Brunswick’s U.S. boat builder acquisitions almost complete

LAKE FOREST, Ill. – Just when the industry was starting to get used to Brunswick’s frequent acquisitions announcements, George Buckley, Brunswick Corp. chairman and CEO, says it is now almost finished “filling in the white space” in its U.S. boat business and will begin focusing on European acquisitions next year.

During the company’s second quarter earnings conference call earlier this week, Buckley suggested that company was on track for another record year.

This is due in part to the strength of marine retail activity “across all boat sizes and regions” since the poor weather in the early season turned warm, he said.

“You can’t dream up softness in small boats like runabouts,” commented Buckley. In fact, Tahoe, Bayliner and Sea Ray have gained market share, which “may feel like contractions to a competitor,” he said. “One man’s gain is another man’s pain.”

Buckley also commented on the layoffs and shutdowns at Brunswick’s aluminum plants, suggesting that it has made progress in clearing the pipeline, but it intends to take further action to continue this process.

“The inventory control medicine is clearly working,” he said.

When asked about Brunswick’s efforts to convert to exclusive dealers, Buckley suggested it will be a long process.

“We all have to accept reality,” he said. “[The company’s] ability to change a population of 6,000 dealers in the U.S. and 12,000 worldwide [is] slow moving.”

2Q sales and profits up

Brunswick Corp. (NYSE: BC) saw a 27-percent increase in net earnings on 12 percent sales growth and a 23 percent improvement in operating earnings for the second quarter, it reported in a statement Wednesday.

Net earnings totaled $114.1 million, or $1.15 per diluted share, for the second quarter, compared with net earnings of $90.1 million, or $0.93 per diluted share, for the year-ago quarter.

“It was a record quarter for Brunswick, evidence of our ability to leverage our competitive and technological advantages to extend our leadership position in all of our market segments,” said Brunswick Chairman and Chief Executive Officer George W. Buckley. “We saw strength in our marine operations where our customer-led strategy of offering new products incorporating the technologies and features that resonate with consumers continues to drive sales growth.”

For the quarter ended June 30, net sales increased 12 percent to $1,598.6 million, up from $1,422.7 million a year earlier. Excluding the effect of acquired businesses that were not part of the company a year ago, sales were up 10 percent in the quarter.

Operating earnings rose 23 percent to $171.7 million compared with $139.5 million in the year-ago quarter, and operating margins improved to 10.7 percent from 9.8 percent.

Net earnings totaled $114.1 million, or $1.15 per diluted share, up 27 percent from $90.1 million, or $0.93 per diluted share, for the second quarter of 2004. Debt-to-total capital was 27.7 percent at quarter end as compared with 31.9 percent a year earlier, and cash totaled $508.6 million.

Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group and Brunswick New Technologies (BNT), reported net sales of $755.5 million in the second quarter of 2005, up 14 percent from $665.2 million in the year-ago quarter. Operating earnings in the second quarter increased 12 percent to $107.0 million versus $95.6 million, while operating margins declined slightly to 14.2 percent from 14.4 percent for the same quarter in 2004.

“Our Mercury Marine engine business continued to show strength, with solid sales growth reported for outboard and sterndrive engines as well as parts and accessories in both the domestic and international markets,” Buckley explained. “In addition, BNT sales remained robust, up 65 percent for the quarter, primarily driven by an 80 percent increase at Navman with its growing family of marine electronics products, as well as an expanding assortment of new GPS-based products for land navigation.”

“During the quarter we continued to invest in projects that will lead to improved financial performance in the coming year. Our new engine plants in China and Japan that started up in the first quarter are good examples of this effort,” Buckley noted. “While we incurred costs associated with the ramp up of production at these facilities, we will begin to see the benefit of our improved cost structure as we build volume over the coming year.”

The China facility is making 40 to 60 horsepower four-stroke outboard engines, while Mercury uses the Japan operation, with joint venture partner, Tohatsu, to make four-stroke outboards from 2.5 to 30 horsepower.

“Effective the first of July, Mercury became the first major engine maker to exit the carbureted two-stroke outboard market, fulfilling our commitment to discontinue producing non-emission compliant two-strokes for sale in the United States and Canada beginning with the 2006 model year,” Buckley noted. “We now have a full line of low-emission engines that includes our direct fuel injected OptiMax two-stroke outboards as well as four-stroke engines ranging from 2.5 horsepower to our new Verado supercharged outboards with offerings up to 275 horsepower. Indeed, low-emission engines accounted for 71 percent of our outboard sales during the quarter, up from 56 percent in the year-ago period. We are very pleased with consumers’ response to our new offerings; however, they generally have lower margins than carbureted two-strokes due to their more advanced technology and higher-cost components. Increased volumes as well as our move to lower cost manufacturing areas are helping to improve that situation.”

Boat Segment
The Boat segment reported net sales for the second quarter of $742.2 million, up 18 percent compared with $629.9 million in the second quarter of 2004.

Boat segment sales for the quarter benefited from the Albemarle, Sea Pro and Triton acquisitions, all made since the end of 2004. Excluding the sales of these businesses, Boat segment sales increased 13 percent in the quarter.

Operating earnings increased to $74.8 million, 31 percent ahead of the $57.0 million reported in the second quarter of 2004, and operating margins rose 110 basis points to 10.1 percent, up from 9.0 percent.

“Our sales growth was driven by a stellar performance from Sea Ray with a 26 percent gain in the quarter as well as from strong contributions from Bayliner and our other fiberglass boat brands. Our customer-led strategy means getting the product right and getting the distribution right. The strong retail demand for our products that we saw in the second quarter is evidence of the success of that approach.

“Additionally, our strategy of organizing and grouping our boat brands around specific market segments is sharpening our focus and firmly establishing Brunswick as a major player in such areas as freshwater and saltwater fishing,” Buckley explained. “Last year, for example, we had two brands – Boston Whaler and Trophy – targeting offshore fishing. Now with the formation of the Saltwater Boat Group and the addition of the Sea Pro, Sea Boss and Palmetto brands, Brunswick now offers our dealers and consumers more choices to meet their saltwater boating needs and preferences.”

“The same is happening in the Freshwater Boat Group, where we acquired Triton Boats during the quarter,” Buckley added. “One of the leading bass boat brands, Triton also offers us additional pontoon and aluminum models to address the needs of anglers and boating enthusiasts. And while we have recently seen some regional weakness in the aluminum boat market, particularly in the Midwest and Northeast where poor weather at the start of the boating season dampened demand, we believe we have put together a formidable line-up of freshwater boats that will provide our dealers with a full array of products to meet their customers’ needs. During the quarter we reduced production at two of our aluminum plants to properly balance supply to demand and prune pipeline inventories in advance of the start of the 2006 model year.”

The Brunswick Boat Group’s growing parts and accessories business also had a strong quarter with Land ‘N’ Sea registering a double-digit sales increase. In July, Brunswick acquired Kellogg Marine of Old Lyme, Conn., to serve as a hub for its parts distribution efforts in the Northeast. Brunswick is nearing its goal, set just two years ago, of offering same- or next-day service on parts and accessories to anywhere in the continental U.S. and Canada.

The Brunswick Boat Group comprises the Boat segment. The group has 18 boat brands, including Sea Ray, Bayliner, Maxum, Hatteras, Sealine, Meridian, Boston Whaler, Trophy, Baja, Sea Pro and Triton along with the Land ‘N’ Sea and Attwood marine parts and accessories distribution and manufacturing businesses.

Six-Month Results
For the six months ended June 30, the company had net sales of $2,999.7 million, up 14 percent from $2,622.3 million for the first half of 2004. Excluding contributions from acquired businesses, sales were up 10 percent.

Operating earnings totaled $270.8 million for the first half of 2005, up 24 percent from the $218.0 million for the corresponding period in 2004, and operating margins expanded 70 basis points, reaching 9.0 percent versus 8.3 percent a year ago.

Net earnings for the first six months of 2005 increased 51 percent to $208.7 million, or $2.11 per diluted share, from $138.1 million, or $1.43 per diluted share, for the same period in 2004.

Outlook
“At the beginning of the year we based our planning on the assumption that marine retail demand would be up in the mid-single digits. Although there have been puts and takes in various geographical areas and market segments, results through the first half of 2005 continue to support that assumption,” Buckley said. “We are also seeing positive trends in pipeline inventories with 23 weeks of supply for boats and 20 weeks of supply of engines in the channel, down eight weeks and nine weeks, respectively, from the end of March. This reflects the strong demand at retail we saw in the second quarter and our dealers’ expectations for continued growth at retail for the remainder of the year.”

“While keeping in mind the impact of underlying economic and stock market conditions, we expect to report another record year for Brunswick,” Buckley said. “Based on our performance in the second quarter and outlook for the second half, we are raising our estimate for the year to $3.62 to $3.72 per diluted share, which includes the $0.32 gain on the stock sale. This compares with $2.77 per diluted share for 2004. This would imply earnings for the second half in the range of $1.51 to $1.61 per diluted share, which we believe will be more or less evenly divided between the third and fourth quarters. The wild card is the timing of planned investment spending, which could result in a few pennies shifting between the two quarters.”

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