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

Brunswick Corporation (NYSE:BC)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

Bruce Byots - VP, Corporate and IR

Dusty McCoy - Chairman and CEO

Peter Hamilton - CFO

Analysts

James Hardiman - Longbow Research

Ed Aaron - RBC Capital Markets

Tim Conder - Wells Fargo Securities

Scott Hamann - KeyBanc Capital Markets

Gerrick Johnson - BMO Capital Markets

Jimmy Baker - B. Riley & Co.

Craig Kennison - Robert W. Baird

Rommel Dionisio - Wedbush Securities

Joe Hovorka - Raymond James

Operator

Good morning and welcome to Brunswick Corporation 2012 first quarter earnings conference call. (Operator Instructions) 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. 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.

As you are aware by now, we have issued our Q1 results today by way of an advisory release. The full tax financial results are available on website. We plan on using this method all of our future earnings releases. I would also like to point out that on April, 19 we filed our Form 8-K to reflect the change to our segment reporting. These changes do not revise or restate the information previously reported in our consolidated financial statements. Please see the 8-K for the detail supporting this revision.

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

Dusty McCoy

Thank you, Bruce, and good morning, everyone. I'll start with the few overview remarks regarding our first quarter results, a quarter which represented our ninth consecutive of year-over-year earnings per share growth.

This was a good quarter from many perspectives. Our first quarter increase in earnings per share demonstrates the continuing success of our business strategy. Short-term financial performance continues to improve even as we make increased investments for long-term organic growth.

As anticipated consolidated sales were modestly lower due to specific factors, affecting our Marine Engine and Life Fitness segment on which I will elaborate shortly.

Our gross margin of 24.2% represents an increase of 20 basis points from the prior year. Low depreciation and pension expenses combined with the successful cost reduction activities contributed to the higher gross margin.

During the quarter SG&A and R&D expenses in the aggregate increased by 3% which is inclusive of company-wide investments in growth initiatives, many of which we highlighted in our Investor Meeting in Miami earlier this year.

As well as the absence are beginning from a sale of properties and insurance settlements recognized in Q1 2011, partially offset by lower variable compensation. Preliminary U.S. retail boat demand was up in the quarter with strong improvements continuing in aluminum and fiberglass outboard product categories. And lower net interest expense and a reduced income tax provision contributed to higher net earnings during the quarter.

Sales decreased by 1% in the first quarter. Three of our four segments reported modest growth in the period which was more than offset by a 2% decline in the engine segment.

Operating earnings excluding restructuring, exit and impairment charges were $68 billion for the quarter, a decline of $5 million as compared to 2011. Operating margins, ex-charges, decreased by about 30 basis points to 7%. Factors causing the decline in operating earnings largely occurred in Engine Segment which I will describe in more detail in a few minute.

Net earnings for the quarter were $0.43 per share including $0.02 charge from special tax items. Excluding these item, our diluted earnings per share would have been $0.45 per share. This compares to a net earnings of $0.30 per share in the prior year which included $0.05 of restructuring charges, and a $0.05 loss on debt impairments. Again, excluding these items, 2011 earnings per share would have been $0.40. In summary, our adjusted EPS increased by $0.05.

Now let's turn to our operating segments and we'll start with the Engine segment. From a geographic perspective, sales to U.S. markets were flat while sales to Mercury non-U.S. customers decreased by 7% in the quarter.

In aggregate, the segment sales declined 2% a quarter. U.S. sales continue to experience growth from our outboard and parts and accessories businesses. They were offset by decline in sterndrive engine. Non-U.S. revenues were affected by varying market conditions around the world. Growth across Asia continued to be healthy, especially in 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 versus the prior year with variations across the continent. There was a growth in Russia, stability in Central Europe that would be Germany, France and the Netherlands and weakness in much of the Nordic region as well as Italy and other Southern European markets. On certain economic conditions are having an impact on overall demand in this region.

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

Mercury recently launched his new 150 FourStroke engine. This innovative products brings many different engine attributes to the market including durability, fuel efficiency and numerous other performance differentiate this. This product has been well received for both freshwater and saltwater applications.

Sales decreased in Mercury sterndrive engine business compared to year ago levels due to product ramp up issues and overall weaker global market demand. These factors are partially offset by market share gain versus the first quarter of 2011.

Regarding our Mercury's production ramp up, Mercury's recovery plan is firmly in place and production is meeting recovery plan daily production target.

Mercury's global parts and accessories business, which accounts for about 40% of the segment's annual sales reported an increases in revenue with solid gains in U.S. market partially offset by modest declines in non-U.S. markets primarily due to unfavorable weather conditions in Europe.

Mercury's operating earnings was at SpellBox approximately $10 million which included the affect of one-time gains totaling $11 million in the first quarter of last year. These gains related to our facility sale and insurance settlements.

Excluding the impacts of these gains in 2011 and lower restructuring charges the segments result decreased modestly. The quarter benefited from strong performance as a domestic outboard business reflecting the strong market for outboard boats in the new 150 horsepower engine. However, this performance is more than offset as a sales and margin impact of the sterndrive production ramp up issue.

Weak European results in growth spend. After taking account of all these factors, margins excluding charges continue to be a healthy 10%.

In our Boat segment, Q1 revenues were up 1% compared to the prior period. If we exclude the impact of the divested U.K.-based Sealine brand, which was sold in the third quarter of 2011, revenues increased by 5% for the quarter. We recorded solid growth in wholesale shipments in the quarter, reflecting the requirements of our dealer.

On the international front, adjusting for the Sealine divestiture, our both segment sales outside the U.S. increased by about 3% for the quarter compared to the first quarter of 2011. Canada, our largest non-U.S. boat market, showed strong sales growth.

European marine markets, which experienced double-digit declines in sales, were under pressure due to consumer concerns about macroeconomic condition. As a result, we're continuing to plan for a decline in European industry sales in 2012, which we believe can be offset with share gain.

As you can see from the U.S. powerboat industry demand statistics provided by Statistical Surveys Incorporated, the U.S. retail market for 2011 unfolded generally as we'd expected with the preliminary estimates for the full year at approximately 139,500 units. This estimate reflects an increase of one-half of a percent compared to 2010. Although this increase is less than 1%, it does represent the first annual increase since 2004.

Based on preliminary first quarter data, aluminum and fiberglass outboard boat markets continue to demonstrate growth, while the fiberglass sterndrive inboard boat market was flat during the quarter which represents an improvement compared to last year's decline.

While we're pleased with the first quarter U.S. retail market results, our view is that the level of growth in the first quarter is likely not sustainable over the year. If we look at preliminary results for March, the largest volume month of the quarter, the market improved 7.6% versus March of 2011.

As we break down March retail volumes, outboard products improved nicely. The sterndrive inboard fiberglass product volumes declined at high single-digit rate. At this early stage of the season, the status of 2012 retail volumes in the fiberglass sterndrive inboard category remains unclear to us. We pay very close attention to this boat category, since it constitutes about 50% of our boat segment sales dollars. During the quarter, Brunswick U.S. retail boat sales growth was greater than that of the overall market, reflecting market share gains in specific market segments.

As we stated in our fourth quarter conference call, we increased our pipeline by approximately 2,000 units at the end of 2011 to establish stocking levels that are appropriate for current market conditions. Therefore, our quarter-end pipeline is up 11% versus the first quarter of 2011. The quarter ended with 39.5 weeks of product on hand on a trailing 12-month retail basis. And this is comparable to the weeks on hand at the end of first quarter in 2011.

Our pipelines for aluminum product 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 that continues to be at record low levels.

The Boat segment sales growth and lower restructuring charges led to the segment reporting its first profitable first quarter since 2007. Getting over this important hurdle in the quarter is a great tribute to the progress Andy Graves and his entire team are achieving throughout the Boat segment.

Now let's take a look at our two recreational segments. Life Fitness completed another excellent quarter. Sales were up slightly compared to last year’s first quarter despite having a difficult comparison from last year's record setting quarter of growth. If we were to exclude the impact of last year's large order from one of its customer categories, sales for Life Fitness would have increased about 10%. International revenues on the same basis were up in the quarter by 2%, while U.S. sales increased by 17%.

Life Fitness' solid revenue growth over the last two years supports our longer-term outlook for this segment. Chris Clawson and his team have done an outstanding job of executing their strategic plan, which has allowed Life Fitness to outpace its competitors and gain market share.

When we combine the organization's outstanding performance with a healthy fitness sector and positive demographic and health trends, Life Fitness is well positioned to continue to deliver excellent results. The introduction of new products combined with the successful existing product line has positioned Life Fitness for continued leadership in the commercial fitness equipment sector.

In 2011, Life Fitness introduced 25 new products. The four panels on this slide represent just a few of the Life Fitness' new product introductions for 2012. Starting in the upper left is the LifeCycle GX. Group cycling is one of the popular fitness activities today. And with this cutting edge design and features, the GX is the latest from the company that invented the extra cycle.

Next in clockwise order is Lifescape, a first in the series of technical innovations that we will be rolling out to enhance the cardio experience. It features interactive high-definition hikes, runs and bikes to famous locations around the world with integrated machine controls that adjust video speed to that of the exerciser and resistance to match the terrain.

The Activate Series is the new streamlined connection of cardio equipment, featuring a variety of efficient and effective workouts for a user. And finally, the Synrgy360 combines several popular total body dynamic exercises into a system that helps personal trainers to more effectively train individuals and groups by giving users unlimited ways to exercise.

Segment operating earnings in the quarter grew modestly, while operating margins remain strong at 15.1%. These are strong results given a difficult comparison to 2011 when sales grew by 31%.

Sales in Bowling & Billiards were up 3% in the quarter. Our Bowling products business experienced solid growth, while same-store retail bowling revenues were down slightly versus the prior year. The segment's operating earnings up slightly due to higher sales.

Now I'm going to 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 2012 and beyond.

Peter Hamilton

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

Let me start with restructuring, exit and impairment charges, which were approximately $200,000 in the quarter. The net charge reflects continued manufacturing consolidation activities in our Marine Engine segment, partially offset by $1.5 million of gains primarily resulting from the sale of properties in the Boat segment. Our current estimate for the full year 2012 restructuring charges is now in the $5 million to $10 million range or $0.05 to $0.10 per share for previously announced actions.

Net interest expense, which includes interest expense, interest income and debt extinguishment losses, was $17.1 million in the quarter, a decrease of about $10 million versus the same period in 2011. Lower losses on early extinguishment of debt combined with lower debt balances contributed to the reduced net interest expense in the quarter.

We did not make any debt repurchases in Q1, but are resuming activity in the next three quarters. During the month of April, we repurchased approximately $10.5 million of debt. And for 2012, our plan continues to include debt reduction in the range of $75 million to $100 million.

Our estimated net interest expense for the year is approximately $76 million to $80 million. This would result in a reduction in net interest of $18 million to $22 million compared to 2011.

During the first quarter, our debt outstanding increased slightly. It remains our objective to regain our investment-grade status as we continue to lower debt levels and increase EBITDA. In fact, both S&P and Moody's raised our credit ratings earlier this month.

Now during the quarter, foreign currency had a small negative effect on sales and a modest positive impact 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 that currency exchange rate fluctuations have on year-over-year earnings comparisons.

For the full year 2012, we are planning for currency to have a modestly unfavorable impact on sales primarily due to a weaker euro versus the dollar. We're currently forecasting only a slight decline in operating margin percentage due to currency, primarily resulting from a stronger yen versus a dollar and the euro. Our planning incorporates again an euro exchange rates that are slightly unfavorable versus the current market rates.

Our effective tax rate for the first quarter was approximately 21% compared to a rate of 32% in the first quarter of 2011. The reduced tax rate reflects our expectation that a higher percentage of our 2012 pre-tax earnings will be derived from domestic sources which will not require a corresponding tax provision due to specific GAAP requirements. Our 2012 tax expense will continue to be comprised primarily of foreign and state income taxes. And given our current earnings guidance range, our expect our overall 2012 effective tax rate to be approximately 21%.

Now let's turn to a review of our cash flow statement. Cash used for operations in Q1 was $70 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 $24 million. Our current estimate for D&A in 2012 is approximately $95 million.

Pension expense resulting from our defined benefit pension plans totaled $6 million in the quarter compared to $8 million in the prior year. In the quarter, the company made minimal cash contributions to its plans. The inflow on the cash flow statement therefore primarily reflects the amount of the pension expense.

We expect our 2012 pension expense to be approximately $25 million, which is a decrease of $7 million from 2011. This includes 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 primarily working capital accounts, excluding the impact of divestitures, resulted in a use of cash in the quarter and totaled approximately $151 million. This change is largely due to the seasonal requirements of marine customers. By category, accounts and notes receivable increased by $106 million. Inventories increased by $26 million. Accrued expenses decreased by $81 million. And accounts payable increased by $59 million.

Given the seasonality of our sales in the marine businesses, we anticipate the liquidation of working capital over the balance of the year. We currently believe that changes in working capital should result in a modest use of cash for the year based on our current revenue assumptions.

Capital expenditures in the quarter were approximately $18 million, while 2012 plan includes approximately $120 million in capital expenditures. The increase from 2012 primarily reflects the amounts required to fund our growth initiatives. Partially offsetting our capital expenditures in 2012 were $9 million in proceeds from the sale of property, plant and equipment in our Marine segments.

So in summary, during the quarter, we reported $78 million free cash flow usage which accounted for almost the entire reduction in cash during the quarter. Supplementing our cash and marketable securities balances is net available borrowing capacity from our revolver of approximately $270 million, which when combined with our cash and marketable securities provides us with total available liquidity of almost $700 million.

Now, I'll turn the call back to Dusty now for some concluding comments.

Dusty McCoy

Thanks, Peter. As we stated in our press release, on the basis of our solid performance in the first quarter and early season improvements in the retail marine marketplace, we're increasing our 2012 earning guidance to a range of $1.30 to $1.50 per diluted share. And although we've raised the lower end of our guidance range, our outlook for 2012 remains generally consistent with the plans described during our investor event in Miami earlier this year.

We're continuing to target mid-single digit revenue growth in 2012 along with a strong increase in operating earnings. Our planning for the year reflects a stable to improving U.S. marine market and a declining European market.

As a result of continued cost reductions and improvement in operating efficiencies, our target gross margin for 2012 remains at approximately 24%. 2012 capital expenditures, SG&A and R&D expenses will be higher than in 2011 as we fund growth initiatives. And as Peter has commented, 2012 net income will further benefit from more restructuring cost and reductions in interest, depreciation and pension expenses.

Our second quarter will have some unfavorable comparisons to the prior year, similar to those that affected our first quarter results. Specifically, these are the absence of Sealine revenues, which approximated $20 million in the second quarter of 2011.

As we noted in the Slide 16 of the deck we've been discussing this morning, the non-recurrence of the large order from one of Life Fitness' customer categories which mainly affected first quarter comparisons is anticipated to have a modest impact on the second quarter of 2012 as well.

And although Mercury's action plan to ramp up sterndrive production is making excellent progress, the Engine segment's revenue growth in operating margin will continue to be negatively affected into the second quarter by these issues.

Lastly, we believe European growth rates in our Marine segment will not be comparable with those anticipated outside of Europe due to continuing macroeconomic factors. So we expect that the double-digit declines experienced in Europe in the first quarter will continue at least through the second quarter.

Our expectations, however, for the second half of the year are for significant sales and earnings increases as growth initiatives contribute. Mercury achieves full plant efficiencies, Life Fitness has more normalized comparison and as our Boat segment benefits from a more stable marine marketplace, which will enable it to produce and sell more products than in the second half of last year.

And with these comments as background, we'll now turn the call back to our operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Please standby for your first question which comes from the line James Hardiman, Longbow Research.

James Hardiman - Longbow Research

I guess my first question is just on the outlook. Obviously you saw some pretty strong growth for the industry. Is it safe to say that that was better than what you were expecting? But then ultimately the European declines were maybe worse and that's why you're essentially where you were three months ago. The assumption is that the U.S. couldn't continue to sustain the pace that we saw in the first quarter. Is that the bigger reason why you haven't gotten a little bit more optimistic on the industry outlook? And ultimately, can you just talk maybe a little bit about why you think that deceleration is going to take place?

Dusty McCoy

The sterndrive inboard fiberglass market is behaving generally in the first quarter like we thought it would. The outboard product categories which are both aluminum and outboard fiberglass, we anticipate will be up and they're actually up a little stronger than we anticipated. And our businesses are performing a little better there than we even thought with this increase in marketing and share gains.

So when you look at the uptick in boats, we feel like the market is way up, but that's because the lower-margin product is where the up is. And then we have to, a little later into that, look at Europe, and our judgment is that Europe at least here in the selling season is likely to remain a pretty difficult marketplace.

So we're ending up, when you shake all that up for our marine business on a global basis, to say it's flat to up slightly. I would put it in the 0% to 5% range. It could change as we go into the quarter, into the real selling season but where we sit right now, that's how we feel the whole marketplace looked. And as far we raise the lower anchors within, we've got not lots of nice protection. On the bottom stack, we're not prepared to say that the market is going to give us a bigger uplift as it expands.

James Hardiman - Longbow Research

And just so on clear, on the market share side of things, I thought you said that generally you are performing better than that call it 15 % growth for the industry, was that the case overall at retail or was that just sort of segment by segment, but you may have to said a view up a little bit less in the industry, can you just sort of clarify where you guys were versus the industry?

Dusty McCoy

At retail, we are up more than reported, 16% for the industry, not in every segment. We've got some placements in some brands, well they maybe not be down a little bit but overall we're up quite nicely, at retail versus the 16% as the stats reporting in the first quarter.

James Hardiman - Longbow Research

And can you talk about just how you've been able to do that, it's been a pretty well established bare case as you pointed out, 50% of your business comes from the part of the market that from an issue standpoint, it doesn't seem to be growing. So your ability to beat the industry is even impressive when you take into account the mix shift. Can you talk about your ability to gain share despite the negative mix shift.

Peter Hamilton

Well, first even with a negative mix shift we may be doing just fine in the segment, its going down, James, from a share perspective. But I think there are three things that are really helping our boat business and I want to stress, we're gaining really nice share in our engine business also especially in the outboard category because we have a lot of shares and the turn around business, we've already gain a lot more of share there.

First, as we look at the boat side, we invest a lot of money, in 2009 in our dealer-network. We've continue to work hard to keep our dealers healthy. We believe our dealer network is healthier and better situated in 2012 than it was before we began this recession. And I bet this can't give up true dose to the dealer network if its start there.

And I think secondly, as we've gotten out of brands that we believe because of a lower market, it's just more going to position us for a lot of reasons to be successful.

Our boat business have gotten very good at choosing the right products to take to the marketplace and while we have acute fewer products or models than we did prior to the recession and we've gotten a lot better at bringing the sort of model to the marketplace that actually sell and work well.

And then thirdly, I think our communication with the dealers because of they are better and we are better is permitting us to be a lot more flexible with the dealer network. I suspect many would say, we're still not flexible enough, but we're doing as best as we can, north of production capabilities that we have.

And I think that partnering with the dealer network and really trying to help them hit their local retail market with the appropriate product, it would be the (inaudible).

James Hardiman - Longbow Research

And then just last question here, it's an unanswerable question, you talk a little bit about how your thinking impacted your business, I guess particularly, at retail, is that ultimately the reason why, versus the 16% for the quarter, you're still thinking from an industry perspective maybe near to 5% just because there was demand pulled forward, how should I think about that?

Dusty McCoy

The first quarter is generally less than 20% of the sales per year. I think there were some pretty good weather, et cetera and as we focus in on March, it's showing which is the biggest month of course, just showing a growth a great increase in the overall market and if an increase in the market, we like and are comfortable with and think it will continue to improve as time wears on.

But again, we go back to the real increase, the significant increase, is occurring on outboard product which are lower dollars and therefore our sales growth is it governed a little bit by those lower dollars rather than the higher dollars sterndrive inboard products.

Operator

The next question comes from the line of Ed Aaron, RBC Capital Markets.

Ed Aaron - RBC Capital Markets

I want to maybe just circle back on your full year industry outlook, so at the start of the year, you kind of talked about a flat planning assumption, now I guess, the range is maybe flat to up 5%, just a sort of for clarification purposes, the industries at the upper end of that range, would that imply upside to the guidance that you've laid out in terms of what your earnings are going to be?

Peter Hamilton

Yes and no, Ed. There is one other factor that I want you to keep in mind here, we've got a lot of new product coming to the marketplace and that's a part of our growth initiative. And a lot will be what we want the pipeline to be at the any particular time in time and whether how much room we're leaving in the pipeline for all the new product we have coming.

Yes, one would say, if it goes to 5% or even above, there are to be some upside in our numbers and we're just going to have to wait and see how it slides out. And then talk to our dealers about the new product streams that's coming and then put it into the pipeline on wholesale basis, which of course will governed our sales and earnings, but we think it is right considering all the circumstances.

Ed Aaron - RBC Capital Markets

Can you maybe also just address your ability to fully meet demand, the product in the first quarter? The pipeline inventories look fine but the feedback from some dealers seem to be have in that or maybe they weren't getting certain boats fast enough to their liking, so just was hoping you could maybe kind of comment on just how you managed the pipeline inventories through what seemed to be a pretty strong first quarter at retail?

Dusty McCoy

Firstly, we try to anticipate in the outboard product in improving first quarter versus last year and that's why we talked about it at year end. But we've increased the pipeline inventory by couple of thousands boats, Ed. We were trying to get at smaller product in the further market that we thought was going to move very well in place, that the dealers would be sitting there ready for the marketplace.

And we've been running pretty much flat out in certain of businesses here in the first quarter that try to meet demand. But we can never be in the perfect ground. And I've said in answer to the last question, well I generally believe we're working a lot better with the dealers and they would tell you we're getting new product much better to position them, to compete in the marketplace. But we're never perfect.

I suspect frankly, and other issue that probably would affect not only our dealers but other dealers is the difficulty we've had in the ramp up of the sterndrive engine business and therefore getting sterndrives to builders as they need them in order to meet dealer demand.

We've put our customers through some pain. We've put our own boat company in excruciating pain and we're working our way through that and we'll have to take the care of that in the second quarter. But I have no doubt that there are places where there are folks who would like to have some sterndrive products. They didn't get it when they wanted.

Ed Aaron - RBC Capital Markets

And just one quick clarification on that, then I'll pass it along. The sterndrive production issue, it sounds like that kind of going to run through Q2, is that going to fully made up for in the back half for the year or to the extent that maybe end up short in the market, on those products, is that something that, you half doesn't get made up for until 2013?

Peter Hamilton

I think the latter is more the case, but I doubt that we can fully make it up.

Operator

The next question comes from Tim Conder, Wells Fargo Securities.

Tim Conder - Wells Fargo Securities

Dusty, just little more clarification on your broad expectations here, heading into the year, I mean I think you've said before that you plan for Europe to be down, sort of unfolding that way. And then for the U.S., I guess the broader clarification is here, entering the year you said, you saw a little raw market flattish. Was that overall market a global comment or U.S. market comment.

Dusty McCoy

That was the global comment, Tim.

Tim Conder - Wells Fargo Securities

And so you're saying now, globally you see the markets flat up 5%, is what you're saying?

Dusty McCoy

Yes. That would the case. I want to keep expressing that European market is very difficult right now. And what we've said in our prepared comments, Tim, was we think it's going to be worse than that as our plan advance. So we're going to need the U.S. markets to be fairly strong to permit to make all that up.

Tim Conder - Wells Fargo Securities

But again in general, entering the year you were saying flat globally and now you're saying flat to up 5% with the European market being weaker than you anticipate and the U.S. being stronger than anticipated moving collectively get them to flat to now flat to up 5%.

Dusty McCoy

Correct. The only other thing I will say is that we don't get people so excited. That movement is going to be in our view right now primarily in outboard based product which is lower dollars and lower margins forth.

Tim Conder - Wells Fargo Securities

And again, in the Engine segment you called out some specific, the gains you had last year and clearly this year, if you apples-to-apples that you had a higher mix of outboard and then the ongoing issues, the ramp issues, the cost you incur in there in sterndrive.

So again, that's why potentially even though the higher outboard because of those two reasons you're not seeing the progress on the engine side, is that correct?

Peter Hamilton

Yes, but there are two things that are going on here, maybe we just need to step back and think about the whole company here from moment, Tim, and some of this happened in the engine business.

The issue in the engine business was we had $11 million of non-recurring items last year. That improved earnings. And they weren't there this year, and we had lower than we had anticipated sterndrive production.

And when we mix those up, our engine business looks fundamentally on the earnings side flat, down slightly, not withstanding the stranded out difficult that they've had. And it's speaks of volume, then about how much we've increased our outboard production, healthy and they performed in the U.S. and as well on Europe.

And we had to offset with all of that significant declines in Europe. So the engine business performed very well. if we step back for the whole company and we've got the delay we look hard internally. How are we really operates. And we sprinkle this throughout our presentation this morning. There are lots of things that have nothing to do with operations. They came in and out of our earnings in the first quarter last year and the first quarter this year.

And it'll not shake all of that out, and I'll let people talk to Bruce to get all the detail, because I don't want to take up the call. But our sales are up 1%. Our EBIT was up 9% and our EPS was up nearly 16% from a pure operating standpoint, it's within our control and have a running foot.

And it's a real tribute to our people with what's going in Europe and all the other issues we've dealt with that they've done good job from a pure operating standpoint.

And from pure operating standpoint, our margins are up at the operating line, even with increases in SG&A and R&D that we get plan in order to fuel growth. So it's great results for our folks. And Bruce can walk everybody through the details but its all here in our presentation. You just have to step back and head it up.

Tim Conder - Wells Fargo Securities

On the outboard engine side, the 150 that you've introduced has been very, very good. And I think that you've even alluded to that you're sold out on that product and are actually building some more tooling for that product.

Number one, can you talk about how that is going and then number two, the time table for looking at expanding that new version family whatever you're calling it here, the 150 the current SKU and both the smaller engines and then larger engine to that new family.

Dusty McCoy

The engine is so successful that we are on allocation which is a good problem and a bad problem and we do need to ramp up, the knowing of additional tooling and getting in place and then we're likely several months away from doing that.

We have gone the investment process for significant investment in an entirely new horsepower range of product based on the 150 product and I'd like, Tim, not to be a lot more specific in that for competitive reason but we are pleased and very confident that we have a real winner as new platform that coming to the market in 150. And that platform is going to continue to be very successful of both for cost and sale, to keep us competitive for very long time.

Tim Conder - Wells Fargo Securities

And last question on the Engine, is so you miss sales in the 150 and you've missed sales in the sterndrive here in the first quarter just because of the ramp issues on the sterndrive and just not have enough product on the 150.

Dusty McCoy

I think that's right.

Operator

The next question comes from the line our Scott Hamann, KeyBanc Capital Markets.

Scott Hamann - KeyBanc Capital Markets

Can you discuss some of the trends you're seeing in the used boat markets and some of the volume and pricing?

Peter Hamilton

We continue to hear this from our dealer, as light as even earlier this week. Used boat pricing is increasing and the availability of high quality used boats continues to be pinning. All of which from many of our dealer standpoint point towards better new boats sales of mix, Scott.

Scott Hamann - KeyBanc Capital Markets

And then just in terms of the Sealine operating profit contribution to Boat segment this quarter and what is it you expected for the year to benefit?

Peter Hamilton

That's something we've talked about.

Dusty McCoy

It's fairly modest.

Scott Hamann - KeyBanc Capital Markets

And is this still boat ramps within the portfolio that are operating at loss?

Dusty McCoy

Yes.

Scott Hamann - KeyBanc Capital Markets

Is it down to just one now?

Dusty McCoy

Generally, yes. One category. I tend to think I would add as categories of our business and I would say that our boat business in Europe is going to have tough time this year also, Scott.

Operator

The next question comes from Gerrick Johnson, BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

I was hoping you could describe a little bit more clearly what you mean by pipeline, is that outstanding on filled orders?

Peter Hamilton

That is boat sitting in dealership, Gerrick.

Operator

Next question comes from the line of Jimmy Baker, B. Riley & Co.

Jimmy Baker - B. Riley & Co.

First your comment Europe, I would think weaker than anticipated market there, could bring you at Mercury and separately in your Fitness business, I mean before the inclusion of international brands from Mercury to the boat group, Europe was just 6% of the boat group sale.

And now maybe that's 11% or so. So it's just being slight if even their market was down dramatically the impact to the boat group would not be that severe. I'm just wondering how you're thinking about that.

Peter Hamilton

Generally correct, yes. That the real issue as we Europe unfolding for the remainder of the year, it's going to be in our interest. In the first quarter, sales in Europe across all of our businesses were down in the range of $20 million that would have been $4 million to $5 million down drafting earning and as we see the year unfolding that's going to continue to be an issue.

Jimmy Baker - B. Riley & Co.

And then staying at the engine business, maybe you can speak to market share trend there during Q1, I'm not sure if you're commentary on your slide speak on wholesale or retail but from what I'm seeing it looks like you may have lost some share there in sterndrives domestically, maybe even outboards.

But it also seems to little surprising that your Marine elimination were up so significantly given the boat groups, your modest growth and it's weighting towards sterndrives. It would mean that externally you lost some shares at wholesale when you compare your results both wholesale outboard activity and the results from your sterndrive competitor that is interested in your comments there.

Do you feel like you can regain that share when your capacity ramps at Mercury or if maybe your Mercury customer or not necessarily underperforming but just under producing relative to the broader market in Q1.

Dusty McCoy

First let's start outboards. I'm confident with real data in our outboard business that we're gaining significant share in the U.S. and gaining share on a much slower rate outside U.S.

On a quarter-to-quarter basis, that is first quarter this year, the first quarter last year we have seen some share gains and strong drive but I think the real world is we're probably experiencing some share decline first quarter versus fourth quarter or third quarter last year. And like as, Jimmy, says, there are inability to make all the engines that we need to find.

Jimmy Baker - B. Riley & Co.

Are you speaking about share gains on a wholesale level or retail sales?

Dusty McCoy

The outboard business I'm doing is at both wholesale and retail. For the sterndrive business the only retail that we have is through year end. But we're doing a bit of extrapolation here as we try to determine sterndrive business at retail in the first quarter. And that's why I said, my believe is that we've lost share in the first quarter versus third quarter last year or fourth quarter last year. But we don't yet have that at retail.

Jimmy Baker - B. Riley & Co.

On the Fitness side, obviously performed a little better there than you expected here in the first quarter, nice topline against a tough comp and margins, one of your commercial competitors recently indicated their seems some broader industry softness here in April. I mean have you observed that at all, certainly your multi-year plan assumes more modest growth than in recent years. There was pretty significant growth none the less, but just be interested in your thoughts on that segment and Q2 in the balance of the year?

Dusty McCoy

We still feel very good about the segment. Believe we're going to have nice top and bottom line growth. Look our guys are out there in a war everyday for sales, first against competitors and then what's happening economically for instance in Europe and U.K. but we're doing very well and South America is doing very well and Asia it's a break level business.

And we're not loosing any slip over the fitness business and in fact I would say, our folks in our fitness business are doing an absolutely outstanding job. And we like the marketplace a lot. The global number clubs continues to rise. The number of clubs members continues to rise. The club revenues continues to rise and in that kind of context they're all going to need more equipment.

Peter Hamilton

Jimmy, maybe our competitors are having difficulty because of us and we cannot underestimate in fitness the importance of the new product flow.

Dusty McCoy

I happened to be out at ERSO which is the big U.S. trade event. We couldn't get into our booth, because of all the new products.

Unidentified Analyst

Just a question now that you've talked international programs into the support group and then have broken out the pension and reported as a line item in the segments. That disclosure is great, but of course it's somewhat voids the multi-year targets you laid for us in Miami. So can you update your target EBIT margins by segment at least in the Marine segments through '14? And on the dealer pipeline front, I think you ended 2011 with 17,000 units in the pipeline. How should we adjust that historical figure for the inclusion of those international brands?

Dusty McCoy

That's something that we're looking at now. Perhaps the next time we are at a conference, we can update that. Remember these are three year numbers and we don't update three year illustration on a regular basis. But suffice it to say that the shift will benefit Mercury and it will benefit the Bowling segment, because those are the two segments that had the bulk of now frozen to find benefit costs associated with them. And of course it will hurt the corporate number, because it will now bear the financing cost and pension. So that's a big thing that will happen.

Of course, it will not change the bottomline. We will update that as we work on our models and as we get to a public forum where we can get into that detail.

Operator

The next question comes from Craig Kennison, Robert W. Baird.

Craig Kennison - Robert W. Baird

Dusty, maybe I'll go after Board with you. You sell a discretionary product here that certainly depends on wealth. Have you guys given any thought to the implications of tax policy, especially in 2013, when it may or may not change and how that could affect your business on how you run it?

Dusty McCoy

Yes, we think about it a lot. Here is where we are right now. We believe the absence of a clear view on tax policy after the end of this year, Craig, is impacting boats and then the engines. I'm picking a number here, but let's say 30 feet and above, because (inaudible) their income level knows intuitively and from what they hear that they're going to be part of how do we saw the deficit issue solution.

Our judgment, however, is that the tax policy is known, and people will make adjustments and move forward. But it's unknown that's probably causing more issue than what it's all going to be. Another great example here that they were all seeing gasoline prices and there was a lot of nice saying that at $4 the bottom would top out. I think it's fair to say the economy across the U.S. hasn't been harmed by the increase in fuel prices that we've seen. The consumer ultimately makes adjustments and then makes the decisions about what they want to do and what they want to participate in.

And we continue to believe then that's really important that we keep heavy with lots of new product coming to the marketplace so that our brands and all of our businesses are (inaudible).

Operator

The next question comes from Rommel Dionisio, Wedbush Securities.

Rommel Dionisio - Wedbush Securities

Dusty, in your prepared comments, you touched on investment spending later in the year, and I wonder if you could just provide us a little more color on whether that's R&D or marketing. And in light of the slightly improving boat work, at least on the lower end of the fiberglass outboard and aluminum, is that going to change your marketing spend? In other words, if you see the market improving, are you going to be spending more money to support some of these new product launches you're coming out with?

Dusty McCoy

Well, in our prepared remarks, we did say we'll continue to invest in growth. And that is R&D as well as in capital and there is some marketing. In tems of whether we're going to spend more, likely not. We're getting very nice market share gains in the specific categories you mentioned. And I think we're very happy with where our brands are positioned and we're positioning those plans as against the competition.

Rommel Dionisio - Wedbush Securities

After the divestiture of Sealine, is your percentage of Boat division sales from Europe about 10% or is that before Sealine divestiture?

Peter Hamilton

That excludes Sealine.

Operator

The next question comes from Joe Hovorka, Raymond James.

Joe Hovorka - Raymond James

Could you give your retail sales increase in the quarter? I know you have been doing in the last several quarters.

Dusty McCoy

If you want, we can go into SSI with report of the industry and parse through where our brands are. They're just short of 20% retail according to the SSI numbers. I'm not saying that they're perfect. In fact, I would say they are not. But if you want to get a perspective as to how we're doing versus the industry, that's what that Q would tell you.

Joe Hovorka - Raymond James

You're saying if you weight the segments by your weighting, you're up 20%. I was unclear of what you said there.

Dusty McCoy

Yes.

Joe Hovorka - Raymond James

And that's a good approximation of where you're at in the first quarter.

Dusty McCoy

Well, using SSI compared to the rest of the competition, yes. We're in different places and in our own internal reporting, but I've always been using, Joe, the SSI number.

Joe Hovorka - Raymond James

And you made a comment that sterndrive was as expected relative to three months ago. I guess I was under the impression that sterndrive was expected to still be down in 2012 and the offset would be the two onboard segments getting you to a flat number. Was I misreading that before?

Dusty McCoy

No, you weren't. When we're saying as expected, focused on a little more on March than perhaps the entire quarter. The entire quarter was flat. But March was down high single digits. It's down to flat right now.

Joe Hovorka - Raymond James

And you also made a comment that the mix shift was going to be negative in '12. Part of the explanation of we're looking at 0% growth for the worldwide demand three months ago. Now, 0% to 5%, but we haven't changed much as far as the guidance on the top side. And part of that was the shift towards the lower margin product. Again, I thought we were also assuming that shift three months ago. Or is this shift more dramatic now?

Dusty McCoy

The shift is more dramatic now. The movement on a relative basis in mix has been stronger in the outboard product.

Joe Hovorka - Raymond James

More so than you even expected.

Dusty McCoy

Yes. And Europe has been weaker than we expected. And when we shake all that mix up, Joe, that's why we're coming to the conclusions we are.

Operator

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

Dusty McCoy

Thanks, everyone, for participating. Also, we always appreciate the quality of the questions. And you were going, in my view, right to the issues that I'm sure everyone is looking at. I do want to stress we're really happy with this quarter. Actually from our perspective, we did very well. I tried to lay out from an operating perspective of how well we've performed. And as we said earlier, we will work our way through the second quarter and we're confident about the remainder of the year.

Thank you for participating. And as always, we appreciate everyone's interest and questions. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a very good 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 Corporation CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts