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Briggs & Stratton Corporation. (NYSE:BGG)

Q3 2008 Conference Call

April 17, 2008 10:00 am ET

Executives

James E. Brenn - Chief Financial Officer and Senior Vice president

John S. Shiely - Chairman, Chief Executive Officer and President

Analysts

Sam Darkatsh - Raymond James

Gil Nathan - Restoration Capital

Craig Kennison - Robert W. Baird

James Bank - Sidoti & Company

Peter Jacobs - Reagan McKenzie

Justin Harrison - Ramsey Asset Management

[Gouze Benpark - Evantick Investment Management]

Stephen Wang - [Citadel]

Operator

Good day ladies and gentlemen and welcome to the Briggs & Stratton Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answers session and instructions will be given at that time. (Operator Instructions). As a reminder today’s presentation is being recorded.

I would now like to turn the conference over to your host Mr. Jim Brenn, with Briggs & Stratton. Mr. Brenn please begin.

James E. Brenn - Chief Financial Officer and Senior Vice President

Thank you Chris, good morning. As Chris indicated, I’m Jim Brenn, Chief Financial Officer and joining me today is John Shiely, our Chairman and Chief Executive Officer. Today’s presentation, our answers to your questions will include forward-looking statements, these statements are based on our current assessment of the markets we operate in and actual results could differ materially from any stated or implied projections due to changes in one or more other factors as described in our filings with the SEC. The conference call will be made available on our website approximately two hours after the end of this call and a phone replay will also be available within a few hours of the completion.

Now, here is John to talk about the third quarter results and our outlook for the rest of the year.

John S. Shiely - Chairman, Chief Executive Officer and President

Thanks for joining us this morning. As you saw in this morning’s press release we reported third quarter consolidated net sales of 725 million an amount slightly over net sales in the third quarter of last year, and approximately 5% below where we had projected the quarter would be.

On a consolidated basis and net sales track reasonably well in total, but at the segment level our experience was different than we anticipated and I will discuss that in my following comments.

Engines segment sales for the third quarter were 546 million, 30 million greater than last year and almost 20 million more than we had projected. Unit volume increases both domestically and international, as well as the benefit of a stronger euro, with the major contributors to the better than anticipated performance over last year and projection. The mix of the shipments to-date has tended to favor small displacement engines as we thought it was based on our projected market placement gains.

Well, we are encouraged by how well our engine shipments have done fiscal year-to-date, we realized that our third quarter engine shipments to the original equipment manufacturers are filling the pipeline before a good evaluation and this spring market has been established. Consequently, fourth quarter demand will be dependent on how lawn and garden equipment does at retail this spring.

As we mentioned in the press release, we know that OEMs in major retailers are watching their inventory levels very closely, and the lawn and garden market appears to be very slow in developing. Therefore, we are being cautious and have lowered our anticipated engine shipment performance in the fourth quarter to a level that will make our fiscal 2008 shipment level approximately the same as it was in fiscal 2007.

Power product segment sales for the third quarter were 240 million, 8 million less than last year and about 43 million less than anticipated. When we analyze the sales reduction from last year, we see that shipments of lawn and garden equipment were up from the prior year, primarily the result of obtaining new placement of product for fiscal 2008. In this initial year replacement with major retailers our focus has been and will continue to be on quality and delivery of products. Well, the new products are only a small portion on our overall volume, they are an important addition to our overall product offerings.

Generator and pressure washer product shipment declines to offset the improvement we saw in lawn and garden. The generator markets still seems to be searching for a bottom as a lack of major storms in the last two years combined with the current sluggish economy appears to have blended consumers activity in this category.

This current market softens may even have contributed to one of our major competitors filing for bankruptcy during the third quarter. Sales of pressure washer product, which had shown a lot of strength through the first half of the fiscal year, also decreased in the prior year in the third quarter. The decline in pressure washer volume may be indicative of the economic environment and possibly the late spring.

As with the engines, even though we have not received significant cancellations for pressure washer product at this time, we’ve become more cautious in our fourth quarter outlook and have lowered our expectation to sales volumes for the year that are more aligned with the fiscal 2007 levels.

The sales of all products in the power product segment performed short of our forecast for the third quarter. For lawn and garden equipment the short fall was primarily related to our forecasted shipments to our dealer organization. We commented on the slow start for the season and is reflected in the orders that we have received from the dealer base.

They understand that we are having the equipment available for them and they remain cautious of taking too much inventory themselves, until they can assess how the market develops this spring. We also experienced weakness in pressure washer and home standby generator product demand for the reasons we’ve already mentioned.

Third quarter consolidated operating income was $53 million, approximately $30 million greater than the third quarter of last year and approximately 7 million below where we had projected the quarter would be.

On the engine segment operating income for the third quarter was $66 million, $50 million greater than last year, and almost $80 million more than we had anticipated. And that was the driver of the improvement in consolidated income from operations.

As discussed in the press release a significant piece of the improvement over last year was the lack of an impairment charge in the current quarter. The remainder of the improvement was provided by initiatives to lower selective manufacturing cost and the closure of the plant, we took the impairment for last year, which was completed last quarter and has benefited us with lower cost and better utilization of other manufacturing operations. The improvement to forecast was mainly driven by the incremental sales volume with all the other operating metrics performing close to forecast.

Our power product segment within operating loss for the third quarter of $10 million posted a decline in operating income of about 16 million from last year, and almost 23 million from forecast. Close to half of the 16 million decline in the operating income between years was a result of startup cost related to new operations and our plans to produce lawn and garden equipment.

The majority of the rest of the decline between years was related to the reduction and sales volumes for generator and pressure washer products. Half of the shortfall to our operating income target for the quarter was the lower than anticipated sales volumes pretty much split equally between lawn and garden equipment and all other products.

The next largest issue has been our estimated what the startup expenses would be in the new lawn and garden equipment operation. It has taken longer to achieve productivity targets than we first anticipated and component delivery challenges related to the late finalization of new products specifications have been an issue. We believe the issues have been identified and will be eliminated as we proceed into fiscal 2009 production.

Finally, utilizations and the operations have produced pressure washers was less than anticipated in the third quarter as we try to monitor inventory levels going into the spring season. As we mentioned before, we believe pressure washer demand may continue to soften in the fourth quarter and that concludes what we wanted to say about the third quarter results. So I finish up with our projections for fiscal 2008.

And now we have significantly lowered our projections for 2008 based primarily on our concerns in two basic areas. First, because of the slow start for the season, inventory levels that have been targeted at the OEM and retail levels, the economic environment and the general assessment of the mindset of the consumer; we are anticipating much lower sales of both our engines and our end products.

As I stated early in the call, we are now forecasting our shipments to be flat between years for both engines and pressure washer product where we have previously forecast strong single digit volume gains. We believe our flat projection between years still reflects an improved market placement for us because they are forecasted as I believe the market maybe down 5% to 7% this year. Second our lower forecast for sales translates into much lower utilization of our production facilities in the fourth quarter for all product lines.

As we stated in the press release, I want to reemphasize that we are not taking down production early in the fourth quarter. We will determine the optimal production level to run as we get the firmer understanding of market demand and how the OEMs and retailers are responding to it.

Now we would like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Our first question or comment is from the line of Sam Darkatsh, please excuse me for miss pronunciation with Raymond James. Your line is open.

Sam Darkatsh

Hi, Jim, how are you.

James Brenn

Fine Sam.

Sam Darkatsh

Number of questions, I’ll ask you, if you will and get back into the queue. First of, did I hear that right with respect to the engines your $20 million in sales above plan and $18 million in EBIT above plan? The mix was roughly inline with what you were looking for and material cost or at least input cost had to be higher. So help me understand if my math is right. Why there is such a positive variance with the $20 million variance of sales?

James Brenn

Well, the engine segment sales in fact were up $30 million, right.

Sam Darkatsh

But versus plan, I thought John said was over, it was 20 million on the plant?

James Brenn

I think we did better at the variance line then we thought we are going to do. And we had some pretty good reductions in couple of the manufacturing overhead cost categories primarily in healthcare benefits and in some case our warranty reserves are lower than they have been in the past.

Sam Darkatsh

Got you.

James Brenn

All is gotten better.

Sam Darkatsh

I got you. Okay. Talk about exposure to steel and aluminum inflation, how that hits or might effect '08 and '09 as you look out?

John S. Shiely

I would tell you, I mean, there is some creep that’s already occurring in ’08, and we are seeing obviously especially in steel even where we have contracts, some of these guys are coming back now due to pushing for surcharges or talking about potentially just ignoring the contracts that are in place. I think that probably gives us a little bit of headwind in Q4, probably in the 2 or $3 million of the reduction that you are seeing is coming from that increased cost. The real ramification in my mind is for ’09. Right today, as we take a look at the commodity cost for aluminum and steel in particular, we probably are looking at probably at 40 to $45 million commodity cost increase in the engine business somewhere in the probably 25 to $35 million in the yard product business because of the steel. And those things will have to be recovered through pricing in next year. The real question in my mind is where do cost continue to go during the year and we are going to try to evaluate what type of pricing mechanism we’re going to use for next year on that.

Sam Darkatsh

So, did I get that right, it’s 40 to 45 million in engines and 25 to 35 in yard products or is it?

John S. Shiely

Or in Power products, so the combination of the steel is used in lawn and garden equipment, but also anything that we use in the home power part of the business.

Sam Darkatsh

About 65 to $80 million all together or so?

James Brenn

Yeah.

Sam Darkatsh

Okay. Talk about the dividends versus earnings expectations and what your thoughts are in terms of either maintaining or towards discussing the dividends going forward?

John S. Shiely

Yeah, this is John Shiely. I think that you would find that we are committed to the dividend in the long run, you can’t pay the dividend unless you earn the dividend. But in the short run, the only impediments we could see right now to paying the dividend would be a liquidity issue or some bank covenant kicking in that would be troublesome. But, we don’t see that on the horizon. In cash flow it’s always been a favorable at Briggs. We have always been able to sustain the dividend through tough time. So we remain committed to the dividend.

Sam Darkatsh

Okay. Last question and I’ll get back in the queue. Jim any further start up or shut down costs, as it is sensitive subject a little bit but, in the near to intermediate term that we should be modeling for?

James Brenn

Well, there is probably another $2 million to $3 million in the fourth quarter that we would still say as some productivity issues that we are going to have in putting out the lawn mover products with those startup plans but then that should be gone as we go into ’09.

Sam Darkatsh

Okay. Thanks Jim.

James Brenn

Sam, its probably been on year-to-date basis we are probably looking at about $12 million and with another 2 to3. This year it’s probably $12 million to $15 million issue for us.

Sam Darkatsh

And next year, that would essentially will equal?

James Brenn

That’s an add back to next year.

Sam Darkatsh

It will no longer be. Okay, thank you.

Operator

Thank you, sir. Our next question or comment is from the line of Gil Nathan with Restoration Capital. Your line is open.

Gil Nathan

Yes, can you comment a little bit on the covenant issues like you said it looks like you have a EBITDA, debt to EBITDA covenant of four times, is that or you guys close to that, is there a problem there?

James Brenn

No there is not.

Gil Nathan

Is the 40 million on the income statement included as an add-back to EBITDA?

James Brenn

Yeah, yeah the agreement itself in the competition of EBITDA is not just a straight-off to financial statements that are carve outs and other things that they go into the competition.

Gil Nathan

When I look at the credit agreement all I had seen was it was net income in basically anything on the income statement. And so, I guess besides the 40 million is there something else we don’t or add on to?

James Brenn

Yeah, there are other take away as again or other carve outs in there.

Gil Nathan

Could you tell us what bank EBITDA is?

James Brenn

I don’t have that sheet in front of me right now, I can give you call back on that.

Gil Nathan

Okay, great. Thank you.

James Brenn

You have my number?

Gil Nathan

Yeah, I do.

James Brenn

Okay.

Gil Nathan

Thank you.

James Brenn

Thank you.

Operator

Thank you, sir. Our next question or comment is from the line of Craig Kennison with Robert W. Baird. Your line is open.

Craig Kennison

Hi, good morning guys. I joined a little bit later, I apologize; just could you remind me what the industry outlook, is that embedded in your revised guidance?

James Brenn

Well, actually the industry outlook is probably a negative 5% to 7% from our lawn and garden equipment point of view. That is not necessarily embedded in our forecast I think as John indicated we are going flat with about the same number of shipments we had this year versus last year, which kind of incorporates into that hard number we believe what we feel is some share gain that we had experienced during the year.

Craig Kennison

There is a problem at looking at those industry outlooks is there lawn mower industry outlooks. And so we have a lot of power products that are nor lawn mowers and the story this quarter is it was actually petty good quarter for engines. It was a awful quarter for generators and pressure washers, which there really is no reliable projection data for that out there. There are any reason to believe all that demand for non lawn and garden equipment would be much better if it’s really just a consumer issue?

James Brenn

No and that’s why we were backing off on a fourth quarter.

Craig Kennison

Okay. And then with respect to…..?

James Brenn

We don’t have any reason to be optimistic right now. A couple of weeks, we will see.

Craig Kennison

So why not may be begin the production cut immediately, why risk building inventory and then not seeing that demand materialize?

James Brenn

I think that the risky run if you cut back immediately as it you can’t. You can’t provide the OEM in retailer base with the product they need if the season does not take. Alright, and so consequently what you will find in every year, even after we have heard from may the OEM’s through the retailers that they think that the season is over, we will go and produce at least another two weeks beyond that because what we had in many times in history is season gets warm, moist, and the market pickups. And so the early trepidation by the retailers or the OEMs basically firms around and also they want their products. So, our experience has been that, we first make sure that we understand that the season is really not in play and that’s how we bring it down and we feel we have the ability to bring it down enough within the last six week’s of the fiscal year, that we can keep our inventories in line.

John S. Shiely

We can bring it down very quickly. The bottom line here is the only major remaining domestic producer of small engines and small displacement engines it’s a huge competitive advantage for us to be able to produce in season and that’s an advantage. We want to make available to our customers until such time as it’s clear that they are not going to need that. Anyway, we do, we can’t shut it down pretty quickly at the end of the year and there is always enough so, not always but there is adequate sell through often to so that we don’t end up with the inventory problem.

Craig Kennison

And then with respect to some of your strategic issues, you talked about how that Snapper brand is doing at Sears and then how the Brute brand is doing at Wal-Mart, and then may be address how your OEM customers have perceived those moves and also how your independent dealers have perceived the decision with Snapper?

James Brenn

I guess Craig, all I tell you is that the product that focus Snapper and the Brute are selling as we expected them to sell. So, we have no concerns that they have not done well in the marketplace.

John S. Shiely

Yeah and these are important aspects of our strategic plan, which is we call the powerful solution strategy and we call out the elements of that quite often, they deal with integration of engine and end product that’s we think that’s where its at, in the future dealing with a major challenges of this industry which are consolidation retailers in the thread of offshore producers. We believe that in order to be, to compete successfully long-term we have to have the capability of producing end product if a decision is made to direct engine placement away from Briggs and Stratton. We need a way to respond to that, to deal with it, and in order to have that ability we need the capacity to produce end product and we need to have strong brands and powerful brands and strong placement in the mass retailers. The Brute brand is getting a very good acceptance. The Snapper brand is always been one of the top five brands in consumer power products. And so we are very pleased with how the program is rolling out.

James Brenn

Craig, the other part of your question we asked about how the dealers are accepting it and I would tell you basically that I can speak for all of them per say but effectively they are not required to service the product that’s being sold to Sears because you realize that Seers has it’s own service organization. So, what we think we have provided them with is the opportunity to potentially pickup some service business if someone does come to them and in effective and provided with the same product that we are selling through Sears. So, conceptually they have not been hurt but they benefit from the added advertising is going on now with the Brute power program through Sears and we think that’s going to help the brands in the future.

John S. Shiely

And it gives some opening price point product line that they might otherwise have.

Craig Kennison

And then just any update with respect to the possibility of vertical integration through a partnership or other joint venture with any of your or OEM customers?

James Brenn

No nothing to report there.

Craig Kennison

Thank you.

Operator

Thank you, sir. Our next question or the comment is from the line of Peter Jacobs with Reagan McKenzie. Your line is open.

Peter Jacobs

Hi good morning gentlemen.

James Brenn

Hi Peter.

Peter Jacobs

Jim or John, could you talk about the goodwill on the balance sheet and what the implications could be with the losses in the power products business relative to and then impairment charge this June when you presumably would be doing the acid impairment tests?

James Brenn

The goodwill comes from the two acquisitions, one is the Home Power Group that was done in 2001 and the other one was Simplicity in 2005. As you imply we do the impairment test every year. As we look at it today we don’t believe and we haven’t done, we haven’t done the full competition yet. We would tell you that we don’t have a problem on that. It’s based a little bit on a projection going forward and I would tell you that two factors come into that; One, do we believe that this is a normalized environment for the product that we sell i.e., generators and even lawn and garden equipment. And number two, there’s the value of the engine business that is embedded in that now for example in the Home Power part of the business. When we are selling generators, we supply ourselves a good 70% to 80% of our own engines in there. So, we get the benefit in that competition. I was looking what the benefit is the entire corporation not just what’s happening in our net retail and product.

John S. Shiely

The margins in engines its no secret that they are much more significant than they are in the product. Let me give you a little color background on this. We’ve been here before. We bought the generator business in ‘01. There were no hurricanes in the fall of ’01, there were no landed hurricanes in the fall of ‘02. We went through the in assessing questioning about impairment of goodwill. In '03, the East Coast Platt got hit hurricane is [well] hit and all of a sudden the projections of the value of that business were well beyond what we paid for. Here we are again.

Peter Jacobs

Okay. And if there would be a write-down if we just had to possibly go through that obviously that would take up the debt to capital ratio. Is there anything relative to bank covenants that stipulates a debt to cap level?

James Brenn

Yes.

Peter Jacobs

Could you share that with us please?

James Brenn

Again, Peter I don’t have that with me, sitting in front of me but if you want to call me on that I can give that for you.

Peter Jacobs

Okay, great. And could also just talk about the receivables to and what your thoughts are at comfort levels with the payment of those presumably you are still you know they are still alike there with getting payments from your OEMs and how that flows through. So could you give us your thoughts that you have seen any unusual?

James Brenn

We seen that’s the unusual all that, all those receivable that you see are current there is a fairly large pickup, probably little bit of change in terms, we use to have firms that were a little bit more seasonal as we tried to encourage people to buy product from us in the July to December timeframe we would have given them longer terms, and then historically shorter terms in the January to June timeframe. This year we have at least one major customer that you said look at just for soon how flat terms year around and so we about a little bit of change in the approach to terms, but other than that, that’s all good stuff and I think we are about 95% current on that stuff.

Peter Jacobs

Great. And lastly could you just give us that the engine unit sales numbers for share down think you have done earlier in the call and what your inventory levels are?

James Brenn

Yeah. Today we are running, we are projecting down effect shipments of about 10.4 million units. And today I would tell you that we are running a probably with the inventory at the end of March of about million 7 units, which in effect is about six to seven hundred thousand fewer than we had inventory about the year ago at this time.

Peter Jacobs

Okay. Thank you.

Operator

Thank you. Our next question or comment is from the line of James Bank with Sidoti & Company. Your line is open sir.

James Bank

Thank you good morning.

James Brenn

Hi, James.

James Bank

Hi, just a little bit confused on a power product comps, it looks like pressure washers, and generators the primary corporate, but then on the engine side for lawn and garden it did quite well. So, I’m curious why may be some of your power product segments going in the lawn and garden, excluding the pressure washers might not have all set some of that decline. Because last year I remember both pressure washers and generators being down as well, still soft. So what I’m missing comps?

James Brenn

Pressure washers were better last year.

James Bank

Okay.

James Brenn

I think the reason that our lawn and garden equipment doesn’t exactly reflect the lawn and garden engine aspect of the business is a resale primarily through the dealer organizations. And the dealers are relatively they are up, but it somewhat slow at this time of year in fact are up primarily because of the units that are being sold through mass, the dealer stuff is down. The engine part of the business we did think we picked up market share, I would tell you the most OEMs in the business have been prepping for this season so therefore, they have bought strongly from us from January through March. And we had improved market placements because of two comps are going away. So we have strong engines but, I guess James as far as sitting back and saying we filled the pipeline everyone anticipated it’s going to be a decent year, it hasn’t been written off yet by any one. But, there are enough signals out there they would say we should be cautious going forward because if these inventories that are at the retail levels with inventory or buying caps on them. And the OEM’s have a lot of inventory at this point in time if that doesn’t start to turn, they will comeback and cut off the engine shipments.

James Bank

Right, okay. It’s really dealers versus OEMs this is okay. Could you tell me how many generators are in the channel and also in your balance sheet units wise?

James Brenn

I would tell you that we believe there are at the major retailers who were the big sellers of this I believe they are probably in the 75,000 to 80,000 unit range and at this point in time we probably are carrying about 60,000 units in our inventories.

James Bank

Okay. And, could I have the after tax number to that $5.8 million startup cost?

James Brenn

Well, --

James Bank

Is that going to be capitalized?

James Brenn

No.

James Bank

Okay.

James Brenn

This is flowing through the P&L right now.

James Bank

Okay. All right, forget it then.

James Brenn

Okay.

James Bank

Your GAAP is, excuse me, your guidance is in GAAP?

James Brenn

Yes.

James Bank

Okay. And last question, the Enmar (ph) alliance agreement you have for 70,000 engines that that won’t hit the P&L until 2011, if I understand that correctly?

James Brenn

I’m not sure of that I want to be honest.

James Bank

Okay.

James Brenn

We talked to the Enmar in the past I don’t know where that’s coming from James.

James Bank

So, it was from the OPI last month’s issue is there was an article in there those mentioned that they are pretty much --

James Brenn

I will have to read the OPI.

James Bank

Okay. I will just check up with you later on that then.

James Brenn

Okay.

James Bank

Thank you. And that’s all I have.

Operator

Thank you, sir. Our next question or comment is from the line of Stephen Wang with [Citadel]. Your line is open.

Stephen Wang

Good morning. I just want some more details, clarifications, so for the lawn and garden equipment sales were up due to placement, but excluding the new placement was that up or down or flat?

James Brenn

I would tell you it was flat in the third quarter. I think that the unit volume gains that we experienced were primarily product that was placed for the first time at Mass.

Stephen Wang

Okay. And then in terms of the distribution dealer versus OE for lawn and garden, was it up or down for each distribution channel for the quarter?

James Brenn

Well, you are I mean you remember you are confusing us little bit on that, we sell our engines primarily to original equipment manufacturers. The dealer is the end product part of the business that basically we would say that was relatively flat between years and it was not going through Mass that was that gain end product wise.

Stephen Wang

Okay. So it was actually up in terms for the OE for the most part?

James Brenn

Yes it was.

Stephen Wang

Through the dealers, most of them through the dealers. Okay. And then that was that including the new placement of product to?

James Brenn

Well I remember again the only differentiate our unit shipments of engines to OEM be they are sales for our product or to external OEMs was up, okay for the quarter. So, the engines have moved into the pipeline if we take a look at our end product sales that we are involved in with our Yard power group we sell to both dealers and to what I call the Mass retailers and in effect the gains that we experienced were to the mass retailers direct not to the dealer organization.

Stephen Wang

Okay. And then one last question just on power products, hypothetically speaking if they were a storm to hit, what is the ability of the Briggs & Stratton’s ability to ramp during these type of events where you know there is huge spike and demand, your levels now versus what’s your capable of?

James Brenn

Well we believe we can ramp up, I would tell you that initially if there was one hurricane probably at retail level probably can consume 70,000 to 90,000 units we typically have been about 50% of that demand so by definition they would draw down their inventories and we would be able to start to dip into 60,000 units that we have on hand and then we would kick the production into place if the question do they come every other week, we can’t keep up to the extent that they are spaced reasonably so that we can keep production levels going, we think that we can handle the demand that’s out there.

John S. Shiely

We would have an unusual advantage this year and that we are the only remaining major domestic producer of generators and a weather driven event is very difficult to satisfy with product that’s being produced there going around the world.

Stephen Wang

Okay. Thank you.

Operator

Thank you. Our next question or comment is from the line Justin Harrison with Ramsey Asset Management. Your line is open.

James Brenn

Good morning Jeff.

Justin Harrison

Good morning. Quick question on the foreign exchange effects on the engine growth, what would that have been with the constant currency?

James Brenn

Yeah, you’re looking for the Euro impact itself.

Justin Harrison

For the quarter -- just for the quarter.

James Brenn

Probably about -- I think there was about $8 million.

Justin Harrison

$8 million, okay. And can you provide some more color commentary on the engines, is that a -- what is that you count at the retail level are they using, is it a walk behind versus ride on shift, you know, what does that mean for at the end?

James Brenn

It's actually is a difference between OEMs and retailers as they sell different product for us. At times it can mean exactly as you are implying as a shift between walks and rides. We’ve got a pretty, pretty constant in the third quarter it was fairly constant between years as to what we've shifts walk versus larger engines versus smaller engines. So probably what you are really seeing is within a smaller engine category for example, you can have an engine that sells, what we call 675 Torque power and then you can have one that sells a lower Torque power like 625 and it just depends on which retailers doing really well and which retailer has placed what product on their mowers that are selling. So, there is a price difference between those two. You can have a mix even within the, I’ll call the smaller engine category and also on the ride. For example larger engines, if the big, big tractors are not selling and which use the [V-Twin] that’s a different, much different price point than a single cylinder what we call model 31 that would be used on a little bit of smaller version of the riding tractor, which in this economy might be selling a little bit better than the real high end expensive tractors. So, it’s hard to, it isn’t just larger versus smaller can be within those categories.

Justin Harrison

Got you, thanks. And then on the competition from overseas, you had mentioned couple of times about being really domestic guys and the benefit of that , are you seeing any change in say Chinese made or just in general some of the foreign made engines at the lower end, is that changing at all compared to what you have seen in the past?

James Brenn

From all those comment to just stand the pure quantity is we’ve talked about this before, I think prior to -- in 2005 and prior there had been no Chinese engines in the US on the lawn mowing type equipment. In ’06 we believe there was probably, I will call 50,000 to 75,000 sold in the US market. In 2007, we believe there was around 300,000 units in the market place and this year, if it works out the way we projected would there may be up to 600,000 units in the market place. So, it has grown pretty well over the last couple of years. The thing to remember is that they are not riding equipment at this point in time, and to walk mowing units that there are on, that’s how US market had probably runs from $5.5 million to $6 million every year or so they started to approach the 10% level of mowing equipment in the United States and push mowers, which still puts them in a smaller position then we would have told you to comps were then historically. So, there is some growth there, but we don’t, we see it as more of filling avoid, that was created by to come sure and then making inroads into our own markets.

John S. Shiely

I would agree with that, we often get the question of what percentage of the market can you serve with -- from that distance, when the market is basically a 3-month of market. There is a lot of challenges there you have to ship in the bulk of the product before the market. We don’t know what is going to be selling and if you can’t produce in market with fairly short delivery lines that makes it difficult. May be in the long run they can capture 20%. But one thing we are seeing in getting reports because we do a fair amount of Chinese sales. The cost of producing engines in Chinese is an increasing significantly and that a lot of non-economic advantages that the Chinese used to have in terms of, you know, the banks collecting interest and the government providing subsidies and the companies paying or not paying their taxes and things like that. That's starting to tighten up, the currency is starting to tighten up. And thank goodness we have already set very productive plans here in the United States. Our plant in (inaudible) Kentucky builds an engine with a half hour labor and it benefits all in that’s about $7.50 and the cost of shipping engines in China is increasing had 7.50, probably isn’t far off what a cost to shipping engines into the United States. So on cost and commodities we’re very, we’re very competitive, the wild character is starting to become more difficult for the Chinese. So I don’t know we can tell that the current Chinese placement is going to double or not, but they do face some headwinds that they didn’t have in the past.

Justin Harrison

Got you. Excellent thank you.

Operator

Thank you. Our next question or comment comes from the line of [Gouze Benpark with Evantick Investment Management]. Your line is open.

Gouze Benpark

Good morning. It should be a generators commentary I think you are mentioning, few months ago that you typically have a better 5% share of the market here in the US, and the competition is not domestically produced but could you help me we are just trying to understand this market little more with who are the primary competitors from the OE perspective?

James Brenn

Yeah. We would tell you that ourselves common power -- common company which is the company went bankrupt about a month ago. And probably the hunt of generators, the three of us probably take up about 90% of the US market.

Gouze Benpark

Okay.

John S. Shiely

The rest are predominantly Chinese producers that have had some had some issues.

Gouze Benpark

Okay. Thank you.

Operator

Thank you. There are no further questions in queue at this time. I would like to turn the presentation back over you Mr. Brenn.

James Brenn

Well thank you very much for participating with us today. We appreciated very much. Everyone take care. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference. We again thank you for your participation. You may all disconnect at this time. Good day.

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Source: Briggs & Stratton Corporation, Q3 2008 Earnings Call Transcript
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