Brunswick Corporation (BC)

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Brunswick Corporation (BC)

Q2 2011 Earnings Call

July 28, 2011, 11:00 am ET

Executives

Bruce Byots - VP, Corporate & IR

Dusty McCoy - Chairman & CEO

Peter Hamilton - SVP&CFO

Analysts

Ed Aaron - RBC Capital Markets

Jimmy Baker - B. Riley & Company

James Hardiman - Longbow Research

Tim Conder - Wells Fargo

Rommel Dionisio - Wedbush Securities

Joe Hovorka - Raymond James

Presentation

Operator

Good morning, and welcome to Brunswick Corporation’s 2011 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 Bruce Byots, Vice President of Corporate and Investor Relations. Please proceed.

Bruce Byots

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

Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements 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 these documents are available on our website at brunswick.com.

At this point, I would like to turn the call over to Dusty.

Dusty McCoy

Thank you Bruce, good morning everyone. By now I am sure you had the opportunity to review our second quarter earnings release. Our strong performance in the second quarter reflected higher marine wholesale shipments compared to the prior year.

Our boat and engine segments continued to perform well across most of their product offerings. In addition, Life Fitness experienced strong revenue and earnings growth, and consistent with the previous five quarters, our consolidated results continue to demonstrate strong operating leverage.

Our results in the quarter reflect revenue growth of 8% and net earnings of $0.75 per share including a $0.02 per share benefit from special tax items. This compares to net earnings of $0.15 per share in the prior year which included $0.26 per share of restructuring charges and a $0.02 per share of expense from special tax items.

Operating earnings excluding restructuring exit impairment charges were $108 million in the quarter, an improvement of $28 million as compared to the prior year period. Our GAAP operating margin was just under 10%. This represents our highest second quarter consolidated operating margin since 2005.

In addition to higher sales levels, our earnings benefited from increased fixed cost absorption, improved operating efficiencies, lower restructuring charges and company-wide cost reductions.

Partially, offsetting these items were higher material costs and variable compensation expense. SG&A remained relatively consistent, benefiting in the quarter from lower bad debt expenses. SG&A decreased as a percentage of net sales.

Our cash and marketable securities totaled $677 million and net debt at quarter end was $110 million. Peter will comment in his remarks on the key drivers of our strong cash flow during the first half as well as provide you with a perspective on our 2011 targets, supporting our objective of generating substantial free cash flow for the remainder of the year.

Let’s review the preliminary second quarter US Marine industry data. The second quarter data is based on 89% of April’s, 78% of May’s and 66% of June’s marketing reporting. Fiberglass sterndrive and inboard unit demand fell by 8%. This compares to declines of 18% in the first quarter of 2011 and 29% in the second quarter of 2010. For the first six months of 2011 unit demand fell by 12%.

Outboard fiberglass boat retail unit demand increased 3% in the second quarter. This compares to declines of 3% in the first quarter of 2011 and 13% in the second quarter of 2010. If this preliminary number remains positive, it would be the first increase in this category since the fourth quarter of 2006. For the first six months of 2011 unit demand increased by 1%.

Aluminum product demand increased by 7% in the quarter. This compares to an increase of 6% in the first quarter of 2011 and a 5% increase in the second quarter of 2010. For the first six months of 2011, unit demand increased by 7%. After taking into account the different changes in unit volumes, preliminary total industry unit demand was up 1% in the second quarter. This compares to a 3% decline in the first quarter of 2011 and a 7% decline in the second quarter of 2010.

For the six months ended June 30 2011, total industry unit demand is down less than 1% over the same period last year. The total industry demand includes the categories noted above as well as certain length and categories included in the NMMA definition of the total fire boat industry. But it does exclude jet boats.

Thus far in 2011, the overall US marine market has been somewhat choppy. As demonstrated by the variability of month to month demand trends, as well as state-by-state relative strength and weakness. However, as you can see from the data, the year thus far appears to be consistent with our plan for a flat 2011 retail market. On the international front, our engine segment sales outside the US increased by 6% for the quarter compared to the second quarter of 2010.

Our boat sales outside the US increased by 14% during the same period. Looking at our growth in emerging marine markets outside the US, Latin America continues to show strength versus prior year across both the engine and boat segments. Growth is particularly strong in Brazil, but the Mexico is also starting to show signs of improving demand although from a very depressed level.

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