Brunswick Corporation (BC)

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Brunswick Corporation (BC)

Q3 2010 Earnings Call

October 28, 2010, 11:00 am ET

Executives

Bruce Byots - VP, Corporate and IR

Dusty McCoy - Chairman and CEO

Peter Hamilton - SVP and CFO

Analysts

Ed Aaron - RBC Capital Markets

James Hardiman - Longbow Research

Joe Hovorka - Raymond James

Tim Conder - Wells Fargo

Carla Casella - JPMorgan

Presentation

Operator

Welcome to Brunswick Corporation's 2010 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode, until the question-and-answer period. Today's meeting will be recorded, if you have any objections you may disconnect at this time.

I would now like to introduce Bruce Byots, Vice President of Corporate and Investor Relations.

Bruce Byots

Good morning and thank you for joining us. On the call this mornings is Dusty McCoy, Brunswick's Chairman and CEO and Peter Hamilton, our Chief Financial Officer.

Before we begin with our prepared remarks, I'd like to remind everyone that during this call, our comments will include certain forward-looking statements about future results.

Please keep in my mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com.

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

Dusty McCoy

Thanks Bruce and good morning, everyone. By now I hope you had the opportunity to review our third quarter earnings release. Our strong results for the past three quarters continues to reflect the hard work of our employees, customers and suppliers, which has allowed us to take advantage of our historically low and well managed Marine inventories as well as the significant fixed cost reductions achieved during the past two plus years.

We reported a net loss in the quarter of $0.08 per share on a sales increase of 22%. The quarterly EPS includes $0.14 per share of restructuring charges. Our quarterly operating earnings, excluding restructuring, exit and impairment charges were $37 million, an improvement of about $118 million as compared to the loss experienced in the prior year period.

Our operating margin, excluding our ex-restructuring charges were slightly less than 5% in the quarter, representing our highest third quarter consolidated operating margins since 2006.

Significant increases in wholesale units in both our Marine, Engine and Boat segments were the primary drivers of our 22% top-line growth, which generated a significant improvement in fixed cost absorption in our Marine businesses.

Further contributing to the strong operating leverage demonstrated in these businesses were approximately $30 million of lower discounts with prior to facilitate retail boat sales and about $6 million of reduced bad debt provisions primarily in the Engine segment.

Lower pension expense of approximately $17 million also had a favorable effect on the Marine Engine and Bowling & Billiards segments, as well as on corporate expenses. A portion of the reduction in pension expense, lower bad debt expense and a reduction of variable compensation were the primary factors that reduced our third quarter SG&A by 10%. Partially offsetting these positive factors were gains from favorable settlements reached during the prior-year third quarter.

Our cash increased by nearly $150 million from year end and net debt decreased by $167 million. Peter will comment in his remarks on the key factors affecting our improved cash position, as well as provide you with an update on cash flow targets for the remainder of the year that will support our objective of generating positive free cash flow in 2010.

Although we are very encouraged year-to-date financial results driven primarily by return from more normal balance between wholesale sales, retail sales and production, overall Marine demand continued to decrease during the first nine months and remain at historically low levels, and the gap between fiberglass and aluminum demand trends continues to be quite pronounced.

Let’s review the preliminary third quarter US marine industry data. Fiberglass sterndrive, inboard boats unit demand fell by 37%. This compares to a decline of 31% in the second quarter of 2010 and 22% in the third quarter of 2009. Outboard fiberglass boat retail unit demand fell 22% in the third quarter. This compares to declines of 15% in the second quarter of 2010 and 15% in the third quarter of 2009.

Aluminum product demand decreased by 2% in the quarter. This compares to an increase of 1% in the second quarter of 2010 and a 20% decline in the third quarter of 2009. After taking into account the different unit volumes represented in each of these segments, preliminary total industry unit demand declined approximately 17% in the third quarter. This compares to a 10% decline in the second quarter.

For the first nine months of 2010, total industry demand declined by 14%. That decline is greater than our full year 2010 planning assumptions of down 10%. Aluminum boats which generally have an average selling price below that on fiberglass boats, have begun to show signs of stability. This development could be a leading indicator of future demand for the overall boat markets.

The higher priced fiberglass boats however, have yet to experience and significant improvement. It appears that the consumer remains a very reluctant to spend in the large fiberglass categories.

Our Engine segment sales outside the US increased by 5% for the quarter compared to the third quarter of 2009 and our boat sales outside the US increased by 39% during the same period. Many marine engine markets outside the US are commercial and government segments and have not experienced the overall level of decline that we have seen in the US.

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