Briggs & Stratton's CEO Discusses F1Q13 Results - Earnings Call Transcript

Oct.18.12 | About: Briggs & (BGG)

Briggs & Stratton Corporation (NYSE:BGG)

Q1 2013 Earnings Call

October 18, 2012, 10:00 am ET

Executives

Dave Rodgers - SVP & CFO

Todd Teske - Chairman, President & CEO

Analysts

Josh Borstein - Longbow Research

Josh Chan - Robert W. Baird

Brad Safalow - PAA Research

Robert Kosowsky - Sidoti & Company

Sam Darkatsh - Raymond James

David Post - Point Lobos Capital

Jad Fakhry - Poplar Point Capital

Operator

Good day, ladies and gentlemen, and welcome to Briggs & Stratton First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode and later we will hold a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Mr. Dave Rogers. Please go ahead.

Dave Rodgers

Good morning and welcome to the Briggs & Stratton fiscal 2013 first quarter earnings conference call. I am Dave Rogers, Chief Financial Officer and joining me today is Todd Teske, our Chairman, President and Chief Executive Officer.

Today’s presentation and our answers to your questions include forward-looking statements. These statements are based on our current assessment of the markets we operate in. Actual results could differ materially from any stated or implied projections due to changes in one or more of the factors as described in the Safe Harbor section of today’s earnings release as well as with our filings with the SEC. We will also make reference to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures including reconciliations to comparable US GAAP amounts is available on our earnings release and in our SEC filings.

This conference call will be made available on our website approximately two hours after the end of this call. A phone replay will also be available within a few hours of the completion of the call.

Now here's Todd.

Todd Teske

Good morning everyone, and thank you for joining us today. As you saw this morning's earnings announcement first quarter consolidated net sales were $309 million, a decrease of $88 million or 22% from the same quarter last year. The adjusted net loss for the first quarter excluding the $5 million of pre0tax restructuring charges was $13.2 million or $0.28 per share. This adjusted net loss for the quarter is $8 million higher than the first quarter net loss last year of $5.2 million or $0.10 per diluted shares.

The increased loss in the quarter was essentially related to lower overall sales volumes and lower production volumes as we have made the necessary adjustments to lower production levels in order to control inventories. These lower sales and production volumes were partially offset by approximately $10 million of cost savings resulting from our restructuring efforts over the last year.

As we anticipated coming into this fiscal year, sales of lawn and garden equipment continue to be significantly impacted by drought conditions in many areas of the United States. For the 12 months ended in August, industry data show shipments of walks and rides decreased 3% and 1% respectively, bringing us to the lowest level of activity in this industry since 1983. For the quarter, industry data indicates walk mowers were down 8.5%. For July and August, rides were down 21.1%. The September ride numbers have not yet been released.

Channel participants have continue to monitor inventory levels carefully by reducing re-orders for the late summer and early fall in order to limit inventory carried in the next season. While we continue to believe that inventory levels in the channel are elevated compared to one-year ago, channel participants, including OEMs, retailers and dealers generally have been cautious to not add to inventory levels causing issues for next spring.

Macro economic concerns in Europe impacting consumer spending continued to impact our business in the first quarter as well. International shipments to customers for the European lawn and garden market decreased over 60% compared to the same quarter last year. Inventory levels in Europe continue to be elevated for this time of the year and channel participants remain cautious of our consumer spending and inventory commitments heading into the next spring selling season.

Shipments of snow throwers were also lower in the quarter compared to last year’s dealers and retailers had high levels of inventory left over from last year’s exceptionally mild winter; while not significant enough to offset the market declines in lawn and garden, there are some bright spots in the quarter. Portable and standby generator sales benefited from Hurricane Isaac; although, the total impact of Isaac for generators was not as significant of an event compared to Hurricane Irene last year. However, the outages this year continue to highlight the need for dependable backup electrical power causing our standby generator sales to increase nearly 20% in the quarter.

We continue to make progress on improving our market share of commercial engines, which are used in commercial lawn cutting, construction equipment and utility markets. We also continue to execute on our restructuring actions in new product development in order to increase the efficiency of our manufacturing operations and to introduce higher margin products. The actions we announced last year continue to be on budget and on schedule and are delivering the cost savings that we anticipated of $30 million to $35 million for the full fiscal 2013 year.

Lastly, we’ve had the opportunity to host over 400 of our Simplicity, Snapper and Ferris dealers over the past several weeks at dealer open houses, where we have showcased over 40 new product introductions to be launched at the dealers next spring. The reactions of our dealers have been extremely positive and our teams are excited to get these new products launched in the coming months.

Now I'll turn it back over to Dave to walk you through our financial results for the first quarter of fiscal 2013.

Dave Rodgers

Thanks, Todd. Our first quarter consolidated net sales of $309 million, was a decrease of $88 million or 22% from consolidated net sales in the first quarter of last year. First quarter consolidated net loss of $16.5 million, a $0.35 loss per diluted share was an increased loss of $11.3 million from the net loss of $5.2 million, a $0.10 loss per diluted share one year ago. As a reminder, we typically report a net loss in our first fiscal quarter due to the seasonal nature of our engines business and the related lawn and garden portion of our products business.

In the first quarter, we did incur additional restructuring charges of $5.1 million pre-tax related to executing the restructuring actions that we announced in fiscal 2012. The additional charges are related to plant closure costs, accelerated depreciation of the plant and equipment and cost to move equipment. Excluding these restructuring costs, the adjusted net loss for the first quarter was $13.2 million or $0.28 per diluted share.

Engine segment sales for the first quarter were $165 million, a decrease of approximately $39 million or 19% compared to the prior year. Shipments to domestic OEMs decreased as retail market demand for walk and ride lawn equipment decreased due to the lingering effects of the extremely dry summer here in the U.S.

Total engine unit shipments were lower than last year by approximately 16%. In addition, product mix skewed towards smaller engines used for walk lawn mowers rather than larger engines used in tractor and snow thrower applications. The decreased volumes and unfavorable mix was partially offset by higher prices implemented in the last fiscal year to offset increased cost of commodities, emission’s compliance and shipping costs.

Due to reduced consumer demand for lawn and garden equipment during the last quarter, we believe that the channel inventories are moderately higher in the U.S. and Europe compared to last year. Excluding $1.1 million of restructuring costs in the engine segment for the quarter, the adjusted operating loss for the engine segment was $16.4 million which is $10.9 million higher than the $5.5 million loss in last year’s first quarter.

As noted earlier, due to the seasonal nature of our business, the quarterly sales and production volumes are typically lowest in the first quarter, resulting in an operating loss for the engine segment in the quarter.

In addition, we reduced engine production even further in the current year in response to current market conditions and inventory levels.

The engine segment adjusted gross profit rate was 15.7%, a 2.4% decrease from 18.1% in the prior year. The gross profit rate decreased 2.8% on unfavorable product mix that skewed towards the smaller engines. The rate was also unfavorably impacted by 2.1% due to lower absorption of fixed cost and lower production volumes and the mix of the engines produced. Units produced in the quarter decreased by approximately 16%. Foreign currency was unfavorable by approximately 60 basis points. These decreases were partially offset by an improved pricing of 1.4% and by cost savings of 1.7% as a result of our restructuring programs.

In the product segment, sales for the first quarter were $173 million, a decrease of $62 million or 26% from the prior year. Sales in lawn and garden equipment and snow throwers decreased in the U.S. and in Europe as Todd discussed earlier. Sales affordable generators also decreased from last year, the impact of Hurricane Isaac was not a significant or prolonged as Hurricane Irene last year. Standby generator volumes were the only products category to increase in the U.S. with sales increases nearing 20%.

As Todd mentioned, the industry sales of lawn and garden equipment decreased in the quarter. Our dealer channel continues to monitor their investment and the inventories very closely with inventory levels about on par with last year. With respect to portable generator inventories, we’re currently in the process of replenishing inventories in the channel as well as our inventories which were somewhat depleted due to the retail demand during and after Hurricane Isaac.

Despite the large sales decrease, the profitability of the products segment was only marginally impacted due to the improvements in the operations that we have implemented in the last year. Excluding pre-tax restructuring chargers of $4 million in the quarter, the Products segment had an adjusted loss from operations of $700,000. This compares to income from operations of $2.3 million in last year’s first quarter.

The Products segment adjusted gross profit margin of 13.1% increased by 1.4% from 11.7% the prior year. The improvement in the adjusted gross profit rate was due to 2.5% improvement in pricing and favorable mix of products being sold through the dealer channel, a 2.4% improvement from cost savings related to restructuring actions, and 0.3% or 30 basis points of favorable foreign currency impacts.

These benefits were partially offset by unfavorable absorption of manufacturing costs impacting the rate by 3.5%, as we had about 44% lower production activity in the plants in order to control inventory levels. Engineering, selling and administrative expenses decreased in both segments for the quarter compared to last year, as restructuring savings and expense reductions across the business more than offset increased pension expenses.

Turning to the balance sheet, net debt at the end of the first fiscal quarter was approximately $126 million, an increase of $37 million from the first quarter of fiscal 2012. After repurchasing approximately $49 million of common shares outstanding, contributing $34 million to our pension plans, and carrying and extra $19 million of on book receivables related to our dealer floor planning programs during the last 12 months.

During the first fiscal quarter, we did purchase an additional $12.9 million of common shares outstanding. At the end of the quarter, we did not have any amounts drawn on our $500 million revolving credit facility. Cash used in operating activities for the quarter was $41 million, primarily related to the seasonal build of inventory levels and a reduction of accounts payable on the quarter.

Accounts payable typically has reduced our first fiscal quarter since production levels are less than our fourth quarter. LTM cash provided by operating activities was $81 million and LTM free cash flow was approximately $34 million. Depreciation for the quarter of $12 million outpaced capital expenditures of 8 million.

Our last 12 month average leverage and last 12 months EBITDA as defined by our credit agreement in place was $244 million and $144 million respectively, resulting in a leverage ratio of 1.7 times, which fall within our debt covenant limits.

We also announced today that we're making certain changes to our defined benefit pension plans and our defined contribution plans. While we've previously closed our defined benefit pension plan to new participants as of January 1, 2008, we're now moving the remaining non-bargaining participants from our DB pension plans to define contributions plans effective on January 1, 2014.

In addition, we're increasing the amount of the total potential company contribution to our defined contribution plans. These changes are being made in part to reduce the volatility of cash payments to the pension plan, to reduce the volatility of the pension plan on our earnings, and to improve the funded status of the plan, thereby improving the overall structure of our balance sheet moving in to the future.

We expect the financial impact of making these changes will reduce our future annual expense by approximately $10 million to $15 million. The actual amount of the reduced expense will be dependent upon, among other things, the actual return on assets in the plan, future discount rates used to value the liability and the amortization period used to recognize the actuarial losses that are in the plan.

From a cash flow standpoint, the impact of the pension funding relief passed earlier this year and the benefit plan changes announced today, will reduce our total minimum cash funding to the define benefit and define contribution plans by approximately $15 million annually over the next three years.

While the future expense and cash flow requirements for the DB plan will be subject to future actuarial assumptions and valuations; I’d like to emphasis that the company’s ongoing expense and cash funding of the DC plans is projected to be approximately $22 million annually, beginning in fiscal 2015, which compares to the current defined contribution and defined benefit total expense of approximately $37 million. We do expect to record a pension curtailment charge of about $2 million in the second fiscal quarter of this year.

That concludes what we wanted to say about the first quarter financial results. So I'll turn it back over to Todd for his concluding remarks.

Todd Teske

Before providing an update on our outlook for the business, I just wanted to expand a bit on what Dave just discussed related to our retirement plans. As we think about compensation and benefits, we want our total pay packages to be competitive so that we can attract and retain the people with the best talent. In addition, we want to provide our employees with the opportunity to plan a safer retirement.

We believe by moving the remaining non-bargaining employees from a defined benefit plan to a defined contribution plan, and increasing the company’s contributions to the defined contribution plan, provides a solid retirement benefit for our employees and will help us to recruit and retain the best people. Our management team and our HR team will be working with all of our impacting employees in the coming months to ensure that our people understand the changes and how it impacts them prior to the January 1, 2014 effective date.

Looking forward to the remainder of the fiscal year, we are reaffirming our fiscal year 2013 projections for net income to be in the range of $60 million to $75 million or $1.25 to $1.55 per diluted share prior to the impact of any share repurchase activity and cost related or announced restructuring programs in pension curtailment.

We continue to be cautious with respect to the magnitude and pace of the economic recovery both here in the US and abroad, both the level of sustained consumer confidence and the ongoing impact if any of the drought conditions in the US. We are projecting net sales to be in a range of $1.95 billion to $2.15 billion which takes into consideration lower sales of approximately $100 million due to exiting the sale of lawn and garden products to national retailers and lower sales of snow throwers in the current year due to adequate inventory in the channel going into this fall.

On a more encouraging note, housing fundamentals continue to improve which is projected to have a positive impact on future [mode] of sales. Our fiscal year 2013 forecast contemplates the US lawn and garden market being higher by 4% to 6%, assuming the current drought conditions do not persist in the next season. We are currently in discussions with all of our key customers regarding product lineups for the 2013 spring and summer selling season, and we should have a better idea of placement at our fiscal 2013 second quarter conference call.

Consolidated operating margins are forecasted to be in the range of 5.1% to 5.6%. The improved operating margins include the benefit of over $30 million of savings as a result of our restructuring activities announced in fiscal year 2012. Offsetting these savings is higher pension expense in fiscal year 2013 of approximately $12 million caused by lower discount rates used to value the liabilities of the plant.

We expect the remaining restructuring savings and the incremental pension expense to be incurred ratably over the remainder of fiscal year 2013. While we do not provide guidance with respect to our quarters, I believe it is important to emphasize a few factors that will negatively impact our fiscal second quarter as compared to last year.

First, second quarter fiscal year 2012, included significant generators shipments due to power outages occurring during the period. We do not include such storm activity in our outlook. Second, we have announced that we will take additional days off in our McDonough plant, control inventories and the tool to plant for the new product introductions that we mentioned earlier. This will negatively impact our production rates and fixed cost absorption.

And third, many channel participants are being cautious with building inventories ahead of the season. Accordingly, we will be closely monitoring our productions to maintain reasonable levels of inventory. Therefore, we believe there will be some shift in orders and productions from the second quarter into the third quarter and from the third quarter into the fourth quarter.

Having said this; all of this factors are included in our outlook for the full fiscal year. From cash flow standpoints, cash flows are estimated to be higher in fiscal 2013 due a higher earnings and additional cash generator from net working capital reductions of approximately $80 million to a $100 million primarily related inventory reductions partially offset by required contributions of approximately $30 million to our pension plan.

Lastly, we anticipate that capital expenditures in fiscal 2013 will be in the range of $50 million to $60 million. That concludes our prepared comments and now we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from the line of David Macgregor of Longbow Research. Please go ahead.

Josh Borstein - Longbow Research

This is Josh Borstein in for David. Thanks for taking my questions. When we left off last quarter channel inventories in the US, they were moderately higher leading to fewer reorders and the hope was that the weather in a more mild autumn might help prepare those inventories. We seem to have the weather autumn, but doesn't seem like the inventories were [flushed] at all. How did inventories play out in the course of the quarter?

Todd Teske

Well, Josh when you look at where the industry shipments into the retailers and the dealers were for the quarter, they are down substantially, and a big part of that has to do with the fact that the continued dry conditions, the drought conditions in the US, really everybody is concerned about inventories. I have been on the road here both here in the US and globally over the last six to eight weeks, and there's a common theme running through and that is everyone wants to make sure, everyone is concerned about the economy in terms of dealers and retailers and OEMs, and ultimately what they are trying to do is make sure that there aren't too many inventories that are making their way into the channel.

So the reason we think there will be some shifts between Q2 to Q3 into Q4 is, it seems like people are going to want to order a lot closer to the season to see that demand materializes. So although the weather, you know the weather in terms of temperature was okay, it still was a situation where there was a lot of dry weather and people were not mowing their lawns. And if you don't mow basically two things happen; one is you don't buy a new mower and also service parts and service repairs are down which is exactly what we saw as well.

Dave Rodgers

Josh this is Dave. The other thing you have to remember is that the majority of lawn and garden equipment is really sold at retail in the spring and early summer season really from a period of, call it, April through June and typically our first fiscal quarter which is the September ended quarter is typically a smaller retail period for lawn and garden equipment.

So to the extent that the channel had higher inventories and at the end of June it would take pretty significant increases to take that inventory down significantly heading into the fall and we didn't see the indications of that because of the continued dry conditions as well as what we saw as far as industry shipments in the retail during the quarter.

Josh Borstein - Longbow Research

And then just on housing starts and business related to housing starts, any idea what percentage of your business is tied to home starts?

Todd Teske

Well, when you look at, we have a kind of metric model that we share out on our, we at least show the chart on our website and I was just with our economist, our outside economist on Tuesday evening and actually before the housing starts came out yesterday and at the end of the day when you look at what really drives mower sales, housing does play a significant role in that and in fact our economist, his comment to me was you know he thinks housing is going to continue to improve which I think was shown yesterday with housing starts. He said, you guys should be encouraged going into next year; which is exactly why we've got the market going up 4% to 6%.

So although we don't disclose exactly what that correlation is suffice it to say that there is a very high correlation to both housing starts and existing home sales, because as people move, they have a tendency to buy new equipment and so as we look at housing starting to recover, we are very encouraged by that. Having said that, we are not anticipating how its going to get back to 2004-2005 level, but any improvement is going to be helpful to the U.S. mower market.

Josh Borstein - Longbow Research

Do you have a housing start number that’s tied to your fiscal forecast for ‘13?

Todd Teske

We do not.

Josh Borstein - Longbow Research

Okay. And then just finally, can you talk about your inroads a little bit more into commercial engine market, you made some references there. It seem to be going well. Just how it's going there compared to the residential channel, if you are able to say what percentage of revenue at least, what percentage increase in revenue commercial engines now make up?

Todd Teske

Yeah, I would tell you Josh that we have put a considerable amount of effort on penetrating that portion of the market. As you may or may not know, I mean we've been very strong in consumer engines for residential users and we plan to continue to be very strong in that. But we haven't played nearly as well in the commercial end of things and so over the last few years, we've been putting more of our product development efforts behind. Features and benefits that are really user driven and so we've been spending a fair amount of time with folks out in the field to understand what the problems are and how can we help solve those problems. You’re started to see that pay off and so on a relative basis, although we not disclose the numbers on a relative basis, I would tell you that our commercial activity is up, fairly substantial for us, while residential has been difficult as you have obviously seen, driven by the market. And so I am extremely encouraged by the inroads that our team has been making in the commercial engine business.

Dave Rodgers

And Josh, just to add to that a little bit, where we’ve made quite a bit of headway in some specific segments of commercial. So as we look at things like commercial cutting as well as the utility vehicle markets, we’ve been making pretty decent headway in those categories; where we need to continue to make some additional gains as for our share for engines and equipment moving forward is in that construction equipment part of the industry; the light construction equipment here in the US and that’s where typically you’ll see Honda being placed on a lot of equipment and we think there are still lots of upside for us in that particular segment.

Operator

Thank you. Our next question is from the line of Peter Lisnic of Robert W. Baird. Your line is open.

Josh Chan - Robert W. Baird

Hi, this is Josh Chan, filling in for Pete. Could you talk about your market forecast for 4% to 6% growth in the US lawn and garden market? I mean by our measure it seems like things have weakened a bit and you’ve chosen to close the McDonough facility during the quarter. Could you explain how that sort of outlook was unchanged?

Todd Teske

Okay, let’s back up a minute. Basically McDonough, we’re really shutting McDonough for a month to basically control inventories as well as to retool for the new products. I shall make that distinction because, it’s not just because to control inventories, it’s also because we have 40 new products that are being introduced, many of which are coming out of that facility.

As we look Josh, at kind of the econometric model that our economist put out there, there is also a couple of other forecast that have been put out in the industry and when you look at the improvement in housing, as well as some of -- consumer confident seems to ebb and flow a bit, but in the end what we see with improvements, perhaps in employment and things like that, we see that the market could be up, should be up, driven by the factors we talked about in the past which is what drives the econometric model again primarily housing.

So although we are trying to control inventories, remember what we see is that there is going to be caution in terms of inventory builds out there and so equipment will be delivered to retail locations we believe much closer to the season. So as we go through and keep our inventories down here in the second quarter, we have tremendous ability, our team has tremendous ability to increase production both in the engine business and in the products business because of the fact that we are located here in the U.S.

And that’s why as we look at our strategy going forward having facilities here in the U.S. are really important so that you can meet inventory or meet retail requirements very quickly and you are not on water for four weeks or five weeks or whatever it might be. So we have the ability in our plants to ramp up and ramp down and that’s exactly what you are seeing us do. So don’t get a misread off of what we are doing in November at McDonough, yes we are controlling inventories, but also as retail as well.

Josh Chan - Robert W. Baird

On the cost side, you said you realized about $9.8 million savings in the quarter; does that sort of put you in front of the run rate that you are externally expecting to get, meaning is there a potential for you to realize more savings than perhaps you have guided to?

Dave Rodgers

What we have said for the full year Josh is that we’ll be around $30 million to $35 million. We did incur some expenses in last year’s first fiscal quarter that we didn’t re-incur this year because we fixed some of the challenges that we had throughout our manufacturing operations particularly in the products group. So, while we are pleased with the progress that we are making thus far, I’ll tell you that, at least for our numbers that we are still forecasting the total savings for the year to be at about $30 million to $35 million.

Josh Chan - Robert W. Baird

And then last question from me. For the pension impacted, Dave you mentioned, since the change doesn't go into affect until 2014; I was a little surprised to see that the cash contribution has come down?

Dave Rodgers

Well, the cash contribution is coming down not only because of the changes that we’re making to the plans, but also in the middle of August, the IRS published the discount rates to be used in order to compute this funding that's required for pension plans. The discount rates that were published in response to the transportation bill that was done by Congress at the end of June. And so the discount rates that the IRS published as well as the changes that we’re making is driving striving the reductions in some of the funding over the next couple of years.

Josh Chan - Robert W. Baird

Okay. But there is no changes on your pension expense line per se?

Dave Rodgers

Well, in terms of the pension expense, I think the way we characterize it is that by the time we get fully implemented in ‘15, we expect the expense to be down about $10 million to $15 million for the benefit plans.

Operator

Thank you. Our next question is from the line of Brad Safalow of PAA Research. Your line is open.

Brad Safalow - PAA Research

Just to go back to the pension, I just want to make sure I have all the numbers correct. So the $45 million in cash contributions that you are expecting for fiscal ’13 now goes to $30 million, right?

Dave Rodgers

It’s about $30 million, that's correct.

Brad Safalow - PAA Research

And then, I think in your K you guys have outlined $54 million in total cash contributions for both ’13 and ’14, at this stage I understand there's a lot of variability based on performance, discount rates etcetera where we pencil the ’14 contribution?

Dave Rodgers

Down somewhere in the area of about $13 million to $15 million decrease. And one of the things that’s actually happening with our plans given the transportation bill on the lower discount rates is used due to funding calculations is, its showing that our plan is very close to being 100% funded as defined by the funding calculations. When you are on one side or the other of that 100% it will determine whether or not you need to make any cash contributions or not and right now it looks that we will be able to reduce those cash contributions from what we previously have shared with you.

Brad Safalow - PAA Research

And so the $13 million to $15 million, that's the absolute or that's the reduction of what you previously were expecting?

Dave Rodgers

That's the reduction.

Brad Safalow - PAA Research

And then just going back to the new product introductions that you are bringing to the dealer channel, what was the number of new product introductions you had a year ago?

Todd Teske

Off the top of my head Brad I don't know; its considerably less than 40.

Dave Rodgers

And one of the reasons for that Brad is, its really the shift that we announced and talked with you about last; making the decision to exit the mass retail lawn and garden business and focus our efforts and our resources on the dealer channel. And so what you are seeing is that shift taking place here over the last 18 to 24 months and the result is being able to introduce these products through the dealer channel in this next spring, which the dealers are extremely pleased with, the reactions that we’ve gotten from them to this point has been very positive, very favorable. Not all of the 40 new products are - new products that are significantly different. There is some changes to existing models, but suffice to say that there is plenty of new products and new features and things like that, that the dealers are excited to receive because it will get their customer base excited to buy new equipment as well.

Brad Safalow - PAA Research

In light of the weakness overall in the market place at the end of the summer early fall; you guys still feel confident that you ended with 1.3 million engine units at the end of fiscal ‘12. Do you still feel confident that you will be able to bring that inventory back to historical norms for you.

Dave Rodgers

Well, the end of fiscal 2012, we were actually closer to about 1.3 million units, and so we’ll bring that down here over the course of this year. We already have been bringing that number down here in the first quarter, where we were carrying extra inventory last year was in preparation for the conversion to the new emissions compliant engines starting January 1. 2012. I would share with you that our engine team has done a great job of bringing those engine units down over the last couple of quarters here, and so we are on plan to get our engine units down somewhere closer to the 1.1 to 1 million unit mark by the end of this year.

Brad Safalow - PAA Research

Just another question on the conversation; I know it's still early with your channel partners. How does the dynamics in the housing market impact those conversations? Obviously we understand last year the weather was awful, but we’ve seen pretty significant acceleration in terms of activity around housing. How does this change the conversation about what kind of inventory they’ll pick on, I understand they’re being cautions. How does that effect, what they might order?

Todd Teske

Well, Brad, I would tell you that it’s interesting because what they will do is obviously they want to keep their inventories as low as possible both at the OEM and the retail levels. And so, although we basically all believe that, because my discussions, at least domestically here has been some optimism obviously with the market, especially as it relates to the housing and housing driven improvements. There still remains a lot of economic uncertainty in the US and so what the idea is, is that everyone is going to expect everybody else to carry inventory and then having it be there when it’s needed.

So, in other words, inventories often times gets push back into the channel. That’s where our ability to react quickly, to ramp up, ramp down production allows us the opportunity to kind of play the year as we anticipate playing it. Meaning, as orders get placed closer to the season, we’ll be able to react much better to what’s needed and what’s not needed along the way.

I don’t anticipate that there is going to be any big inventory surge if you will, in anticipation of a season. I do anticipate though that, as things play out and if they play out favorably and are up, it will just ultimately allow us to increase our velocity through our plans, which is exactly what we’re good at. So in short, I don’t expect the improved housing to drive higher inventories going into the season. I expect that there will be much more of an emphasis placed on having products available much closer as the demand occurs.

Brad Safalow - PAA Research

Okay. And just your economy of metric model I am guessing would suggest that you are on a higher plane for demand than you were at six months ago all else being equal. I mean we don’t know what happened with weather obviously, but excluding weather factors you would be on a better trajectory just given what’s happened in housing.

Todd Teske

Yes, I would tell you that our outside economist anticipated six months ago we would have put in better housing statistics for ’13 as he went out. But as the statistics now come in actual, we start to feel better about where we are at. And again as you point out, notwithstanding other factors that impact the market like weather. But yes I would tell you that when we see things like the housing start number that came out yesterday, we are much more encouraged by what we believe the season is going to be next year.

Operator

Our next question is from the line of Robert Kosowsky of Sidoti & Company.

Robert Kosowsky - Sidoti & Company

First off just [quick] numbers question, Dave which share account should we be using for the year?

Dave Rogers

Well I am not going to make any projections about how much in terms of shares we may or may not buy back as we move forward. So I am not going to give a forecast on how many shares, and you kind of take a look at what our shares are outstanding at the end of the quarter.

Robert Kosowsky - Sidoti & Company

A little bit of fully diluted number then because this is the basic number.

Dave Rogers

The fully diluted number is the number - it should be the same Rob, because when you are in a loss position you don't have any dilution affect of the shares.

Robert Kosowsky - Sidoti & Company

Yeah, but if you were to have made my - what would that have been?

Dave Rodgers

I would have to do the map on that Rob and then get back to you.

Robert Kosowsky - Sidoti & Company.

Secondly, I guess within the engine segment. Could you maybe talk about which sub segments either geographically or by product line, you know did better or worst than that 60% declined, that you did see on the quarter from the unit shipment standpoint?

Dave Rodgers

Well, Rob, I will tell you that, when you look at what happened in the US. I would tell you that obviously [rides] were off. The history data shows rides were off, [lots] were off less. So that has a big impact as we continue to control, what we call large engines that are used in running our equipment. When you look at Europe, Europe is primarily a walk behind market and so therefore the market being off in Europe would relate to small engines used on walk mowers. So as we look at it, really the decline was for different regions and different pockets, but at the end of the day it was obviously down.

Robert Kosowsky - Sidoti & Company.

Okay. So its fair to say with the 16% down average, you probably had worst volume declines in Europe and you got (inaudible), you might have had worst declines in US. ride? Is that kind of the way we are looking at?

Dave Rodgers

That's pretty fair, yeah. But again [blocks] in the US were down as well. But yes, I think that’s a fair way to look at it.

Robert Kosowsky - Sidoti & Company.

How much of the negative volume was due to just the lack of generators sale through, not as big as they were last year, they just kind of have the engines, they obviously were putting those generators and the impact is for the volume?

Todd Teske

Yeah, consistent with last year Rob, we typically don't break out each of the different products within the products group.

Operator

Our next question is from the line of Sam Darkatsh of Raymond James.

Sam Darkatsh - Raymond James

I understand that in respect that you don't have perfect visibility yet, with respect to comparative listings for next year versus your peers, but with respect to the early returns, how are they shaking out and/or how much risk do you see or how worried should folks be that there might be a material change in your market share next year.

Todd Teske

Sam the early returns would indicate that things are going as we had expected, which is obviously I'll make it explicit, but it’s implicit in our guidance. I will tell you that perhaps there is some encouragement that we might be able to pick some things up along the way, but I would not anticipate significant market share increases, but I think there are some opportunities for us to incrementally do a little bit better on a year-over-year basis.

Sam Darkatsh - Raymond James

Second question I noticed your pricing was up both in power and in engines, and I think Dave you mentioned a lot of that was carried forward from prior price increases. When do you begin to anniversary those and how should we look at pricing for next season.

Dave Rodgers

Consistent with previous years the engine pricing typical starts to take effect during the middle of the second fiscal quarter. For different parts of the world it maybe different but generally the majority of the increases you'll start to see the impact of during the second quarter in the engine business.

In the products business, where you typically start to see that coming through is as we start to ship product into the spring season. So you will start to see it in the third and fourth quarters for the products business as a general rule.

With respect to the levels of pricing, that's something that we are currently in discussions with Sam and we’ll be able to maybe give you a little bit more detail on that when we have our second quarter call.

Sam Darkatsh - Raymond James

Last question, there's a lot of moving parts with pension and with inventories and what have you. And if you mentioned this in the prepared remarks I apologize Dave I missed it. Do you have a sense of what your free cash flow conversion might be this fiscal year?

Dave Rodgers

We think that and we did say in the prepared comments that we thought that cash flows would be higher in ’13 compared to ’12 and that we think that we've got working capital reductions of somewhere between $80 million and $100 million. That will be offset somewhat by contributing about $30 million to the pension plan and then CapEx will be somewhere between $50 million and $60 million. So I think that all in free cash flow will be improved because primarily the working capital reductions for this year.

Sam Darkatsh - Raymond James

So I should look at free cash as your $60 million to $75 million net income plus the $80 million to $100 million in working capital, less the $30 million in cash pension, less the $50 million to $60 million is that how I should look at it or is the pension going to have to be net out versus your expense.

Dave Rodgers

No, those are the key pieces.

Operator

Our next question is from the line of David Post of Point Lobos Capital. Your line is open.

David Post - Point Lobos Capital

I had a question on unused restructuring savings of I think $9.8 million that you called out. You know, if I am thinking about the full-year, does that mean, if you say weren’t for these restructuring savings then earnings would have been $0.13 lower this quarter. And I am just trying to understand, are these $30 million to $35 million of restructurings, these cost savings, are they kind of to offset other issues that are going on in the business or are they actually additives to earnings from last year?

Dave Rodgers

Well, I will take you back to the announcements that we made last year and the things that we’re trying to achieve in terms of executing on our strategy and you are starting to see the results of the execution of those items, which is the $10 million in the first quarter. When we set upon the restructuring plan last year, there were several pieces to it.

Number one is we said that we're going to take some capacity out of our engines business and we're going to do that by closing our Ostrava, Czech Republic plant as well as downsizing some of our operations here in the United States. And so those activities have been completed at this point in time and we've been able to take out cost as a result of doing so without necessarily taking our capacities down below the point that which we feel comfortable being able to serve the markets.

The second thing that we said we were going to do an order to take additional cost out of our products business was that we're going to close our Newbern facility and consolidate it with our remaining two products facilities in the United States. You’re starting to see the results of that; that’s included in the $10 million of cost savings in the first quarter, because the plant closed during our fourth fiscal quarter of 2012.

We’re also doing a number of things within our product manufacturing operations in order to simplify and take cost out of our manufacturing operations. Some of those things that we’re doing are reducing the number of product platforms, reducing the number of unique components. All of those things help us reduce cost in terms of lower engineering costs, lower procurement costs, lower inventory carry and space costs in the plants and certainly, it takes out complexity along the way.

Lastly, I’d tell you that we said that, because of the economic environment that we’ve been in here and the market decreases that we’ve seen, we’ve reacted to that by reducing our salaried work force last year by about 10%. And so those are some of the savings that you’re seeing coming through as well. So basically what I’m saying is, we’ve been executing upon our restructuring plan. We said that we’d have about $30 million to $35 million of savings in fiscal ’13 and you’re starting to see the results of that in Q1.

David Post - Point Lobos Capital

So just to get back to kind of the question, what I’m trying to understand is modeling this and then looking at the way that analysts are modeling the company, kind of just taking the $35 million of restructuring savings and kind of adding that to what you guys earned last year and this quarter if you do that, it’d be, you’re still down on a year-over-year basis. So I’m just trying to understand is, there were some market share losses last year, there were some other things going on in the business, and you’re exiting another business; I’m just trying to understand, is the math really that simple as kind of help you remodeling it or is there other things that you would be factoring in?

Dave Rodgers

David, basically if I boil the first quarter down on a year-over-year basis, we walk through what’s happening in the market etcetera the two large things that are happening in our first quarter compared to last year as you see that sales volume is down and that is really because the market is down in the United States as well as in Europe and then you are also seeing us take our production down in order to manage inventory levels in response to the market decreases. Those are the two big things happening in the quarter that have an impact on the sales as well as the bottomline in Q1. And to answer your question that $10 million of cost savings is helping but it’s not going to overcome some of the decreases in volume for sales and production in Q1.

Todd Teske

But yeah David if you think about modeling going forward I mean comparing year-over-year is interesting simply because you’ve got ebbs and flows in the market, right. And so, you got to factor those in, but yeah, the restructuring is, if you look it on a year-over-year basis and the way other analysts have kind of put it in there it is fair to put it in there as incremental improvement; if that’s what your question is, this incremental improvement year-over-year, yes it is.

David Post - Point Lobos Capital

And another modeling question is just on this $100 million of sales that is going away this year; how much of that occurred in this quarter, so just trying to model what negative drag that had on this quarter and then what negative drag of the $100 million on the remaining three quarters of the year?

Dave Rodgers

Yeah, due to the nature of the types of products that are sold at retail, so we said that we were exiting the lawn and garden business and most of that is sold in the third and fourth fiscal quarter. Most of the impact you are going to see later on in our fiscal year.

Todd Teske

But I will take you back David to last year when we made the announcement or earlier this year I guess calendar wise, when we made the announcement, what we told everyone was that the impact of the reduced sales would not have a significant impact on operating income. So you’ve got to factor that into your model as well that even though there is a $100 million that will be coming out, but a chunk of that will have very little impact on operating income.

Operator

Thank you. And our next question is from the line of Jad Fakhry of Poplar Point Capital. Your line is open.

Jad Fakhry - Poplar Point Capital

So I had two questions, one was on placements and share and the second one was on pension. On placements and share, I pulled up a few different data points and I wanted your thoughts on and the industry numbers that you guys had mentioned for unit in the first quarter for walks and rides and your mix of walks and rides suggest that kind of industry is down about 10% maybe to 11%, your shipments are down 16% and the industry data point that I found was thrower was done about 7.9% shipments in their most recent quarter, the walks were up little bit and that's relative to you guys been down 16%. And there is a little bit of anecdotal data that I noticed at Home Depot in terms of placements; your placement appeared to be down quite a bit.

So taking all those data points, and the most recent couple of quarters including this quarter; I am trying to understanding the guidance, so the back half, quarters two, three and four the last three quarters, your sales guidance would suggest that you are going to grow at the midpoint 6% up to 10% at the high end of your guidance, which would at the high end and at the midpoint suggest you’re growing in line to a little bit better than your projections for the market growth of 4% to 6%.

So, I’m trying to understand, how we go from underperforming, OPEI, the Toro numbers and losing share to back to gaining share. What are you seeing in your business that would suggest you’re going to start gaining share. Does that have something to do with the Chinese and how many Chinese engines are coming in?

That was the first question, the second question was just on pension, I think you guys had mentioned the reduced pension contributions, does that affect the total number that, because I think between pension and post retirement there's $435 million of under funded-ness, does that affect that number?

Dave Rodgers

Let me take your fist question. With respect to the market, compared to our unit shipments for the quarter, the other significant piece that you did not mention is Europe. And so there's other - the 30% of our sales roughly are outside of the United States, and so what I would tell you is that our sales while I'm not going to break it down by country, our sales are very much in line with the market that the we see here in the United States and that the European shipments which we referenced in our prepared comments were down significantly to OEMs that make equipment for the European market. So you have to compare apples and apples to make sure that you are doing the right comparisons.

Secondly, with respect to placements, I think if I go back to our previous conference calls, we said that on an overall basis last year that we were down slightly in terms of market share, and if you are taking a look at Home Depot, you may have seen us lose a couple of skews at Home Depot, but there were also other retailers where we picked up placement as well.

So when you make analysis like that, you really have to take the total market and there is typically wins and losses on a skew by skew basis with all of the retailers and the dealer networks that are out there. So, as far as the Q1 and how that plays in the rest of the year, Jad, I don't see it being an issue with respect to run-rate.

We're sticking to the 4% to 6%. 4% to 6% is our call for the US market. What we said in August is that we're anticipating that the European market is relatively flat, which is off a pretty a low base because that market was down last year, but we just don’t get excited about a lot of the consumer sentiment that we continue to see coming out of Europe.

With respect to the pension question, there is a lot of information that goes in to computing, the funded status of plants and you're correct in adding up the [OPAB] and the pension plans that the under funded status is in excess of $400 million. One of the largest pieces of why the funded status has increased year-over-year is that the discount rates that’s used to value the liability has continued to go down.

To give you an idea of the sensitivity of that discount rate, just isolating the fine benefit pension plan for a moment; if interest rates were to increase by about 2.3%, and you redo the actuarial valuation, we’d be fully funded on a GAAP basis. So what happens if the discount rate goes up is that the liability or the projected benefit obligation goes down. So, to the extent that we put cash into the plan, that certainly would have the impact of making the funded status increased, you’re correct in that assumption.

Operator

Thank you. And we also have a question or a comment from the line of Robert Kosowsky of Sidoti & Company.

Robert Kosowsky - Sidoti & Company

Yeah, two questions, first off Dave or Todd, any idea what Europe was down for the year, do you have good data for that?

Dave Rodgers

We don’t have as good of a market data for Europe, but going back to where we saw it, we thought it was down anywhere from 15% to even, it could be 20% across western Europe primarily, and we didn’t see that improve significantly in the most recent quarter.

Robert Kosowsky - Sidoti & Company

Secondly, as far as the stock buybacks, it’s been like in the $10 million to $15 million range for the next few quarters and you’re like six quarters into buyback stock. Kind of, how are you looking at this from kind of philosophic standpoint, and do you think you’re trending to be more opportunistic, is it going to be more sort of dramatic at this $10 million range. Just kind of, your thoughts about doing that, given that you’ve been doing it for about year and a half now?

Dave Rodgers

One of the things that we think about is buying back shares in order to offset the impact of any potential dilutive impacts of our equity based compensation plans. Well that’s one thing that we’ll continue to do as we move forward. But also moving forward, I think what we’ve shown in the past is that we’ll have a pretty steady approach in order to repurchase shares.

My approach to it is not to time the market or to be opportunistic, I think that typically most of the study show that people that try to do that, they’ll look back as that doesn’t necessarily go in their favor. Having said that we think because of the plans that we have at the company and the execution that we have on those plans is continue to point things in the right direction and so we’ll take stock of where the current market is at and where the price is at and take all of those factors into consideration moving forward.

Robert Kosowsky - Sidoti & Company

But it seems like you are saying it’s a little bit more of pro-dramatic than as an opportunistic and is it true that this like $10 million rate might be kind of like a decent [proxities] or is that a little bit elevated?

Todd Teske

It depends on so many things Rob that I am just not going to give you a number of that we may buy back in future quarters. The market is so volatile that it’s something we will continue to keep a close on, but I can’t predict what’s going to happen specifically with respect to that.

Operator

Thank you. And at the moment I am showing no further question in queue.

Todd Teske

Thank you, and thank you everybody for joining today’s conference call. Our next quarterly earnings conference call will be in January. Have a great day.

Operator

Thank you. And again thank you once again ladies and gentlemen for your participation in today’s conference. You may now disconnect have a great day.

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