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

Brunswick Corporation (NYSE:BC)

Q4 2011 Earnings Conference Call

January 26, 2012 11:00 AM ET

Executives

Bruce Byots – VP, Corporate and IR

Dusty McCoy – Chairman and CEO

Peter Hamilton – SVP and CFO

Analysts

James Hardiman – Longbow Research

Edward Aaron – RBC Capital Markets

Tim Conder – Wells Fargo Securities

Jimmy Baker – B. Riley & Co

Rommel Dionisio – Wedbush Securities

Craig Kennison – Robert W. Baird

Joe Hovorka – Raymond James

Operator

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

I would now like to introduce Bruce Byots, Vice President, 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 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.

I would now like to turn the call over to Dusty McCoy.

Dusty McCoy

Thank you, Bruce, and good morning, everyone. By now, I’m sure you’ve had the opportunity to review our earnings release. We’re supplementing our remarks this morning with a slide deck that will be posted to our website at the end of our call. We’re hopeful that this enhances our discussion of our financial performance for the quarter and the year.

2011 was an important year for Brunswick. With the backdrop of global economic challenges and overall flattish retail marine demand, our results reflect the significant progress that our company has made in growing its revenue and improving its earnings.

Results for the year reflected the successful execution of our core strategy of generating free cash flow, performing better than the market and demonstrating outstanding operating leverage. Market share gains throughout our organization combined with improved production and operating efficiencies generated 10% revenue growth and increased our operating earnings by $176 million.

In 2011, net income also benefited from the marine plant consolidations and asset sales, lower restructuring costs, reductions in interest, lower warranty, depreciation and pension expenses as well as from a lower tax provision. Operating earnings excluding restructuring, exit and impairment charges were $250 million for the year, an improvement of $137 million as compared to 2010. Operating margins, ex-charges, increased by about 340 basis points to 5.7%. For the year, our operating leverage was 40%.

Sales increased over $3.7 billion in 2011 with growth reflected in all of our segments. Life Fitness experienced the highest level of sales growth at 17%. Net earnings for 2011 were $0.78 per share including $0.25 of restructuring charges, $0.21 of losses on debt retirement and a $0.07 benefit from special tax items. Excluding these three items, our diluted earnings per share would have been $1.17 per share. This compares to a net loss of $1.25 per share in the prior year which included $0.70 of restructuring charges, $0.06 of losses on debt impairments, and $0.03 of expenses from special tax items. Again, excluding these items, 2010’s loss per share would have been $0.46.

In summary, our adjusted EPS increased by $1.63. At year-end, our cash from marketable securities totaled $508 million. Total debt outstanding was $693 million, representing a reduction for the year of $138 million and our lowest debt level since the first quarter of 2004. Peter will comment in his remarks on the key drivers of our strong cash flow as well as provide you with a perspective on our 2012 targets.

Our quarterly results continue to demonstrate solid performances across all of our business segments. Results benefited from higher sales, company-wide cost reductions, and lower warranty cost partially offset by higher variable compensation expense. This was our best fourth quarter operating performance since the fourth quarter of 2007 and our consolidated results continue to demonstrate strong operating leverage.

Turning to our fourth quarter results in more detail, sales increased 8% with growth reflected in all of our segments. Our Boat segment experienced the highest increase at 20% followed by Life Fitness at 11%. Operating losses excluding restructuring charges were $14 million in the quarter, an improvement of $43 million as compared to the prior year.

All of our operating segments experienced year-over-year improvements. Operating margins ex-charges increased by 600 basis points. Our Q4 net loss was $0.33 per share which included $0.05 of restructuring charges, $0.03 of losses on debt retirement and a $0.05 benefit from special tax items. Excluding these three items, our diluted loss per share would have been $0.30. This compares to a net loss of $1.17 per share in the prior year, which included $0.21 of restructuring charges and a $0.02 expense in special tax items. Again, excluding these items, 2010 fourth quarter loss per share would have been $0.94. In summary, our adjusted fourth quarter of 2011 EPS increased by $0.64 from the prior period.

Now, let’s turn to our operating segments starting with the Marine Engine segment. From a geographic perspective, sales to U.S. markets grew by 10% while sales to Mercury’s non-U.S. customers decreased 2% in the quarter. In the aggregate, the segment experienced top line growth of 6% for the quarter. Non-U.S. revenues were affected by varying market conditions around the world. Growth across Asia continued to be strong, especially China.

On the other end of the spectrum, Australia continued to be weak even during the height of the retail selling season. In Europe, business conditions were off slightly but with variations across the continent. We experienced significant growth in Russia with a moderate growth across the stronger economies of Germany, France and the Netherlands. This growth was offset, however, by weakness across much of the Nordic region as well as in Italy and other Southern European markets. The sovereign debt crisis is certainly having some impact on demand, specifically with tightening credit in some market segments.

From a product category perspective, sales in our global outboard engine business continued to experience solid growth, reflecting an improving aluminum and fiberglass outboard boat marketplace in addition to market share gains. Global outboard engine production in Mercury in the quarter was higher than year-ago levels.

Sales decreased modestly in Mercury’s sterndrive engine business compared to year-ago levels as market share gains only partially offset declines in the overall market. Mercury’s global parts and accessories business, which accounts for slightly more than 40% of the segment’s annual sales, continued to report solid increases in revenues.

Mercury’s top line growth, the combined effect of costs reductions and improved operating efficiencies as well as lower warranty costs and restructuring charges, all had a positive impact on fourth quarter operating earnings. During the quarter, these positive earnings factors were partially offset by higher material and variable compensation cost.

The Engine segment, excluding charges, finished the seasonally low sales quarter with above breakeven operating earnings, yet another indicator of the strong year Mercury had in 2011.

In our Boat segment, fourth quarter revenues were up compared to the prior period. And if we exclude the divestiture of the Sealine brand completed on August 30, growth was even stronger. Strong global wholesale shipments in the quarter reflect the pipeline adjustments that were required to meet the small boat requirements of our dealers. This increase, combined with higher fiberglass shipments reflecting manufacturing shutdowns experienced in 2011, also affected the quarter’s growth.

On the international front, adjusting for divestitures, our Boat segment sales outside the U.S. increased by about 17% for the quarter compared to the fourth quarter of 2010. Canada, now our largest non-U.S. boat market, experienced the strongest growth. European marine markets were under pressure due to consumer concerns about macroeconomic conditions. As a result, we are projecting a decline in European industry sales in 2012 which we believe can be partially offset with share gains.

Returning to the U.S. powerboat market, as you can see from U.S. powerboat industry demand statistics provided by Statistical Surveys Incorporated, the U.S. retail marine market for 2011 unfolded generally as we had expected. Aluminum and fiberglass outboard boat markets experienced solid growth while the fiberglass sterndrive inboard boat market continued to decline, although at a more moderate pace versus the prior year.

During the quarter on a full-year, Brunswick’s retail boat sales growth was greater than that experienced by the overall market. This performance reflects improving 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.

In 2011 we increased our pipeline by approximately 2,000 units to reflect our view of stocking levels that are appropriate for current market conditions. Our unit pipeline is up 12% versus the fourth quarter of 2010. The quarter ended with 32 weeks of product on-hand on a trailing 12-month retail basis comparable to the weeks on-hand at the end of the fourth quarter in 2010.

Our pipelines for all aluminum products and fiberglass boats under 24 feet are up over last year’s level, while our pipeline for fiberglass product 24 feet and larger is down and remains at record low levels. The Boat segment’s strong sales growth combined with increased fixed cost absorption and cost reductions as well as lower restructuring charges, led to lower operating losses for the Boat segment in the quarter. Partially offsetting these factors were an unfavorable shift in product mix and a higher variable compensation cost.

Now, let’s take a look at our two recreational segments. Life Fitness completed another outstanding quarter. Sales were up 11% as compared to last year’s fourth quarter. For 2011, revenues increased by 17%. Commercial revenues continued to be strong during the quarter with sales growth experienced in all major distribution channels. International sales were up in the quarter but at a lower rate than that experienced in the U.S.

Segment operating earnings in the quarter grew by about $4 million. For the year, the segment reported on an operating margin of about 14.7%, a record for Life Fitness. In addition to the benefits from increased unit volumes, a more favorable product mix contributed to the higher level of profits.

Sales in Bowling & Billiards were up 2% in the quarter. Our bowling products business experienced solid growth, while same-store retail bowling revenues were up slightly versus the previous year. The segment’s operating earnings were about $3 million higher than last year’s levels due to higher sales, lower bad debt expense and improved operating efficiencies.

Now I’ll turn the call over to Peter for a closer look at our financials and then I’ll get back on to give you an update on our perspective on 2012 and beyond.

Peter Hamilton

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

Let me start with restructuring, exit, and impairment charges which were $4.5 million or $0.05 a share in the quarter. The majority of the charges related to the previously announced actions at our marine operations.

Also in the quarter, we incurred a $3.8 million of charges pertaining to the announced dissolution of our Marine Engine segment joint venture. This amount is reflected in the equity loss line in the consolidated statement of operations. Our current estimate for 2012 restructuring charges is $10 million or $0.10 a share for actions that we previously announced.

Net interest expense which includes interest expense, interest income and debt extinguishment losses was $19.6 million in the quarter, a decrease of $3 million versus the same period in 2010, primarily due to lower outstanding debt balances. Our plan for 2012 contemplates debt reduction in the range of $75 million to $100 million, which would result in net interest expense for the year of approximately $76 million to $80 million. This would reflect a reduction in net interest of $18 million to $22 million compared to 2011.

During the fourth quarter we lowered debt by about $11 million, resulting in a $138 million reduction for the year. As you can see from the chart – the nearest maturity – the 11.75% 2013 notes at an outstanding balance of under $75 million, which can be easily funded by a portion of our cash on-hand. It remains our objective to regain our investment grade status as we continue to lower debt levels and increase EBITDA.

During the quarter, foreign currency had a negligible effect on sales and 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 that currency exchange rate fluctuations had on year-over-year earnings comparisons. For the year, currency had a modest favorable effect on sales with a negligible effect on operating earnings.

For 2012, we expect that currency will have a modestly unfavorable impact on sales due primarily to a weaker euro versus the dollar. There will be only a slight decline in margin percentage due to currency, resulting primarily from the stronger yen versus the dollar and the euro. Our planning incorporates yen and euro exchange rates that approximate the current market rates. A further 10% weakening of the euro would reduce margins by approximately 10 basis points.

Our effective tax rate for 2012 was approximately 20%. This rate is lower than our previous tax rate guidance due to higher-than-expected domestic earnings, where due to our 3-year cumulative loss position; we don’t record a tax provision. As a result of the decrease in the effective tax rate, our tax benefit in the fourth quarter was about 31%. In the fourth quarter of 2010, we actually recognized tax expense of $5.1 million, primarily related to earnings from foreign operations. Our 2012 tax expense will continue to be primarily composed of foreign and state income taxes. Given our current earnings guidance range, we expect our overall 2012 effective tax rate to be consistent with 2011 or approximately 20%.

Now let’s turn to a review of our cash flow statement. Cash provided by operations in 2012 was $89 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 $105 million. Our current estimate for D&A in 2012 is approximately $95 million. Pension expense resulting from our defined benefit pension plans totaled $32 million in 2011 compared to $39 million in the prior year.

In 2011, the company made cash contributions to its defined benefit pension plans of approximately $80 million in total. The 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 2012 pension expense to be approximately $24 million which is a decreased of $8 million from 2011. This reflects the benefit of higher asset levels, planned contributions and lower interest costs associated with plan liabilities.

In 2012, the company plans on making cash contributions to its defined benefit 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 the use of cash in the year and totaled approximately $78 million. By category, accounts and notes receivable increased by $17 million. Inventories increased by $26 million and accrued expenses and accounts payable decreased by $33 million.

Our investing and working capital was higher than our previous estimate but this has not been caused by a deterioration in our working capital metrics. Our receivable collection metrics continued to improve across all of our operating segments while our inventory turnover and payable metrics remain strong at prior-year levels. The increase in working capital was predominantly related to timing considerations. We increased both our engine and small boat inventory in advance of the marine selling season and our accrued expenses were lower than our prior estimate, largely due to delays in the collection of customer deposits for our larger boats. These deposits have or will be collected early in 2012.

For 2012, our working capital performance will primarily be a function of our revenue assumptions and given the seasonality of sales in our marine businesses, we anticipate using cash to fund working capital in the first quarter of the year and then generate cash from the liquidation of working capital over the remainder of the year. This activity is expected to net to a modest usage for the year.

Capital expenditures in 2011 were $90 million. For 2012, our plan is for approximately $120 million in expenditures. This increase primarily reflects amounts required to fund our growth initiatives, partially offsetting our capital expenditures in 2011, with $31 million in proceeds from the sale of property, plant and equipment in our Marine segments.

In summary, during 2011, we generated $43 million in free cash flow. After using approximately $163 million to retire our debt plus the $20 million transferred to restricted cash, our cash and marketable securities decreased by about $149 million, ending with a balance of $508 million. Supplementing our cash and marketable securities balances is the net available borrowing capacity from our revolver of approximately $231 million, which when combined with our cash and marketable securities provides us with total available liquidity of $739 million.

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

Dusty McCoy

Thanks Peter. We continue to believe global economic and marine markets in 2012 will remain challenging, yet comparable to 2011. While we are confident that global marine markets will improve over time, we are targeting mid-single digit revenue growth in 2012 along with a strong increase in operating earnings in a flat marine market environment.

We will focus on delivering growth by designing and introducing new products to expand our current portfolio and by increasing our focus on the marketing and sales of products in those markets where the opportunity for sales growth is highest. These are our objectives to capitalize on immediate growth opportunities while funding future growth initiatives.

Additionally, our entire organization remains focused on maintaining its favorable cost position, a reflection of the significant actions taken over the past several years. And we will continue to benefit from our strong brands, outstanding product quality, and a premier distribution network which have enabled us to grow our business during this very challenging period.

As a result of continued cost reductions and improvements in operating efficiencies, our target gross margin for 2012 is approximately 24%, up 140 basis points from 2011. 2012 capital expenditures, SG&A and R&D expenses will be higher than in 2011 as we find growth initiatives, partially offset by a modest reduction in pension expense. And as Peter commented, 2012 net income will further benefit from lower restructuring costs and reductions in interest expense.

We expect to continue to generate positive strong cash flow and we’ll use that cash flow along with the existing cash balances to opportunistically retire debt and pursue the full-funding and eventual de-risking of our frozen defined benefit pension plans. After taking all factors into consideration, we expect 2012 GAAP EPS to be in the range of $1.20 to a $1.50 per share.

We do expect a slow start to the year in our first quarter top line performance. Revenues are likely to be down in the mid-single digit range in the first quarter compared to 2011 when sales increased 17%. Some of the factors influencing this decline are the absence of Sealine revenues, the strengthening U.S. dollar, a large order from one of Life Fitness’ major customers in the first quarter of 2011, and lower Engine segment sales resulting from a reduction in the availability of sterndrive engine units.

Regarding sterndrive availability, over the past year Mercury has been engaged in a complex consolidation of its sterndrive and large outboard engine manufacturing into a single facility in Fond du Lac, Wisconsin. This closure of our Stillwater, Oklahoma factory – where the sterndrive engines was previously assembled – was completed late last year as the manufacturing of these products transitioned to Fond du Lac.

As the pace of assembly has accelerated at Fond du Lac, we’ve experienced a slower ramp-up that will reduce the number of sterndrive engines we were planning to build in the first half of this year to meet expected customer demand. This will negatively affect our engine and boat sales until this issue is resolved. Meeting our customers’ requirements for sterndrive engines has the absolute highest priority at Mercury and we are intensely focused on taking the necessary operational actions.

We plan on discussing our outlook in further detail at our Investor Event in Miami on February 16, which will also be webcast. At that time we will review our 3-year plan which we are basing on a concerted assumption that the global economic and marine market outlook will continue to be challenging and comparable to 2011. Despite this conservative assumption, the growth programs we will describe in Miami drive mid-single-digit revenue compound annual growth and double-digit operating earnings compound annual growth over the 3-year period as well as strong free cash flow. Of course, marine market improvements to our base case would accelerate sales and earnings growth. We look forward to describing our growth plans on February 16 in Miami.

And with that, we are through with our prepared remarks and we’ll be pleased and happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of James Hardiman from Longbow Research. Please proceed.

James Hardiman – Longbow Research

Morning. Congratulations on another great quarter. A couple of quick questions for you guys, I guess as I start to think about that, $1.20 to $1.50 worth of guidance, it sounds like you’re essentially saying that the working assumption is a flat industry. So I guess two questions. What are the major sources of variability between the lower end and the upper end of your guidance? And then ultimately, how does that guidance change under sort of different industry assumptions to the extent that you could even qualitatively talk a lot about that?

Dusty McCoy

Well, first, what – we are guiding to a flat market, flat marine market. Our view is that aluminum product, both fishing and pontoon will continue to increase, that we will see some – also some increases with smaller than in aluminum, in outboard fiberglass and in small sterndrive product; we believe larger fiberglass product will continue to be under pressure. I think what could move us between or within the range would first be any worsening in the European situation than we’re presently seeing. We think we’ve – we’re doing a good job there. We think we understand how we can perform. But if that situation were to change dramatically or I’ll put a quotes around these words, “Meltdown in Europe”, that could be a significant issue for us.

We’re a bit – befuddled would be my word and maybe not the organization’s word – about what the presidential election is going to do to the economy. So again, we’re assuming that the economy continues to behave generally as it has been behaving over the past six months. If the economy were to get better, of course, we would be moving to the upside of those numbers and if it would get worse, we would be moving to the downside. That’s generally the things that we’ve got on our mind or we’re concerned about.

James Hardiman – Longbow Research

Okay. And then just real quickly on the Boat segment. Obviously I think better-than-expected performance over the course of the year, but still a little bit of an operating loss during 2011. What levers remain to help you drive a profit in 2012? And I guess ultimately should we expect a profit in 2012? And are there any incremental cuts to the brand portfolio that we should be expecting? There was – once upon a time there were two brands that you were considering getting rid of and it looks like you got rid of one of them. What’s the status on the second?

Dusty McCoy

Well, firstly, we haven’t been actually considering and getting rid of brands. I mean, we’ve had the view that our Boat business must be running at a breakeven basis as we exit ‘12. And we are fundamental – well, not fundamental – we are there in this entire business, say, for one brand. We continue to believe that the plan we’re following for that brand will produce profitability not in ‘12, but in ‘13 since we will be exiting ‘12 on a run rate basis. And if as we work through the plan and events unfold, we ever reach the conclusion that our plan is not going to come to fruition then we’ll take appropriate action, James.

But right now, we are continuing to work the plan and our view is that the Boat segment will post an operating loss in ‘12 but we ought to be running at a breakeven basis so that as we go into ‘13 we should plan on ‘13, at worst, being breakeven.

James Hardiman – Longbow Research

That’s very helpful. And just one last question and then I’ll hop back in the queue. Sealine, for the year – now that you’ve gotten rid of that – how much of a net benefit on operating income do we get, just by not including Sealine?

Dusty McCoy

$5 million.

James Hardiman – Longbow Research

$5 million. Great. Thanks, guys.

Dusty McCoy

You’re welcome.

Operator

Our next question comes from the line of Ed Aaron of RBC Capital Markets. Please proceed.

Edward Aaron – RBC Capital Markets

Great. Thanks and good morning, everybody and congrats on a great year.

Dusty McCoy

Well, none of the people in this room had much to do with it. All of the folks are out in the field brought this one in, but thank you.

Edward Aaron – RBC Capital Markets

So, I don’t want to steal too much of your thunder from Miami but I was hoping if maybe – you can maybe talk in a little bit more specifics about your investment spending plans. And I’m interested in learning how you’re allocating those dollars across your different businesses and how you’re thinking about the incremental returns on that spending?

Dusty McCoy

And I would like to wait till we get to Miami to jump into that in detail. But you will see in Miami that we are increasing investment in all of our businesses. And I think we – we’ll be prepared to talk about generally how we’re going up capital expenditures, expenditures in R&D and we can work it in business. Peter, do you want to provide some more color to Ed?

Peter Hamilton

Well, as Dusty said, we’ll provide much more color in Miami – but as you might expect, Ed, the growth investments have a international tilt to them. We’ve already announced the Brazilian boat plant facility which is underway – which incidentally will be a source of growth in our Boat business even if the U.S. market does not improve in 2012. We will be focusing more on diesel initiatives in the wake of our switching our joint venture and you’ll see in our other Life Fitness and Boat and Bowling business segments, you’ll see some new product enhancements that we believe will drive growth.

Edward Aaron – RBC Capital Markets

Great, thanks. And then my other question, you’ve got some comparability issues that affect your top line in 2012 between currency, the divestiture and then some inventory comparison issues. But by my math, a single-digit top line is really more like the high single-digits when you adjust for those factors which a flat market would imply, quite a bit of market share gain. I was just hoping you can maybe kind of rank-order where you see those gains coming from and across your different businesses?

Peter Hamilton

We expect to have growth in all of our businesses and you’re right that our sales growth as adjusted will look better than just on the face of the comparisons. And again, I think, in Miami we will be able to provide more detail on exactly where the growth is coming from, but it’s not as a result of any particular large impact on growth in any particular segment of the business.

It occurs in Mercury with new products that they have brought out. It occurs in the Boat group with international expansions and with market share gains. It occurs at Life Fitness with new product introductions and market share gains, and we are putting more capital against our retail bowling centers now to refresh and modernize some of them and we see some gains there. So it really is across the board.

Dusty McCoy

And Ed, as we look – just to supplement what Peter said – when we are guiding to mid-single digits, we see across all of our business units a remarkable uniformity and what we believe will be their top line growth rates in ‘12.

Operator

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

Tim Conder – Wells Fargo Securities

Thank you. Let me continue on with that. Dusty or Peter, whoever wants to take this, if you could maybe spend a little bit more time on the – and a little bit more depth on the diesel opportunity – and in sort of a segment of the changes with Cummins and how that relationship was changed and then how that compares to Volkswagen – Granite, Volkswagens and the smaller diesel engines. But where do you see the opportunity there? And then you talked about also now that you have a very good saltwater product and now that you’re through the financial crisis and debt triage mode – to take outboards and looking at those and international markets against a large Japanese competitor where you haven’t competed before, so just maybe a little more color on those two items?

Dusty McCoy

With diesel first, we with our joint venture partner made the decision that we ought to dissolve the venture for a couple of reasons. First, we had – maybe three reasons, Tim – we’ve established the venture at a time when we were going to be and we were extremely successful going in with a great diesel engine provided by our joint venture partner, great drive systems established by us and then using our combined distribution network going into the market. We made a whole lot of money there.

The market obviously declined fairly significantly on a global basis. And the game changed, if you will, more technology needed to come into that market. And what we found is that we were each carrying within our respective organizations a level of R&D and SG&A to support the venture and the venture was carrying a level of R&D and SG&A. And we had a level of expense that our view wasn’t sustainable and our judgment was we could continue to serve the market very well from our venture partner and from ourselves – and with a lot less cost and a lot more service capability.

Where we are now is our partner will continue to supply larger, I’ll call, mid-range to high-range, large size diesel engines to the marine market. We will provide, commensurate with that, drive systems and joystick docking systems to the market and they can easily be married. And then in addition, we’ve now become the exclusive distributor of the Volkswagen High-Speed diesel engines which are going to be in the range of 300 horsepower or under, which in our view as the marine market recovers there will be more and more focus first outside of the U.S. – but in my view, eventually in the U.S. – for these very powerful great diesel engines that Volkswagen makes.

If anybody on the call has driven any of the cars in which these TDI engines, diesel TDI engines are placed, unbelievable performance. It’s just outstanding. So it puts us into a great segment of the market with another great partner, i.e. Volkswagen. So we, our joint venture partner, and Volkswagen are now happy in my view as to how we’re going to be able to go attack the market.

As we look at the outboard market, it’s our view that we – and I’m going to put quotes around this, because this is the way we really need to start thinking about this is “We’re entitled to the share outside the U.S. that we have inside the U.S. but we got to go get it.” And our share inside the U.S. is higher than any of our other competitors. And outside the U.S., first, we’ve been hampered a bit by the fact that one of our large competitors has a very complete – we – I call it dirty two-stroke, you know, high-emission two-stroke engines – that are wonderful engines and have served the market very well over time.

But as the world begins to move toward four-stroke product and the environmental requirements that those products permit everyone to comply with as well as the great performance and ease-of-use of four-stroke product, we now have in our view a great product offering, we’ve now put the organization in place all around the world to go attack these markets. And we’ve begun to understand that we can do much better in commercial markets than perhaps we have in the past.

We are going to continue to invest in new outboard product. Our new 150 product is the foundation for an entire engine line and an entire new set of engine platforms and we’re putting the money in. The engines will continue to roll out and we’re very confident that there’s a lot of upside for us in the outboard market outside the U.S. Is that helpful, Tim?

Tim Conder – Wells Fargo Securities

That is definitely. And then also I want to say thank you for the broad color on ‘12 and then the ‘12 to ‘14 framework. That was helpful also.

Dusty McCoy

Yeah, thank Bruce for that. He’s piecing-up that we – how we’ve got to start talking to people, so.

Tim Conder – Wells Fargo Securities

One other – just to revisit more on the immediate term, I guess, ‘12 and then maybe after that, ‘14. You’d talked about previously that ‘12 and maybe for a year or two beyond that, that roughly you’d see a 30% incremental operating margin – an operating profit slowdown rate from incremental revenue. I just wanted to revisit that and any additional color you’d have around that?

Peter Hamilton

Tim, it’s Peter. I would hasten to add at this point that our 30% number is always been characterized as our variable contribution margin. And of course, we’ve done better than 30% over the past couple years because we have been significantly reducing fixed cost which has increased our 30% variable contribution run rate two percentages above that.

We expect to maintain – certainly in this year, 2012 – and see no reason why we cannot in the out- years, our 30% variable contribution margin. But as you can see from Dusty’s comments on SG&A and R&D, we will, in the pursuit of our growth initiatives, be adding dollars to those accounts and so we will actually have fixed cost increase in 2012 and that in turn will lead to – if you just run the math – it will lead to an operating leverage of less than 30%. But the fundamental variable contribution margin stays the same and then the operating leverage is going to be a function of whether we are in growth mode, which we certainly are in 2012, or whether we were in a cost reduction mode which we were appropriately in, in years ‘08, ‘09, ‘10, and ‘11.

Tim Conder – Wells Fargo Securities

Okay. So, you’re saying in general ‘12 could be a tad less than that 30% and then due to the incremental investments and then beyond that, we will see the 30% is still very reasonable – just to clarify, Peter?

Peter Hamilton

What I’m saying for ‘12 is, and if you take restructuring out of it, just try to look at on an ex-items basis – if you run the math where we provide the data points, Dusty provided the data points, I think you’re going to find that the number of – within our range dimensions will be lower than 30%. With respect to years ‘13 and ‘14 we would expect to be slowly but surely improving on that number, but it is very much a function of the growth opportunities we see in those years and the amount of money we put on those growth opportunities. But after we take all of that into account and as we will be more specific in Miami, we believe that we will see the bottom line growth in the dimensions that Dusty articulated in his comments.

Tim Conder – Wells Fargo Securities

Okay. Thank you, gentlemen.

Dusty McCoy

You’re welcome.

Operator

Our next question comes from the line of Jimmy Baker of B. Riley & Co. Please proceed.

Jimmy Baker – B. Riley & Co

Hi, thanks for taking my questions.

Dusty McCoy

No problem.

Jimmy Baker – B. Riley & Co

Just – before I get into my question, one clarification point on the guidance. The GAAP guidance at $1.20 to $1.50 in earnings but I believe – that looking at the slides that Peter was discussing – that includes, what, roughly $0.10 in restructuring charges and $0.10 to $0.15 a share in debt repurchase charges? So is it – is my math correct that your, kind of adjusted 2012 EPS guidance is $1.40 to $1.75?

Dusty McCoy

Yeah. That’s right (inaudible).

Peter Hamilton

Yeah. We’re trying very hard to quote GAAP numbers.

Jimmy Baker – B. Riley & Co

Okay. Okay, fair enough. I just wanted to make sure I had that right. So if we could just spend a moment on the Fitness business growing pretty rapidly here in 2011, but I guess – and more importantly, generating around $100 million in EBITDA for you, which I believe is roughly $30 million higher than its prior peak in 2007. Hopefully, you could give some color on maybe what’s driving the strong incremental profitability in that business and maybe what kind of visibility you have into continuing its momentum here in 2012 ex the kind of Q1 comparable issue that you mentioned?

Dusty McCoy

First, the overall answer I can say is – is that business unit is operating incredibly well right now. I think it first starts with – we’ve become globally, by far, the most significant player with the best product and it’s permitted us to maintain margins very well in the marketplace. Secondly, as we’ve introduced new product we have begun to have this great ability to tier our product offering to clubs and we make great money in the entire tiering, but it also permits us to serve various price requirements for club owners.

Thirdly, we have begun to see commercial clubs need to replenish – up their capital expenditures, if you will, because most of the time the product they have on the floor represents their capital expenditures. And there’s been a need to update what’s on the club floor and we’re there with the best product.

And then lastly, I think in fairness, some of our competitors have gone through some difficulty and our team has done a great job of taking advantage of that and making sure that we secure a good place in all global markets.

I think as we look forward, we’re quite excited about Life Fitness. We, of course, know the investment we’re making in new product. We have a good view about what the new product we’ll be able to do. It’s interaction with an exerciser who’s using the product. And our view is that we’re going to be able to continue to grow with fabulous product, with good margins.

It may be difficult when one begins to get the share we’ve gotten, to hold onto the margins we have because sometimes people need to attack the share with pricing. And our expectation is, in the coming months and years, there will be some pricing pressures. So it may be hard to maintain operating margin of 15% but they’re not going to deteriorate a whole lot, but we should expect those margins are going to be difficult to hold onto.

Jimmy Baker – B. Riley & Co

Okay. And then I also wanted to drill-down a little bit on your P&A business. I guess on an annual basis, could – for the P&A segment, could you provide maybe what that was as a percent of Mercury sales or even just its year-over-year growth rate would be helpful. And I’d also be interested in kind of understanding if P&A, I know some of your P&A is on new boats and engines, maybe you could provide some color on P&A content levels on an outboard boat versus sterndrive?

Dusty McCoy

Well, first in 2011, P&A represented about 40% of Mercury segment sales. That’s – and that is a little higher than we would have been in say 2005, 2006 when new engine sales were running higher, Jimmy. Then in terms of whether it’s D&A on new products or P&A on existing product, there’s much more of this business that services existing product rather than new product.

And in fact – if you just step back and if we could all reflect on this a moment – in the new product, it’s generally served by warranty and we go out and take care of that many times without recording sales or income from honoring our warranties. So the P&A product is – the P&A revenue stream and earnings stream is very much a reflection of what already you have in the marketplace over time. And therefore it always remains very important to us that Mercury and every product segment continue to grow share versus – because when we’re profitable selling the base product – but it also always provide then a much better and stronger annuity for the P&A stream.

Jimmy Baker – B. Riley & Co

Okay. That’s very helpful. And lastly, I apologize if you kind of went over this a little already but you’d spoke about exiting 2012 on a breakeven run rate in the Boat group and just wanted to get a little bit more specifics as to what exact steps you need to take to get there and if that maybe requires some additional strategic refinement of your portfolio?

Dusty McCoy

Well, again, we believe we can get there with the existing portfolio. Again, as I’ve said, we have one brand in one product segment, within the Boat segment, that’s not there yet and that’s causing the entire segment to look as if it’s not – well first, it’s not profitable and that is – that particular brand, we have a very clear plan as to what we have to get done and it involves product, distribution, cost, several pieces. The guys in that brand are working hard in executing against the plan and if – we’ll either get there with that brand or if we’re not going to get there, then we’ll need to make strategic adjustments. And that’s about the best I can tell without – tell you, Jimmy, without going beyond what I think we ought to be doing competitively.

Jimmy Baker – B. Riley & Co

All right. Thanks very much for the time and look forward to Miami.

Dusty McCoy

You’re welcome. Okay, great. Look forward to seeing you there.

Operator

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

Rommel Dionisio – Wedbush Securities

Yeah, good afternoon. Dusty in your preferred comments you talked about tightening credit in Europe. But I just wondered if you could sort of walk us through the dealer health you’re seeing there in some of the weaker markets. Is there a – impact obviously on floor plan financing and are you seeing any dealer attrition in markets like Italy and some of the more challenging markets there?

Dusty McCoy

First, great question. Dealer inventory is good in Europe. The dealers there along with our teams have done a good job of insuring debt. We’ve not let – as sales have declined in view of the economic conditions there – let our dealer network get clogged up, that’s number one. There is less issue at financing at the wholesale level and more of an issue at financing at the retail level in Europe. And generally, our dealers are not having problems stocking product in Europe.

Peter Hamilton

And our – it’s Peter – our floor plan financing outstandings internationally, which would basically be predominantly Europe, is at essentially the same level since they were at the end of the previous year and that means that we’re not getting a buildup of product there nor are we getting a buildup of repurchase liabilities here.

Rommel Dionisio – Wedbush Securities

Okay. Great. That’s helpful. Thanks very much and congrats on the quarter.

Peter Hamilton

Thank you.

Dusty McCoy

Yeah. Just to make a comment about the industry globally, it’s our judgment that both ourselves and our dealer network globally have become much, much more focused on maintaining very good inventory levels, having an inventory of what’s needed to service known and reasonably expected demand and none of us are very pie-in-the-sky about what’s going to be coming at us and we’re all managing this very much better.

Operator

Our next question comes from the line of Craig Kennison of Robert W. Baird. Please proceed.

Craig Kennison – Robert W. Baird

Good morning and thanks for taking my questions. You’ve addressed most of my questions, but I’ll ask if you would just characterize the trends you’re seeing in the used boat market, both in terms of volume at the dealer level and what you’re seeing in terms of price on those used boats.

Dusty McCoy

A very good question. The consistent theme we hear throughout our dealer network is there is not enough good used product available to satisfy demand and that’s – it feels very common sense correct in the following way. The dealer network in general has gotten its inventories down to very healthy levels. The age of product in the field is increasing. We’ve documented that and I think over the last decade, the age of prior boats in the market has moved from an average of 15 years to about 21 years.

So during this downturn, people are holding onto their product longer and have not made the decision yet to go replace with new. As a result, the trade-ins, the movement that always occurs with higher new boat sales is just not occurring. And dealers tell us if they can find a good used boat – they, in some cases have a waiting list for it and – but selling prices for that have not continued to increase and in fact our judgment is that the relationship between new and used pricing is back to pre-2008 historical norms.

Craig Kennison – Robert W. Baird

That’s helpful. Thank you so much.

Dusty McCoy

You’re welcome.

Operator

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

Joe Hovorka – Raymond James

Thanks, guys. Just one quick question. Could you give your retail sales number, or how much retail is up in the fourth quarter and then for the full-year 2011 for Brunswick, not for the industry?

Dusty McCoy

Let me – can I take a look at the slide here really quick. I – memory says we had that – yeah. If you’ve got it up, it’s our slide 19, Joe.

Joe Hovorka – Raymond James

Okay. I think I’m doing something wrong because I can’t get the slides to move.

Dusty McCoy

Oh, are you kidding me?

Joe Hovorka – Raymond James

I’m sorry.

Dusty McCoy

He did all these work, Joe, to make this easy for you.

Bruce Byots

I’m moving it, Joe.

Dusty McCoy

Joe, it’s...

Bruce Byots

I’ve got it up there now.

Dusty McCoy

...Here’s what we had on the slide.

Joe Hovorka – Raymond James

Okay.

Dusty McCoy

Q4 retail was up 21% and full-year retail was up 9%.

Joe Hovorka – Raymond James

21% and 9%?

Dusty McCoy

Yes, sir.

Joe Hovorka – Raymond James

Great. Sorry, I missed that.

Dusty McCoy

That’s okay.

Joe Hovorka – Raymond James

That’s all I needed.

Dusty McCoy

That’s okay. It broke my heart, we did all this work, but...

Joe Hovorka – Raymond James

Thank you.

Dusty McCoy

You’re welcome.

Operator

At this time, we would like to turn the call back to Dusty McCoy for some concluding remarks. Thank you.

Dusty McCoy

As always, thanks for everyone’s participation. Thanks for the great questions that we get. It always indicates a real understanding of us and our industry by the people who follow us. We are pleased with ‘11. We’ve got a good plan for ‘12. We’ve got our sleeves rolled up. We’ve said internally, we can’t take what we did in ‘11 and expect us – ourselves to drift into ‘12 and achieve the results within a range that we’re giving you. So we know we’ve got a lot of work to do and our sleeves are rolled up and we’re at it.

I hope everybody come to see us in Miami or at least join the webcast. We’re looking forward to talking about what our – we think our company can do in ‘12 and beyond. So thanks very much and we look forward seeing you in Miami.

Operator

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

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

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

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

Source: Brunswick's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts