Brunswick cuts may total up to 4,000 jobs

LAKE FOREST, Ill. – When Brunswick Corp. Chairman and CEO Dusty McCoy told Boating Industry magazine in April that the company was re-evaluating its marine brands in an effort to increase profitability, it wasn’t clear how extensive these changes to Brunswick’s marine business would be.

Since then, the company has announced it will stop production of four of its boat brands and has furloughed production at many of its boat plants for the month of July. But that wasn’t the last of Brunswick’s restructuring.

In a statement today, Brunswick has gone one step further, unveiling a set of comprehensive actions to resize the company to improve profitability during the current downturn in the U.S. marine market, including action to reduce its fixed-cost structure by $300 million versus its 2007 spending levels.

McCoy alluded to changes in previous quarterly reports, as well as in a one-on-one interview with Boating Industry Senior Editor Liz Walz.

“In the continuing challenging economic environment,” he explained in the interview, “we are assessing the recovery potential for all marine segments in which we participate, their fragmented nature, the costs of our continued presence in certain of them, and the position of our brands. Our work is ongoing and is focused on developing profitable brand positioning in all segments.”

Changes include immediately cutting 1,000 positions from its hourly and salaried work force at certain marine plants and four additional plant closures, in addition to the eight the company has closed since 2007.

When the resizing is complete, the company will have shrunk by 4,000 employees, largely from its marine businesses, with 2,900 of those cuts coming from the company’s hourly employees, said Peter Leempuette, CFO, during a conference call with investors on the restructuring this morning. More than 60 percent of these cuts have already been achieved and most of the rest should be completed by the end of 2008.

“Our goal is for Brunswick to produce mid single digit operating margins in 2010, even if we have a sales base of $5 billion dollars,” McCoy said during the call.

“For the past several years, we have been implementing initiatives to fundamentally change our cost structure by reducing our manufacturing footprint, and leveraging purchases of common components and materials across our brands and operations,” said McCoy in today’s statement. “In addition, we have addressed the prolonged downturn in the U.S. marine market by continually reducing production rates throughout our marine businesses, divesting under-utilized assets, exiting or divesting certain businesses, eliminating discretionary spending and reducing headcount. While these efforts have resulted in significant savings, the realities of the current U.S. marine market have caused us to step up the pace and magnitude of these efforts.”

“Retail unit sales of power boats in the United States have been in decline since late 2005; however, the rate of decline has been accelerating,” McCoy added. “Industry retail unit sales were down 13 percent in the fourth quarter of 2007 and down 21 percent in the first quarter of 2008 compared with the respective year-ago quarters. Further, these reductions were recorded off of an already low base. Total unit sales of power boats in the United States in 2007 were at their lowest in more than 40 years.”

The rate of the marine market decline may be accelerating, McCoy said during the conference call. Brunswick believes it is prudent to proceed as if no catalysts currently exist to spark a market rebound, he suggested.

“An uncertain economy, high fuel and food prices, slumping home sales and values, rising unemployment and other factors continue to erode U.S. consumers’ confidence and are reducing their ability and desire to purchase discretionary items such as boats, and billiards tables and fitness equipment for their homes,” McCoy said. “For our planning purposes, we are not assuming that these pressures will abate any time soon. As a result, we are planning for an environment in which the U.S. marine market will be smaller in the near term, and we will resize our company accordingly. Our objective is to thrive and prosper while the U.S. marine market remains under pressure and to outperform when we see a rebound in demand.”

During the call, McCoy said that Brunswick is planning as if the declines in U.S. retail sales will continue in 2008, followed by slight declines in 2009. The company is also taking into consideration the likelihood that markets outside the U.S. also may be impacted by the current downturn.

“Outside the U.S., developed countries are feeling the same inflationary pressures,” McCoy said during the call. “And as we’re looking at marine demand in more developed westernized countries, we’re beginning to see a slight slowing of growth. For planning purposes, we assume the economic conditions impacting us in the U.S. will have some impact outside the U.S.”

Cost Saving Efforts

Brunswick stated its $300 million cost savings target will be achieved in part by further shrinking its North American manufacturing footprint. The company plans to have 17 or fewer boat plants at the end of 2009, compared with the 29 it had in 2007. This will require four plant closures in addition to the eight plant closures already completed or announced.

Brunswick will also continue its efforts to reduce the complexity of its operations, including reducing the number of models and option packages it produces, focusing on those that are popular and clearly resonate with consumers. The company’s efforts also entail assessing the outlook for continued participation in certain market segments across its operations that may not offer opportunities to generate acceptable levels of profitability.

There’s little doubt that some of these efficiencies will come from the company’s effort to embrace platform engineering and manufacturing, a subject McCoy expounded on during his April interview with Boating Industry magazine.

“We believe that we’re now beginning to get to a place that we can move to true platform design, platform engineering, which will permit us to do platform manufacturing. A great example of some platform work we’re doing is in our pontoon business,” he stated in the interview. “Now, we are today building multiple brands of pontoons in the same plant. We’re building some fish boats, multiple brands in the same plant. And again, those were simpler to get the platform work done. But it doesn’t mean the brand integrity has been compromised at all. In fact, the brand has likely been helped because quality is better.”

The company will further reduce costs by implementing a new matrix operating model that will more efficiently provide common support functions and administrative services across all Brunswick business units, lowering spending in all functional and operations activities, and reducing its work force, according to Brunswick’s statement.

Brunswick’s CFO, Pete Leempuette, said that the company is expecting restructuring charges of $200 to $220 million dollars, over 40 percent of which will come from severance packages.

Going Forward

Brunswick notified employees today it would be reducing 1,000 positions from its hourly and salaried work force at certain marine plants.

“These obviously are hard decisions, dictated by a difficult economy that has both constricted and altered the U.S. marine market,” McCoy said. “We have chosen to act now to recast and resize our operations with the objective of being profitable within a smaller marine market. We are confident that these targeted savings and other changes are realistic and achievable, as well as necessary, to create a leaner organization that will be able to both prosper within these market conditions, as well as take advantage of any up tick in demand.”

“Our immediate focus remains on managing pipeline inventories at our marine dealers, as well as enhancing our solid liquidity at Brunswick,” McCoy said. “We will continue to produce at rates below retail demand to lower pipeline inventories. A reduction in production rates also results, unfortunately, in the need for fewer workers.”

The company is contemplating further workforce reductions of approximately 1,000 hourly and 700 salaried employees across the company’s marine business units and staff functions as additional plant closures and consolidations and other cost-cutting measures are completed.

“Maintaining liquidity will continue to be a key priority in these uncertain times,” McCoy said. “We are focusing on generating cash through good working capital management, paring inventories and discretionary spending. Our balance sheet is solid, and we expect to generate positive cash flow benefits in 2008 by further reducing capital spending and from positive contributions from changes in working capital.”

CFO Peter Leempuette suggested there may be modest boat and engine price increases ahead during the conference call.

“With inflation, we have to pass that on,” Leempuette said.

Light at the end of the tunnel

McCoy made it clear in April that he believes some of the factors that have caused this market downturn will be with us for a long time.

“I don’t believe we’re going back to $50 a barrel crude oil,” he commented in the interview. “I believe for certain commodities that are all-important to the boating industry, demand – which is really important when you think about crude oil, copper, aluminum and all those things – we’re in a global situation now where supply and demand are much more in balance because we see India, China and other countries growing. I don’t believe we’re going to see them go back to previous levels. Wage inflation is not going to be able to keep up with that inflation. Our consumers are going to be squeezed, and we have to accept and understand that.”

Despite this, he is optimistic about the boating industry’s long-term outlook.

“Demographically, there is still an enormous growth of wealth all around the world, and that’s why boating is going to do very well going forward,” he said in the interview. “There are higher levels of poverty in many parts of the world. But there are also enormous gains in the middle class and the ultra rich. I think as an industry we can look around the world and feel very heartened that there are going to be more and more consumers who can partake of what we offer them than perhaps we ever thought of.”

Brunswick’s conference call, including commentary from McCoy, Senior Vice President and Chief Financial Officer Peter Leempuette and Kathryn Chieger, vice president of corporate and investor relations, is available for replay. It will be accessible through midnight CDT July 3, 2008, at 866/420-4829 or 203/369-0791. The replay will also be available at www.brunswick.com.

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