 million. Partially offsetting these uses of cash was an increase in accounts payable of $60 million.

For 2011, our working capital performance will primarily be a function of our revenue assumptions. We currently believe that changes in working capital should result in a modest usage of cash. Given the seasonality of our sales and our Marine businesses, we anticipate the liquidation of working capital in the fourth quarter especially reductions in receivables to have a positive impact on cash flow.

Capital expenditures of the first nine months were $58 million, our 2011 plan reflects approximately $85 million of expenditures. This increase versus 2010 reflects expenditures to develop new products and to fund our marine manufacturing plant consolidation activities. Partially offsetting our capital expenditures were $23 million in proceeds from the sale of property, plant and equipment in our marine segments.

During the first three quarters of 2011 the cash flow statement includes about $60 million of additional net investments made in short and long-term marketable securities. This is part of the program initiated in the fourth quarter of 2010 to expand the company’s cash investment program to include marketable securities with the maturity beyond 90 days. This new program is designed to increase earnings on the portion of the company’s cash reserves. The investment maturities are two years or less and include high-grade corporate commercial paper and government securities.

Cash flow in the third quarter also included a transfer $20 million of restricted cash, transfer $20 million too restricted cash. This reflects cash used by the company to collateralize the portion of the company’s obligations related to workers compensation claims. Company is required to provide collateral against these obligations under the terms and agreements with insurance companies or state regulators. The company is traditionally collateralized these obligations with letters of credit or surety bonds. This new arrangement will result in approximately 500,000 of annual savings. Related cash remains on the company’s balance sheet and is reflected as restricted cash but is excluded from our definition of total cash in marketable securities. Neither of these transactions affects our calculation of free cash flow or liquidity.

In summary, during the first three quarters of 2011, we generated $59 million in free cash flow and after using approximately $145 million to retired debt plus the $20 million transfer to restricted cash. Our cash and marketable securities in the first nine months decreased by about a $110 million ending with the balance of $547 million.

Supplementing our cash and marketable securities balances is a net available borrowing capacity from our revolver of approximately $243 million which when combined with our cash and marketable securities provides us with total available liquidity of $790.

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

Dusty McCoy – Chairman and Chief Executive Officer

Thanks Peter. I’ll conclude today by our commenting on our outlook. Thus far in 2011 we successfully executed our core strategy of generating free cash flow performing better than the market and demonstrating outstanding operating leverage. As I said, the retail marine market for 2011 is unfolding inline with our plan with the Aluminum and fiberglass outboard markets experiencing solid growth. And the fiberglass turn drive markets continuing into decline albeit at a more moderate pace.

In summary, the 2011 total U.S. market appears to be flat up slightly when compared to 2010. As we entered the final quarter of 2010 we’ll continue to focus on this core strategy as well as pursue various operational and financial strategic initiatives that will enable us to continue to deliver future revenue on earnings growth. During the quarter, we’ll continue the business in our products to give our dealers and distributors the opportunity to gain market share.

In our Engine segment, we announced the plan in September for Mercury to assume future responsibility for worldwide sales, service, distribution and support for the Cummins MerCruiser Diesel line up of high–speed diesel marine engine system including the TDR range of Volkswagen engines. The Volvo diesel market is an area that (Mark) and his team have identified as an excellent growth opportunity for us over the next several years.

For the remainder of 2011 and even beyond we believe our fitness in bowling and bayers businesses can continue to benefit from their market leading positions in overall operating strengths to deliver strong earnings in cash flow. We are still planning for a higher single digit consolidated Brunswick revenue line of growth for 2011. This targeted top-line growth is based upon improvements in market share and all of our business segments.

For the year, net income will benefit from a previously announce marine plant consolidations and assets sales or restructuring cost, reductions in interest, depreciation and pension expenses as well as from a lower tax provision.

After taking all these factors into consideration, we currently expect our 2011 earnings per share to be in the range of $0.65 per share to $0.75 per share. (Indiscernible) seasonal factors affect the fourth quarter results of our marine related businesses. Our strong brands, outstanding product quality and a premier distribution network have enabled us to grow our businesses in a great challenging economy.

We remain confident that overtime the recovery of global marine markets will be consistent with improving economic conditions. We are focused on managing our businesses to deliver growth flat marine market environment. Our growth strategies (indiscernible) on the successful delivery of singles and doubles rather than risky path of swinging for (indiscernible). Portion of our growth initiatives with the study introduction of improvements and breakouts some our existing product lines such as Mercury recently launched 150 horsepower outboard engine.

Last week received in international innovation of board signing of slight way and its superb fuel efficiency in performance. Another exciting product enhancement is like fitness is iPhone and iPad touch comparable virtual train our website. That services two exercises customize in track and appropriate work our plan. At the same time were designing introducing completely new products expand our current portfolio.

Mercury is outboard business is been successfully developing clean fuel systems for the marine industry and is also a recipient. Our international product innovation award and in bowling we were soon introduce of battery power line conditioning machine offering proprietary is more convenience. We are also focusing our focus on the marketing in sales of Brunswick products in those markets for the sales growth is highest.

Both group recent note to manufactures Sea Ray and Bayliner were boats in cruisers in Brazil Brunswick one example of that. These products on regional initiatives will drive continue growth in share. Move us into new products segments and result in sales and earnings growth for Brunswick despite weak marine markets. At these markets recover our growth will be further accelerated. As we look forward to 2012 on organization is focused on maintaining its favorable cost position and generating continued revenue in earnings growth.

Particularly through these organic growth initiatives, we further believe that are 2012 lend income will benefit from previously announced from marine cost reduction activities, lower restructuring cost and reduction in interest expense. And as we continue to focus on organic revenue growth, local currently and opportunistically target debt reduction and pursue the full funding an eventual de-risking of our frozen defined benefit pension plans.

Thank you for your time and now we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ed Aaron with RBC Capital Markets. Please proceed.

Ed Aaron – RBC Capital Markets

Thanks good morning.

Dusty McCoy

Hi Ed.

Ed Aaron – RBC Capital Markets

Hi, I guess I wanted make start by (indiscernible) differ on the engine margins in the quarter, you listed in number of factors with those for ability that bridge we see with last year with those kind of order of magnitude as you discuss them?

Dusty McCoy

Yes, (indiscernible). That’s typically they were report that’s only always start report.

Ed Aaron – RBC Capital Markets

Okay, helpful. Thank you. And then on the international with the performance was kind of different between boats and engine were seems in Europe. Sounds like you saw pressure on both for not really in engines and then I think in Asia Pacific I think you said that China offset pressure in Australia and New Zealand for the engine business. But I think you can said the opposite about the boat, business just can wondering at high level, how should we think about the differences?

Dusty McCoy

First, we intended to say that China helped the boat engines and boats and I’ll say we think this in Australia and New Zealand in both segments and so if I said differently I apologize. Then is to the difference between the segments let’s try to go for the three things, first in above business we serve recreational market and Europe is after the United States the largest recreational market and it’s been tough there for boat. On the engine side that we serve commercial in government we get a lot of repower and we continue to have a very good P&A business so as long as boats are used. So, that’s important.

And then thirdly as you look at boats how we report there is dollar change and we can have just a very small number of very large boats differ on a year-to-year and they can have a pretty dramatic impact on the dollar change so, when you had all that up that’s a different between the two segments.

Ed Aaron – RBC Capital Markets

Thank you. And then one last one I’ll pass it on, but at the high-end of your guidance kind of state unchanged, but you have observed the (indiscernible) charge, which we didn’t know about last year. Should we think about the quarter in terms of effectively rates to a guidance excluding that and so what’s the kind of the incremental driver versus when you last uploaded your guidance.

Dusty McCoy

As far as I hope you take low and bottom as the rates is that it was our intent. Secondly, perhaps that the biggest driver as repositioned primarily our marine products this time a year for continued market share growth next year. We need to get a lot of product position and the pull through of retail into our production and wholesale here in the fourth quarter is strong, we have very strong backlog and our dealers are really looking for us the product for them so, we indeed to go to work a little more in the fourth quarter in order to be ready for the selling season next year.

Ed Aaron – RBC Capital Markets

Thank you.

Operator

The next question comes from the line of Jimmy Baker with B. Riley & Company. Please proceed.

Jimmy Baker – B. Riley & Company

Hi, good morning.

Dusty McCoy

Good morning.

Jimmy Baker – B. Riley & Company

Can you talk about the promotional activity in the marine engine market may be segregated by outboard and sterndrive, are you feeling the effects of some renewed promotional activity out there in outboard market either here or a broad and may be how do you see that playing out through the boat shows easing in the spring.

Dusty McCoy

Our promotional activity is unchanged on a year-to-year basis. And in fact we are, Peter is just helping me here, he is the fount of all knowledge on numbers. We’re actually helped about lower discounts on a year-over-year basis in both engines and boat. So, we’re growing share here is to real understanding without the need to do any discount in effect for going share doing a less discounting. And I think that attribute to our very strong dealer network.

Jimmy Baker – B. Riley & Company

Great. Are you seeing more promotional activity from your competitors may be specifically (indiscernible).

Dusty McCoy

No, no, not at all.

Jimmy Baker – B. Riley & Company

Okay, excellent.

Dusty McCoy

You got a good feel of market as you know some manner, so we can go look.

Jimmy Baker – B. Riley & Company

Can you may be share the mercury’s P&A number for the quarter.

Dusty McCoy

Which number?

Jimmy Baker – B. Riley & Company

A P&A sales in the quarter.

Dusty McCoy

That’s not a level of detail here that we’re going to, I think from time-to-time we have given the percentage of total sales is probably get to the same number, but I don’t know I have that one that’s differ from my finger right now.

Jimmy Baker – B. Riley & Company

Okay, fair enough. So I wanted to touch on this retail slide that you offer first thanks for providing that, but I wanting to get some color on MMA reporting lot sales basically here in Q3 and how you kind of reconcile that with the SSI numbers and may be what you are seeing out there and what’s positive – a meaningfully positive growth in aluminum and positive growth in the fiberglass outboard which kind of dominate unit volumes and a category you anticipate in. Would you say that’s fair that you are kind of seeing at least low single digit positive growth in total of your shared the market.

Dusty McCoy

First, you made the things between SSI and in MMA and the chart we publish is really SSI view of the total ministry that NMMA covers kind of a strange way to say it. That chart is an SSI chart. Here’s the way I’d say it. On a year-to-date basis, we believe our retail sales are up 9% versus the industry laying up 1%. And we believe our retail we know our retail in the third quarter was up significantly more than the 9% on a year-over-year basis. So we’re quite comfortable that we are gaining shares. We look at segments, we think we’re gaining share and across the board in stern-drive, inboard fiberglass product.

In aluminum fishing product, we are probably losing on little share in outboard fiberglass, but remember also that last year we cut back on the product offering of our Triton brand. And it looks like there is a lot of small outboard fiberglass product getting sold in the third quarter.

The other thing I’d point out is the numbers I have given you on our sales growth. It is our global growth and we don’t really report or talk much about what we’re doing in just the US. We continue to ask our businesses to drive growth across the globe, because we think it’s a whole boat world is looking at it, the near-term growth opportunities are going to be outside the US and we got to be very good there.

Jimmy Baker – B. Riley & Company

Okay thanks for the color in clarifying that. And just lastly on your debt repurchase activity, well very active in the quarter it was a bit half weighted I suppose and I don’t want to ask for too much detail on your strategy, I know you’re not providing 2012 guidance but can you give us some general color on how the magnitude of debt repurchases will track in 2012 relative to the magnitude that we have seen here in Q3. And kind of what cash if you like you need to keep on the balance sheet and how you will be waiting debt repurchasing again pension contribution?

Peter Hamilton

It’s Peter, Jimmy. First, we will be waiting them essentially equally. We have the same level, we place the same levels importance on returning to our investment credit as we do on fully funding in permissive time, our force and define benefit pension plans. And so you will see that, and this year for example we’re making considerable contribution, $75 million to $85 million, the pension plans, and through today you can see from my remarks $135 million of debt reduction.

When we look to 2012, it is not possible now to give any hard and fast rule as to what the balance of cash contributions will be to either of those two strategic imperatives. First because the debt reduction is very much in opportunistic and price in our treasury staff does on a week-to-week, even day-to-day basis. So it really does depend on a lot of moving parts and most fundamentally the price of the debt. And it also depends upon our cash generation capabilities since we move through 2012. The pension contribution of course has a lot to do with moving discount rates and asset valuation and that makes that difficult to asses exactly what we do in the future, but as we look to 2012, I think the only scope I can give is we will continue to reduce debt and we will continue to fund our pension plan and both will be significant calls on our cash during next year. And that is specific if we can get perhaps on our fourth quarter call, when we know a few more facts we will be somewhat more specific.

Jimmy Baker – B. Riley & Company

Okay. Thanks very much Peter and Dusty. Thank you for your time.

Peter Hamilton

You’re welcome. Thank you, Jimmy.

Operator

Your next question is a follow-up from the line of Ed Aaron with RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Hi great, thanks for taking the follow-up. You said about your retails sales in the quarter kind of treating so, 9% number year-to-date, what if memory surge wasn’t the number at Q2 more like kind of a mid sort of mid single-digits and Q3 is a seasonally slower quarter, so that would just imply a pretty massive step up in the quarter. Am I understanding that right? And then if so when you look at the different parts of your business, where did you see that acceleration the most?

Dusty McCoy

Your interpretation in mass is actually right and we saw in both fiberglass and aluminum, but more so in aluminum.

Ed Aaron – RBC Capital Markets

Great. And then maybe just one other follow-up on the international question from earlier, as I understand that you are kind of using your capabilities especially in P&A within your engine segment to really kind of get a bigger foothold in some of these markets? And then ultimately you think that the both business would kind of follow that? How do you think about that as we go out the next couple of years in terms of the progress that you are seeing within your engine business in some of those markets and the ability to kind of drive the both business to capitalize on that?

Dusty McCoy

And I am not always sure that the boat business will follow the performance of the engine business, because in these markets especially outside the U.S., the markets themselves are so different, as I said both are primarily focused on recreation. Although I will tell you we are really beginning to move forward on government and commercial business in boats, but for our engine business, we are good at rack, but we also have these other commercial and government opportunities and they can be very different than the rec opportunity.

Stepping back here is what’s happening in the boat world in our judgment. Everybody sees the same set of issues around economies and then are looking for growing economies that have lifestyles and consumers who also like boating or can be attractive for boating. And many, many boat builders are going to these economies and therefore, the winners are going to be people who can execute and we really like our chances in that environment.

Ed Aaron – RBC Capital Markets

Thank you.

Operator

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

Tim Conder – Wells Fargo Securities

First of all, again, gentlemen, congratulations to you and everyone on just, I mean continuing great job there.

Dusty McCoy

Thank you, Tim. We hope we are becoming boring.

Tim Conder – Wells Fargo Securities

It’s nice to be boring in this trajectory.

Dusty McCoy

That’s what we are hoping.

Tim Conder – Wells Fargo Securities

A couple of things here Dusty, given the divestitures of Sealine in the (indiscernible) can you update us if there has been any material change here on your statements that you have made before in the breakeven industry retail units that you need for the industry to achieve the corporate breakeven. And then I guess the corollary of that is you have mentioned that you would have corporate operating margins similar to where the things were in 2005 at a certain level of retail unit sales. So, based I guess on those figures if that has moved the needle ending with these divestitures.

Dusty McCoy

I am going at this way. The divestitures have had an impact, but more importantly, as our businesses have rolled up their sleeve and they have done a magnificent job in identifying organic growth opportunities. We think the margin and margin dollar targets that we previously disclosed are no longer applicable and we have not really set down and redone the numbers in a way that we can talk about MTM, but if we have said our 200,000 units we would make more margin dollars than when the industry was at 300.

That number is fairly significantly lower now in our view based upon our ability to go forward, but we have not done any detail calculations around that and that’s something maybe in the next call or two we will sit down and give folks a view there, but these numbers have been lower, but that is driven by our folks done a great job identifying beginning to execute against our granite growth conditions. As what it’s lowered is the marine market volume necessary to achieve the objectives that we set out, gosh, I think it was in 2009.

Tim Conder – Wells Fargo Securities

Great.

Dusty McCoy

So, as a result of cost reductions and other things we’ve done at the company, we find that we can achieve those numbers and even lower growing market, but it just we said we haven’t seen the need to continually updated because we think our performance is in and up itself ratification that we are able to significant exceed those 2009 objectives.

Tim Conder – Wells Fargo Securities

Okay, okay. And then gentleman, I think you’d refer to one of the prior answers, the prior question that you were ramping up you sold the need the ramp up the papering a little bit just because of the good pull through and one of the prior chart that should given I think you’d said some more between 15,000 and 16,000 units in the inventory was a goal just an updated number from that perspective.

Peter Hamilton

I think it’s going to be right now in the sort of market conditions we see, I think we’d locked to walk out of this year was around 17,000 in (June) and the way to think about it is I said this in my prepared remarks under 24 feet fiberglass and aluminum we moved up so that we can keep our dealers in both going to the selling season above 24 feet fiberglass we really got out hands around that one carefully and we continue to run a record low levels.

If you ask me my concerned about any of that I’m going to give you surprising answer which you didn’t ask me, but I do have a concern and the concern is may be we don’t have enough in the pipeline on some of the smaller product, but our guys are working real hard to make sure we were positioning our leaders well for that showing too.

Tim Conder – Wells Fargo Securities

Okay. And obviously that has implications to your – what you’d done here with your guidance and goes to the one of the questions I added ask earlier about the raising of the guidance. Peter, directly I think you gave us some numbers that you’d already repurchased I think you said $23 million in the quarter on debt and how much is that plus anything additional above that factored in to your $0.65 to $0.75 for the full year.

Peter Hamilton

What we said, well, the $0.65 to $0.75, Tim is an all in number takes account of any activities that we contemplate the present time including any remaining fourth quarter debt reductions.

Tim Conder – Wells Fargo Securities

Okay, okay, okay, helpful sir. Thank you. And then just the couple of housekeeping items, anything that you can say at this point on restructuring expectations for 2012, D&A CapEx for 2012 and then you said that the fourth quarter interest run rate would be about 17,000. As you look to would that be exiting fourth quarter and obviously depending on how much more debt you repurchased, but then should we annualized that 17 would that be a good starting point and may be goes a little bit lower for 2012.

Peter Hamilton

Yeah, first on the restructuring, that’s obviously a function of decisions that we may in the future we would certainly expect and we said here now as to have a lower restructuring number next year, but that’s not something we can absolutely promised because that’s will be what the future holds and in terms of interest for next year we did say that now the run rate has been reduced to $17 million and I can only say to the extent we buyback some more debt in the remainder of the fourth quarter that number multiply by four would go down somewhat as a run rate, but I don’t expected there is going to be a significant if you will improvement in that interest number because we have purchased already brought back $135 million notional of debt already this year and in the next couple of months, I don’t think that we will continue unless the opportunity is normal, I don’t think we’ll continue at our phase.

Tim Conder – Wells Fargo Securities

And then the D&A CapEx, Peter at this point.

Peter Hamilton

For 2012, please stay tune for the conference call three months from now.

Tim Conder – Wells Fargo Securities

Okay. One other thing, I think that you’d mentioned before gentlemen is that you talked about an annualized run rate of break-even on an operating basis for the boat segment, exiting in the fourth quarter of 2012. Again at this point, would that imply that you’d still expect an annual loss in boats for 2012 or trying to get reconcile and given the fourth quarter is traditionally a tough quarter to begin with on a seasonal basis, or should we expect a profit out of the boat segment in 2012, assuming you’d have larger seasonal quarters would be substantially reduced losses year-over-year or even may be some profits?

Peter Hamilton

Kim it’s a bit too early for us to give you those precise numbers because we have not done our plan yet for 2012.

Tim Conder – Wells Fargo Securities

Okay.

Peter Hamilton

We will be able to give you a good view of that in January call.

Tim Conder – Wells Fargo Securities

Okay. Great, I’ll get back in queue for any other questions.

Peter Hamilton

Thank you.

Operator

Your next question comes from the line of Laura Starr with Nuveen Asset Management. Please proceed.

Laura Starr – Nuveen Asset Management

Hi guys, how are you?

Peter Hamilton

Well, how are you?

Laura Starr – Nuveen Asset Management

Fine, you talked about expanding your relationship with I can’t remember who was gave comments on the diesel engine strategy. And I am curious on that, if you could just give us a little more color, is that because you can get it into a better customer group. I mean government and commercial customers especially overseas want diesel, more diesel engines. I mean what about the consumer market and if you could have had a better diesel offering now, was your share you think have been even higher, I mean can you talk about those opportunities (indiscernible).

Peter Hamilton

What we’ve done is, our CMD joint venture was the market oriented distributor of the high-speed diesel engines that the venture was offering new markup price. And we moved that out of venture into Mercury. And the real star of that line up is going to be the TBI Volkswagen engine. And I saw a commercial this morning. I mean more and more people are beginning to understand these under 350 horse power diesel engines perform as well are better than gasoline engines. This is particularly true in Europe. This TBI engine will do well in commercial and government, but we think the demand is going to be significant outside the US in the recreational markets. And the reason we’ve moved it from and it is completely with our venture partner. Out of the venture into Mercury is our distribution system and our relationship with both builders who would use this particular engine is probably more developed and little more mature than what the venture has. So we think this is real opportunity here for us.

Laura Starr – Nuveen Asset Management

Will you be able to, will that be a big push in 2012 or not be till 2013?

Peter Hamilton

No, we’re going right now.

Laura Starr – Nuveen Asset Management

Okay.

Peter Hamilton

We announced that at the general boat show in September and early October and we’ve got folks lining up for the engines.

Laura Starr – Nuveen Asset Management

Are they significantly more expensive than your existing line up or are they the same price just keeping them more offering to pick some?

Peter Hamilton

It just gives us more offering to choose from and again it permits us to serve non-US markets who prefer diesel in a much more effective way.

Laura Starr – Nuveen Asset Management

Okay, thanks.

Peter Hamilton

You’re welcome.

Operator

The next question comes from the line of (indiscernible). Please proceed.

Unidentified Analyst

Hi guys, I actually had a couple of questions on your fitness segment. And just see how you view the overall market going forward on the commercial side if you’re seeing a lot of new gyms opening up and if you are gaining market share there?

Dusty McCoy

Perhaps Peter and I both should talk to this. Peter has actually managed the business for good period.

Peter Hamilton

Great, great.

Dusty McCoy

We are clearly gaining share in our view and we’re seeing a bifurcation of the fitness market and I’ll let Peter speak to that and how well we’re doing.

Unidentified Analyst

Okay.

Dusty McCoy

Well, I think the fitness market is extremely good now for two reasons, first proprietors, health clubs, and hotels and gyms and universities are beginning to replenish some of the deferred maintenance of the machine rate that they did in the past over the difficult two years. So, the equipment has different spends of life, but over time it needs to be replaced and when someone improving economic conditions you see the fitness industry beginning to reinvest in an equipment. So that’s good across the board.

Unidentified Analyst

All right. Are they mostly replacement machines or they actually expanding their….

Dusty McCoy

No, that’s actually the second part of the (indiscernible).

Unidentified Analyst

Okay.

Dusty McCoy

The bulk of the industry replacement but there is also very nice increase in new health clubs that are driven to a great extent by the value proposition that says that with the somewhat more difficult economic times people are very interested in having an option of health clubs where there monthly fees can be within there individual budget. So, the (indiscernible) industry is growing at both into the spectrum. First is growing on the value side with smaller clubs it have less offerings but they have a lot of fitness equipment.

Unidentified Analyst

Correct.

Dusty McCoy

It also beginning to grow again on the high-end side for the upscale growth it all for our four major of offerings and so on both accounts life fitness (indiscernible).

Unidentified Analyst

Excellent. And then I note historically you guys have been mostly all in commercial is there any push to go into the consumer market I know you guys evaluated around $3 billion. So, it seems like a significant market opportunity.

Dusty McCoy

We’ve always said presence in consumer. We are certainly attempting to grow our consumer presence because it is just arithmetically our greatest market share opportunity. I think that we have more opportunity so, we’re seeing more opportunities actually outside of the U.S. on the consumer side and within the U.S. But it will be an area of focused by fitness but importantly it will not diverted by fitness is focused from in score central meet in the theatres product line which is commercial.

Unidentified Analyst

Great. Thanks guys.

Dusty McCoy

You’re welcome.

Operator

Your next question comes from the line of Carla Casella with JPMorgan. Please proceed.

Carla Casella – JPMorgan

Hi I have a similar question on the commercial side, but in the other segments. Can you just remind us what percentage of the marine and the boat business is now commercial – commercial and government I guess includes both together.

Dusty McCoy

On the boat side is relatively small it’s going to be under $40 million under $30 million in that range. On the engine segment I don’t actually know that because we did not something we track like we do on the boat side. Because we have a business segment in the boat side, that’s when you math do little bit of follow-up with Bruce, Carla.

Carla Casella – JPMorgan

Okay, but that sounds like at the growing area for mercury especially overseas is that correct?

Dusty McCoy

Sure it’s an opportunity for us.

Carla Casella – JPMorgan

Okay great. And then at this point are you hedging any of your current (indiscernible) exposure?

Dusty McCoy

What we have modest currency hedges usually about 50, 50% of our larger known exposures, but it is just maintain in our hedge.

Carla Casella – JPMorgan

Okay. I guess that’s all. Thank you.

Dusty McCoy

You’re welcome.

Operator

Your next question is a follow-up from the line of Jimmy Baker with B. Riley & Company. Please go proceed.

Jimmy Baker – B. Riley & Company

Thanks for taking the follow-up. Just a quick one on the follow-up to the fitness commentary earlier, and could you maybe give a little color on what allows you to drive such high incremental margins in that business maybe kind of what the long-term if you can give over the next at least couple of three years what the right kind of operating leverages to think of how that business. And separately as if you do become kind of expose to the consumer market and more kind of successful in that vertical. Is that kind of deteriorate of operating leverage potential of this business?

Dusty McCoy

Well, we will not answer the last question first. What we’re certainly not going to engage in those portions of the consumer segment, the marketplace that would had significantly lower margins from the commercial marketplace that would not be an objective. We are enjoying very, very excellent sales and operating margin conditions at the present time, Jimmy and that is a function of things that will continue in the future, which is that we have fabulous products, the life fitness team has the fabulous sales force, terrific installation, terrific service, terrific accessibility, all the things that health club proprietors want a need all that will continue in the future and we open the product.

So, it will be even accelerated. It is also true that the life fitness is at the present time the one of the most significant suppliers of choice because it is an extremely stable company, it is got a very, very known and well-recognized management team and it is under the umbrella of the stable larger holding company with the stable capital structure and for health club proprietors. I think they want to do business with the entity for the management team and everything about the business looks like it’s going to stay there. And I think that drives significant sales and earnings at the present time, which may not always the case in terms of the competitive situation. So, will these operating margins continue at their current terrific rates perhaps not will they always be strong double digits, yes.

Dusty McCoy

Jimmy, I’d like to just comment one to add Peter to this brand is a really powerful brand. And one of things we don’t want to do is going in any markets where we get drag into competitors that wanted play discount price. Our brands stands for extreme quality, durability, reliability and the point Peter may high end or low end we’re winning the battle with our equipment on both hands of these clubs and that’s because of how great the equipment is the lowing that computed in forget about it. How you got computed in and these got a right for his consumer, for his customer then nobody else can provide. And we’re going to protect this brand going forward very, very diligently, but it’s a great brand, so, it’s a great business team there really performing well. And we want to be very careful and trying to push them into markets that they don’t really belong.

Jimmy Baker – B. Riley & Company

That’s very helpful. Thanks. And just one more quick and I’ll ramp up and looking for some kind of qualitative commentary regarding you’re the sediment in your dealer network and maybe if you could compare sediment today at this time year ago and, I mean 2011 to-date seems in-line with your expectations would say with in line with your dealers expectations and maybe how do you see their sediment impacting the appetite for inventory risk you model in 12?

Dusty McCoy

First, I think our dealers in our aluminum product line up, you better this year than they did last year. They’ve done a magnificent job of capturing share. They pushed us very well keep the product upcoming and we continue to introduce new product and ramped up our manufacturing to serve them. And there view in general is that please keep us stock so that we can exceed at selling season on phones. On the fabric last said I think in smaller product that’s seems we generally there review is not quite a strong as it is aluminum, I think in large fabric last product both we want dealers are going to be very cautious that’s (indiscernible) inventories are record loads in the amount of states in those products and they’re going be careful and large consumer sentiment and economic conditions in ‘12 before we could set to really begin to ramp up and put more product in their dealerships.

Jimmy Baker – B. Riley & Company

Thanks very much, Dusty.

Dusty McCoy

You’re welcome.

Operator

There are no further questions in queue. At this time, we would like to turn the call back to Dusty McCoy for some concluding remarks.

Dusty McCoy – Chairman and Chief Executive Officer

First, thank everybody for serious of excellent and great questions. They all went to the heart of several issues and how we are performing. I am incredibly proud of our organization and what it’s doing and always said it a bit jokingly at one point to call, we do want to become boring and we want to get away from big swings in this business than I hope as you watch as you become more and more comfortable that we just continue to perform and grow the top and bottom line with that worrying too much about overall economic conditions. So, thank you for your time and we will talk to you if not before in the next call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect your lines.

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