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Brunswick Corp. (NYSE:BC)

Q2 FY08 Earnings Call

July 24, 2008, 10:00 AM ET

Executives

Kathryn J. Chieger - VP, Corporate and IR

Dustan E. McCoy - Chairman and CEO

Peter G. Leemputte - Sr. VP and CFO

Analysts

Hayley Wolff - Rochdale Securities

Steven Rees - J.P.Morgan

Timothy Conder - Wachovia Capital Markets

Operator

Good morning and welcome to the Brunswick Corporation's 2008 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded if you have any objections you may disconnect at this time.

I would now like to introduce Kathryn Chieger, Vice President Corporate and Investor Relations. Thank you, you may begin.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

Thank you, good morning and thank you for joining us. With me today are Dustan McCoy, Brunswick's Chairman and CEO; and Pete Leemputte, our CFO.

Now as many of you know I am retiring next month. So this will be the last time you will hear me utter these immortal words. Before we begin our remarks, let me remind everyone that during this call our comments will include certain forward-looking statements about our future results. Keep in mind that our actual results could differ materially from expectations as of today. For the details on the factors to consider take a look at the 10-K for 2007, our 10-Q for the March quarter and our press release issued this morning. All of these documents are available upon requests or by going through our website at Brunswick.com. We appreciate your taking time to be with us this morning and given that we are in the busy earnings reporting season we'll try to keep our remarks brief and wrap up the call in 45 minutes.

Now I will turn the call over to Dustan.

Dustan E. McCoy - Chairman and Chief Executive Officer

Thanks, Kathryn and good morning everyone. We appreciate you joining us for our call. I hope we are not missing anyone who wanted to be on the call today because we changed the start time. We made the change to accommodate some of our analyst and investors who were double booked for an event in Las Vegas.

I'll begin with a brief overview of our results, the markets and our reaction to market conditions. Pete will give us some color on context around our numbers and I will close by talking about several great things we have underway in the second half of the year.

We had a solid quarter in a difficult economic climate. Before we go further I want to thank our employees for outstanding performance as we deal with market conditions and changes coming about as we resize our company.

We reported a loss of $0.07 in the second quarter as we absorbed $0.55 in restructuring charges, net of some favorable tax items and investment gains.

Excluding these items we earned $0.48 per share down from $0.64 in the second quarter of 2007 also excluding some small restructuring cost in that quarter. I will not repeat the factors affecting the U.S. recreation and marine markets as we have unfortunately been discussing them for several quarters. Suffices to say that these factors have not abated and the decline U.S. recreation and marine markets accelerated somewhat in the second quarter.

Preliminary second quarter industry data was slightly over half the staged reporting those fiber glass retail demand was down 29% and aluminum demand was down 18%. This compares with declines of 24% and 17% in the first quarter respectively.

Looking at the numbers at this level shows the slightly accelerating decline, but a deeper look is more instructive. If we look at the U.S. stern-drive inboard market, that segment is down in the second quarter more than 30% versus 2007.

In general this is our most profitable segment in both our engine and boat businesses, and declines at these levels have a significant impact on our earnings as a result. Anticipating poor market conditions we had cut our production levels in the quarter.

Although our fiberglass boat production levels were down in the high 20% range, retail demand was down even more. This disconnect was impactful, as more than 40% of the boats which sell all year in the United States are retailed in the second quarter.

In our aluminum boat businesses retail demand was also slightly lower than our production and shipping levels. The result then is that while the absolute number of boats in our dealer pipeline is about flat with the second quarter of 2007. Our weeks [ph] of supplier on hand has risen to 32 weeks from 26 weeks at this time a year ago.

We're taking most of our fiberglass plants offline for a month in the third quarter in this we will reduced pipeline significantly in the near term. But we will also be reducing our production levels across our fiberglass boat and engine plants for the next several quarters, to ensure that we achieved the necessary pipeline adjustments.

We do this to act as a responsible party in our dealer relationship. As difficult as the domestic ring market has been, our global markets have been a bright spot. Our focus on growth outside the United States has never been more important. 47% of our sales in the second quarter came from outside of United States. Our non-U.S. sales grew 19% led by 35% growth from our boat businesses.

I now want to move from this portion of the call without missing the great work from our non-marine businesses in the quarter.

Life Fitness delivered a 9% sales increase even though the consumer portion of its business has suffered the same downward pressure I've been describing in our marine businesses. Their new products and great efforts by the commercial businesses in Life Fitness were the foundation of this nice growth in sales and earnings.

Our Bowling and Billiards businesses also demonstrated outstanding sales growth of 7%. Pete will cover our cash flow, cash and balance sheet positions in a moment.

It suffices to say that we are pleased with our performance. We're coming out of the quarter with great liquidity and a strong balance sheet and that's a nice situation to be in.

Pete I'll now turn the call over to you.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Thanks Dusty, and good morning everyone. Let me start with a few details on our restructuring cost which totaled $83 million in the second quarter just as we expected.

Non-cash impairment charges in current asset write-downs represent $50 million or 60% of the total restructuring cost. The shutdown of Sea Pro another valued saltwater fishing brands is one component, accounting for about $17 million of the impairment expenses. While the decision to evaluate strategic alternatives for the commercial Billiards Table business at Valley-Dynamo resulted in an $18 million charge.

Fixed asset write-downs at Mercury and the BoatGroup make up the largest portion of the remaining impairment expenses.

Next, severance and related costs totaled $14 million during the second quarter; our hourly and salaried workforce at our domestic marine businesses and at the corporate office fell by 2200 people during the first half of the year, a decline of about 14%.

We also saw cash restructuring expenses of $19 million related to a number of other actions we have taken, including costs associated with the plant shutdown and expenses for the move of production into other lower cost manufacturing facilities, among some additional items.

The $83 million in restructuring charges reduced earnings per share by $0.59 in the quarter. We also recognized income of $0.03 per share from the special tax benefit and another penny from final adjustments associated with the first quarter transaction involving the divestiture of MBK, a bowling joint venture in Japan.

So on net as, Dusty, mentioned there was a $0.55 per share unfavorable impact from these items. By the time our actions are complete by the end of 2009 we expect to deliver a reduction of $300 million in annual fixed manufacturing cost and operating expenses.

Actions already underway will deliver $100 million in annual savings as we move into 2009. As I mentioned last month our restructuring charges for the full year are estimated to fall in the range of $170 million to $180 million. In the first half we have recognized $105 million. So our current estimate for these expenses in the second half of 2008 is $65 million to $75 million.

Please note that I will exclude restructuring cost in my remaining comments and our financial results. So you can get a better sense of the underlying performance in our businesses.

Dusty indicated the importance of global diversification in offsetting lower domestic sales. Total revenues outside the U.S. grew by 19% in the quarter with all segments and most geographies posting favorable performance. The weaker dollar did play a role but international sales were up a very healthy 12% when measured using a constant exchange rate. We are however watching this closely as there are emerging signs of weakness in some European markets.

But we anticipate continuing growth in Latin America, Russia, the Middle East and Canada. In fact sales in the quarter through Latin America and the Middle East were extremely strong increasing a rate in excess of 50%.

With the top sales decline in the United States and strong growth abroad, international sales accounted for 47% of our overall revenue in the quarter as, Dusty, mentioned, that compares to 38% last year. We have spoken about our goal to have a 50-50 split in domestic and international sales. We're not going to claim success if we hit the targets due to a significant drop in the U.S. sales and our marine business saw a 19% decline in the second quarter.

But our efforts over the last few years to build a greater international presence are obviously paying off, particularly with our boat brand.

Operating margins stood at 4.4% this past quarter down 130 basis points versus 2007 again with boat figures excluding the restructuring costs. Gross margins accounted for the full decline.

Operating expenses measured on a percent of sales basis were actually down by 10 basis points. The gross margin decline is driven by reduced fixed cost absorption on lower production volumes, particularly at our key fiberglass boat brands and the MerCruiser's stern-drive to powered them.

In addition we are also paying higher freight build in most of our operations due to fuel price surcharges. Accruals for potential losses on inventory purchases at the BoatGroup for dealers in default also impacted our gross margin; more on that in a minute. As in the side lower absorption of fixed costs will significantly increase in the second half of 2008 as we take greater production outages.

These will adversely effect both the third and fourth quarters with most of our fiberglass boat plants taking so low in the month of July or August. And many of our fourth quarter holiday shutdowns are being extended beyond their normal course.

Keep in mind however that both Life Fitness and Bowling & Billiards will enter their strong selling season during the fourth quarter. So the earnings pressure will be more significant through September absence in need for any further production cuts. Dusty will speak a bit later on trends expected in the second half of the year.

In terms of discounting our product at retails that help marine dealers reduce inventory we to continue to offer support in select markets.

Overall however there has been no significant degradation in pricing as a result of these programs in the first half of the year relative to 2007.

Operating expenses were down in the second quarter by $8 million or 3% versus the prior year. After removing the impact of the weaker dollar on local currency expenses outside the U.S. and a slight increase in variable compensation in bad debt accruals operating expenses fell by 10%. Our cost reduction initiatives are kicking in and we should see the reductions continue to grow as we move through the remainder of the year.

Next let me offer some highlights on our balance sheet and liquidity. We generated free cash flow during the second quarter of $109 million, down only slightly from the $118 million in 2007. While lower earnings played a part keep in mind that much of the earnings decline was due to non-cash restructuring charges. So our free cash flow was stronger than you might otherwise to think.

In addition, capital spending of $30 million in the quarter was down $13 million versus 2007. Favorable working capital liquidation also had a significant positive effects on free cash flow. Inventories in particular fell by almost $56 million during the second quarter of 2008, as our accelerated production cuts took hold. That compares to a decline of $10 million in the prior year.

The impact was offset however by a lower payables arising from reduced production levels and lower capital spending to some extent, it was not a full offset. Cash balances at the end of the quarter stood at $393 million up $126 million for March and $61 million from year end.

We're very pleased with our cash position which demonstrates how well earnings in the marine industry can be quite cyclical. Our cash flow is much less volatile if managed properly. We expect healthy cash flow to continue through the second half of the year allowing further growth in cash balances.

Our most significant short term cash exposure relates to inventory repurchase obligations from dealers in defaults or bankruptcies. We could see an increase in the number of dealers facing financial distress, as the current marine season starts to wind down in the third quarter.

Our largest dealer on the West Coast filed for bankruptcy protection last week. Olympic boat centers contribute several of our brands in California, the Pacific Northwest and British Colombia. While we can not comment specifically on the proceedings we are actively working to insure that the needs of our end use consumers continue to be met and that we maintain distribution in this market, and we are confident we'll have solid distribution on the West Coast.

We believe our cash exposure on inventory repurchase is quite manageable and limited. As I've stated in the June conference call if we extrapolate from the worst downturn seen by the industry in the early 1990 our repurchase obligation would be $40 million or so.

In most cases we are able to arrange alternative distribution to take on our brands in the affected market, and the inventory has moved to the new dealer without us having buy it back or take title to the product. And in those cases where we do buyback inventories the cash impact tends to be one of timing, until new distribution is identified or product is moved into other markets.

The loss that we experienced in such cases is not excessive and we maintain reserves for this exposure on our book. We did increase this reserve in the second quarter at our BoatGroup and this was one factor which influenced BoatGroup margins in the second quarter.

We remain on track to amend our revolving credit facility to ensure that we have uninterrupted access to it. We are also still planning to refinance our $250 million in notes that mature in July 2009.

Please note that capital spending for the full year should be at $140 million or lower, down from $208 million in 2007. Depreciation and amortization expense is estimated at $185 million.

With that let me turn the call back over to, Dusty.

Dustan E. McCoy - Chairman and Chief Executive Officer

Thank you Pete. We've a lot going on and the actions we are taking are succeeding. They will keep us healthy in the near term and position us very well for the future.

Our resizing efforts are well underway and are being led by our employees. We will report on our successes in future calls. We're having some really great contacts with consumers through our events and new product introduction. Last weekend our Sea Ray brand kicked off its annual AquaPalooza celebration, the largest in water event in the world, and its starting out again to be one heck of a party.

Now, in its third year, the enormity of the event and its success keeps surprising even the extensive talent in Sea Ray and its dealer network.

Throughout the summer AquaPalooza events are scheduled at a 123 locations around the world. More than 11,000 boats and 50,000 people have registered to come to the party and typically actual attendance exceeds the registration.

Boaters are still enjoying boating as a life style and social activity. The success and low around our active intension [ph] product continues. We hear from dealers and users constantly that these products are changing their boating habits and they are building to enjoy boating, likely forever.

Anyone who has seen these and which, even in all of this can dock a boat equipped with these systems, recognizes that this is truly game changing technology. We're working on alternative power and draft systems for marine application to meet the desire of consumers to more grim and to decrease the cost of boat operations.

The flow of new products continues across all of our businesses. We have investment decisions to make around new products, and our liquidity gives us the ability to fund these investments.

We never forget that new product is our lifeblood. We remain focused on being a great partner with our distribution. Our unrelenting focus on our dealer pipeline is important for our dealers health.

Our liquidity permits us to make hard decisions to curtail productions for extended periods in order to more quickly reduce the pipeline.

Our dealers have access to programs such as Brunswick Dealer Advantage, and its range of assistance, from scholarships for the children of dealer's employees, the new and less expensive healthcare options for dealers, to office supply and other buying programs that improve their profitability.

Our Life Fitness, Bowling & Billiard's businesses continue to grow in importance. And we believe each was positioned to continually improve its performance.

As we said in the press release with the reduction cuts we've planned for the remainder of the year we will not be profitable in the second half excluding restructuring charges or any potential goodwill impairments. We are planning to be profitable for the year excluding charges in the market conditions existing today.

Any non-cash goodwill impairment charge at our BoatGroup is something we will monitor as the rain season continues to unfold. Goodwill to BoatGroup is about $370 million.

Finally we continue to generate cash. We have access to capital and we have a stable source of floor plan financing for our dealers with Brunswick Acceptance company; our joint venture with GE which is in place through 2004... 2014. In short our balance sheet and liquidity are healthy and not under stress.

In my prepared remarks we're well positioned to handle this tough market and look forward to speaking with you next quarter.

Before I take questions I want to say a few words about Kathryn Chieger, who is now getting red faced and looking at me very angrily.

Kathryn said she is retiring, this maybe Kathryn's last conference call. She is irreplaceable and we're trying to replace the irreplaceable and she has agreed to help us for some period of time in case we haven't gotten a replacement on Board by the time for the next call.

Kathryn's been here 12 years, she has trained three CEOs, myself being the last and for those of you who know Kathryn, she is a real task master. She doesn't suffer fools easily and I have been through which many times. So I've incurred wrath a lot.

She has trained three CFOs, Pete being the last; Pete's gone through the same training that I have gone through. Kathryn will be sorely missed in this company as both, a friend, a confidant but more importantly the face of Brunswick to many of you.

Kathryn we're going to miss you and we wish you nothing but a wonderful life in retirement.

Now last thing you won't believe Kathryn is going to go off in retirement and shrink away somewhere, she now owns one of the fastest car's on the planet... fastest sports car's I should say on the planet, and has one of the best SUVs on the planet. So the best I can tell watching her plan of retirement it's going to be a wild and lot of fun and we're not worried about of Kathryn at all going into retirement.

So with that now I'd be happy to take the questions.

Question And Answer

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Thank you our first question comes from Hayley Wolff with Rochdale Securities. Please go ahead.

Hayley Wolff - Rochdale Securities

Good morning.

Dustan E. McCoy - Chairman and Chief Executive Officer

Hi Hayley.

Hayley Wolff - Rochdale Securities

First I just want to echo to Dusty's comments about Kathryn. I started working with her when she had joined the company in 1996. And she has endured a lot. She's by far one of the best IR people I've ever worked with. So I am going to miss her as well.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

Thank you.

Hayley Wolff - Rochdale Securities

Couple of questions; first, Pete, on some of the comments on the dealer exposure. Can you just characterize how you're different versus the 1990s? I mean you've got a lot more brands out there. So I would suspect the exposure may be a little bit more and then how did you come to own the 12% of Olympic BoatGroup?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

In terms of how the exposure is different, I mean we are a larger company there is no doubt about that compared where we were in the late 80's, early 90's downturn, Hayley. But one key difference is the amount of inventory that's out there. Honestly the industry did not shut off production; the OEMs did not shut off production fast enough and that included Brunswick. And so in some cases there was more than a year's worth of inventory sitting in the channel which actually drives up your exposure. And that really does to some extent, Hayley I think offset the fact that we are at big figure than we were then.

Hayley Wolff - Rochdale Securities

Okay.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

But you know, the number that I quoted that $40 million to $50 million sort of number is really based on the experience that we had back at that period of time extrapolated to the amount of inventory we have in the channel today

Hayley Wolff - Rochdale Securities

Okay.

Dustan E. McCoy - Chairman and Chief Executive Officer

Hayley, and, Pete, may I add one other comment; I think we ought to give credit to the dealer network. The dealer network is becoming a much better network, dealers across the United States are great business people. A lot of them have learned through the hard knock, but they continue to raise the level of and quality of the processes they have in their dealership and we have a lot better information for the entire industry about how markets are doing and dealers are in my view running their businesses better and much better able to anticipate where markets may be going and position themselves, Hayley, in order to react better.

Hayley Wolff - Rochdale Securities

And the ownership of OBC?

Dustan E. McCoy - Chairman and Chief Executive Officer

You'll recall at one point we had ownerships in MarineMax and both ownerships came about as a part of the approval to set up a conglomerate if you will; a set of dealers through one dealership and we took an equity interest in each as a part of the initial approval.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

And we have written down the value of that equity... many, many years ago.

Hayley Wolff - Rochdale Securities

Okay. And then can you give a little more color on international sales in terms of the mix overall parts and accessories business and with international driven by few large boats that were shipped over there?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

In terms of a few large boats, no. I mean it's very consistent across every geography and its brands, like some of our fresh water boat brand, U.S. Marine Bayliner as well as Sea Ray they're not necessarily a couple of big boats that are driving that.

Dustan E. McCoy - Chairman and Chief Executive Officer

Hayley, the key to our growth is we've put strong regional organizations in place now, in Latin America, Asia-Pacific, Europe and then the European organization controls through the CIS and the Middle East. And the key our growth is building a strong dealer network. We believe we are not opportunistically pushing boats outside the United States, we're in fact working very hard to build the dealer network for all of our brands in all regions of the world.

Now we're clearly being helped by the dollar and there is absolutely no question about it. But as we said in our prepared remarks our global sales are up 19% but when we strip out currency from the volume prospective we're still up 12%; that is very good and we believe it's coming about because of our strategy.

Hayley Wolff - Rochdale Securities

And how did PNA hold up in the quarter?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

PNA, in the domestic market was actually down a little you've got to keep in mind that a portion of our parts and accessories business is related to rigging for new boat sales and so it does tend to have some components that was in there so it was down slightly. And to some extent we are seeing slightly lower utilization of boats on the water as well, which could to lower sales of oils and product and things like that.

Hayley Wolff - Rochdale Securities

And international PNA.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

International PNA is holding up fine, I mean it's not as big of a business over there as it is in the U.S. marketplace, particularly in the boat side it's fairly small. Mercury has a very solid business there and it's similar to the underlying engine in boat volumes.

Dustan E. McCoy - Chairman and Chief Executive Officer

In overtime we should see that PNA business outside the United States grow as our presence outside the U.S. continues to improve.

Hayley Wolff - Rochdale Securities

Very well, thanks a lot, well done quarter.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Thank you.

Dustan E. McCoy - Chairman and Chief Executive Officer

Thanks for the comments on Kathryn.

Hayley Wolff - Rochdale Securities

I'm just waiting to go on a road trip with her.

Dustan E. McCoy - Chairman and Chief Executive Officer

She's only got a room for one more and not much likely.

Hayley Wolff - Rochdale Securities

I want, Thelma alright, not Louise.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

Okay you are Thelma. Thanks' Hayley.

Operator

Thank you our next question comes from Steven Rees with JP Morgan. Please go ahead.

Steven Rees - J.P.Morgan

Hi, thanks just a follow up on those international comments. Pete, you mentioned that there is... certain European markets are showing signs of I guess of a potential slowdown. I guess what are the signs, what's the magnitude of the slow down you're seeing in--

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Well, we are seeing it, first of all in Scandinavia, we have a very big presence up there, couple of different boat brands, some that we hold an equity interest and that market was running very hot for a couple of years. It's showing some decline at this point in time. Also the UK, they're going through some of the similar issues as the U.S. is, with regards to sub-prime loans in housing and to some extent Spain as well where houses prices had really shot up and are going through a correction.

Some signs as well I think in Germany; other markets like Russia is doing extremely well like I mentioned and Italy at this point is holding up okay as well. It depends on a specific country.

Steven Rees - J.P.Morgan

Okay, and then you also mentioned that you've continued to provide support to certain retailers in select markets but you haven't seen pricing degradation. Can you just sort of explain that comment and sort of what you are doing today versus last year on the dealer relief front?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

We will always have some programs out there either for dealers well, we will offer them basically an incentive to move a certain amount of volume and take a certain amount of volume that's pretty typical in the industry in order to level their own production it's a very seasonal business. And then we also will offer programs at retails; special programs basically the intense volume and consumers to come in and buy. And when you look at those discounts as a percentage of kind of growth sales relative to the prior year from Marine businesses they are basically flat or down modestly.

Steven Rees - J.P.Morgan

Okay. And then just finally you've mentioned that you have increased the reserve to deal with the Olympic BoatGroup in the West Coast. Can you just talk about the magnitude of the increase and then perhaps just some color on your remaining large dealers and sort of what happened there?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

It was a mid single digit dollar reserve that was sequential and its basically is there to represent the potential loss if we have to buyback the inventory and then resell it. And its something in that order of magnitude. We are working through it right now with the bankruptcy part and then as I had stated we're pretty confident we are going to come out of those in very good shape. And if you sit back and also listen to what I said with regard to the amount of cash exposure we have, we don't want to go into any detail on that with regards to that particular dealer at this point of time but we're pretty confident we can manage quite well through the cash exposure that we would have.

Steven Rees - J.P.Morgan

Okay. Great thank you very much.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from Tim Conder with Wachovia. Please go ahead.

Timothy Conder - Wachovia Capital Markets

Thank you and let me also say to Kathryn, enjoy the retirement. I hope you have a large privilege fund to pay for the excessive speed.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

Thanks, Tim.

Timothy Conder - Wachovia Capital Markets

But no it's been a pleasure working with you for as long or may be a tad longer than Hayley had mentioned, so again it's been a pleasure. A couple of items as usual here; Pete if I could follow on to the previous question, the could you talk about, you said mid single digits reserve was that just related to Olympic or was there with the total reserve that you took in the quarter?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

It was related for all of our exposures as we stated.

Timothy Conder - Wachovia Capital Markets

Okay, okay great thank you and what's the balance on that reserve any color you can give us there?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

It's probably about 10 million in total. And just to point out to you know the dollars of inventory that we could potentially buyback will ultimately lead to the exposure there. We have not seeing to-date any big cash fall on the company. We literally, we bought $2 million of inventory in the first half of this year that's actually running below what we had to payout in 2007?

Timothy Conder - Wachovia Capital Markets

Okay.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

And so even just to reiterate to, even though you may have a situation like the one Olympic is dealing with it doesn't mean necessarily that we have to buy that inventory back. We worked to establish new distribution in this case, Olympic is still active, and there selling products through the season they're just going to through a reorganization and we are looking at all options that we have on the table.

Timothy Conder - Wachovia Capital Markets

Okay. I know as you said in the previous call it's a little more difficult given the international and so forth to get some color on number of weeks of engines in the supply channel. But anything if you give that would be appreciated. And then in relation to your cash target if you could just remind us what's you target again is has that changed from your previous conference call for year end period cash target?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Actually we did such a good job with generating cash in the second quarter; we said we wanted to have near $400 million by the end of the year. We have $393 million and if you listened what I said to, I made the point that we expect to have solid cash flow in the second quarter and to build our cash -- excuse me in the second half, I apologize; and to build our liquidity and cash balances over the second half of the year. So it will be higher than that.

Timothy Conder - Wachovia Capital Markets

Okay.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

In terms of pipeline, as we look at an internally the engine pipelines are up about four weeks, however the problem is with that, we've seen such an increase in international sales to Canada, there is a lot of product manufactured here that goes across the border and also over into Europe. And in many cases those boats and those engines are never registered. We never see access to it. So we actually think that delta there is significantly lower and that's what we should imply. But you see the exact same trend as what we see on the boating side, Tim.

When you look at outward boat inventories are in a better shape, pipelines are in better shape just because of the fact that they sell faster and we've had more time to make the correction there, we see the same thing on outboard engines. And then when you get into fiberglass boats that use stern-driver inboard boat products they're a little bit heavier and the same thing holds up with the MerCruiser stern-drive.

Timothy Conder - Wachovia Capital Markets

Okay. And the comments regarding PNA that you made earlier in response to some questions, were those -- were you discussing PNA as a whole or were just referring to the BoatGroup, I took it as a whole but I just want to clarify?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

It was as a whole.

Timothy Conder - Wachovia Capital Markets

Okay

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Both BoatGroup and Mercury

Timothy Conder - Wachovia Capital Markets

Okay. And then two last ones here could we anticipate over the balance of the year here it seems some additional changes in some of your boat brands or additional footprint changes, and then finally maybe just give us a little additional color of what the expansion with the GE in the Latin America will do here. I mean is that was there some type of financing bottleneck that now maybe that can accelerate some growth in Latin America here as we look into '09?

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

First with regard to what front changes we've stated back in June that there was another four plants that were going to ultimately close we haven't announced haven't announced those at this point of time. In terms of other brands I mean we'll keep you abreast as time moves on I think at this specific point we're comfortable with the portfolio as we stand but that's always subject to more evaluation. And then with regard to Latin America, the financing scene there's not going to go through Brunswick acceptance it's going to be on the side. And this challenge was the Mexican market was not very well developed with regard to the floor planning model.

On the automotive side that there was some but its really kind of an emerging industry down there. And so we worked with GE to help set that up. And the amount we have a limited amount of inventory that we will so that can finance with dealers, we think its efficient to help our business flow down and our dealers business to grow in Mexico. And it's kind of a similar concept to what you see here.

Timothy Conder - Wachovia Capital Markets

Okay great. Thank you, and Kathryn again enjoy the retirement.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

Thank you, Tim.

Operator

Thank you. Our next question comes from Paul Burgon [ph] with RBC capital markets. Please go ahead.

Unidentified Analyst

Hi thanks and congratulations, Kathryn, from Ed and myself. I just wonder most of my questions have been answered, just wondered on the furloughs you talked about. You had mentioned previously in your prior call that you are planning out furloughs in July but now you are talking a little bit about August and I read that also somewhere previously, something. So I am just wondering how, a little more detail on that and then how you expect that to effect inventories within the year and may be dealer inventories what your thoughts are just little more color please.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

It's just to clarify, Paul, it wasn't that the same plant will be down in July and August. So with that certain plants would be down in July and others would be down in August.

Unidentified Analyst

Right.

Kathryn J. Chieger - Vice President, Corporate and Investor Relations

So, it's really is of all the fiber -- most of the fiberglass plants will be down for a month, sometime during the third quarter.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

And the majority of them were in July that's what because of the last time and some are... and some are taking place in August. There is nothing, there is no new information in that--

Unidentified Analyst

Okay.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

With regard to inventories, we do expect to see some further inventory reductions and the third quarter related to the furloughs although we are also cutting back on our shipments to dealer at the same time. So it's Analyst:.. maybe not necessarily is greater that and into the fourth quarter as well. Normally we take a fair amount of down time around the Thanks Giving and Christmas, New Year holidays and in some cases wells are being extended by a week or a week or two just to take advantage of it and to help a make further cut.

So overall we are going to expect to see continued improvement for lower inventories by the end of the year no where 922 now I would hope to see something in the mid 800s by know at the higher at the end of the year.

Unidentified Analyst

Okay, thanks.

Dustan E. McCoy - Chairman and Chief Executive Officer

And with that we have no one else in the queue. No questions coming so we thank you very much for your attention. And we'll look forward to talking to you next time around.

Peter G. Leemputte - Senior Vice President and Chief Financial Officer

Take care.

Operator

Thank you that does conclude today's conference call. You may disconnect at this time.

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