Brunswick dealers OK with cuts

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Most in sampling say action was necessary

Some Brunswick dealers are not sounding any alarms as a result of production cutbacks, layoffs and plant closures announced by the boatbuilder earlier this summer.

“We’re not concerned about it at all,” said Warren Moulis, sales manager at Fox Lake Harbor in Fox Lake, Ill.

“Brunswick is one of the largest boat companies in the country, so I don’t think there’s a problem,” Moulis added. “I think they’re just trying to save a little money with the production cutbacks.”

Tom Stidham, owner of Norris Marine in Norman, Okla., says difficult times sometimes call for “draconian” decisions.

“I think everybody has been making their own adjustments for what the market demands,” he said, adding that Brunswick is no exception. “I would rather see them do this sooner than later.”

Stidham says Brunswick and other boatbuilders are learning from the lessons of the late 1980s, when manufacturers flooded the inventory pipeline and pressured dealers into taking on more product than they could sell in a down market. By cutting back on production now, Stidham said Brunswick is ensuring its own long-term financial health, as well as its dealers.

“I think they just have to react to the marketplace,” he said.

There is no argument there from Phil Keeter, president of the Marine Retailers Association of America.

“Brunswick has to answer to its shareholders, and dealers are not selling anything,” Keeter said.
“None of this makes me terribly happy.”

Given its size, Brunswick can weather the storm and consolidate, Keeter said.

“I just wish there was some way to gain back consumer confidence. The industry is doing everything it can with its dealer certification programs, Grow Boating and Discover Boating campaigns,” added Keeter.

In late June, Brunswick announced plans to close four plants in the coming year, in addition to the eight plant closures already completed or announced. This will bring the number of plants down to 17 or fewer by the end of 2009, compared with the 29 it had in 2007, and will reduce the company’s fixed-cost structure by $300 million.

The company also notified employees it would reduce its hourly and salaried workers at some of its marine plants by 1,000. Further work reductions of about 1,000 hourly and 700 salaried employees across the company’s marine business units are under consideration.

Lake Forest, Ill.-based Brunswick previously announced furloughs at nearly all of its U.S. fiberglass plants in July.

“The objective of our downsizing efforts is to ensure solid profitability for our business in this tough domestic marine market,” said senior vice president and CFO Peter Leempuette.

“Efforts to reduce our hourly workforce help to ensure that direct labor remains a truly variable cost as we face lower unit volume. In other words, it is a key factor to prevent further slippage in growth margin,” he added.

Leempuette said savings of about $100 million are expected by the end of 2008, with the full $300 million in savings coming by the end of 2009.

“Maintaining liquidity will continue to be a key priority in these uncertain times,” said Dustan E. McCoy, Brunswick’s chairman and CEO. “We are resizing the company for solid profitability under current conditions.

“We cannot plan based on an assumption that markets will, on a unit basis, reach levels of three or four years ago in the near term,” McCoy said during a recent conference call. “We’re not predicting where the market is going. What we’re doing is sizing ourselves so no matter what happens with the market, we’ll be able to be profitable.”

McCoy, in his statement, said the company has addressed “the prolonged downturn in the U.S. marine market by continually reducing production rates throughout our marine businesses, divesting underutilized assets, exiting or divesting certain businesses, eliminating discretionary spending and reducing head count.

“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 sales of powerboats in the U.S. have been in decline since late 2005, but that number has been dropping at a quickening pace, said McCoy. Industry retail unit sales were down 13 percent in the fourth quarter of 2007 and down 21 percent in the first quarter of this year, compared with the respective year-ago quarters.

He said Brunswick is not assuming that the uncertain economy, high fuel and food prices, slumping home sales and values, rising unemployment and other factors that continue to erode consumer confidence will ease up anytime soon.

“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,” McCoy said in a statement.

The company’s immediate focus remains on managing inventories at its dealer network. “We will continue to produce at rates below retail demand to lower pipeline inventories,” said McCoy. “A reduction on production rates also results, unfortunately, in the need for fewer workers.”

The company said its actions are estimated to result in restructuring charges in the range of $200 million to $220 million pretax, which includes about $75 million of previously announced restructuring charges related to actions taken earlier this year. Brunswick estimates that between $170 million and $180 million of these charges will be incurred in 2008, with the balance in 2009.

Long-term credit ratings on Brunswick were downgraded by Moody’s Investors Service and Standard & Poor’s Rating Service following the announcement of production cutbacks. Moody’s downgraded Brunswick from Baa3 to Baa2 and S&P downgraded the company to “BB+” from “BBB-.”

“The downgrade reflects our view that the downturn in the marine market will continue into the foreseeable future and is worse than our previous expectations as consumer spending continues to deteriorate due to the ongoing credit market and housing market crises as well as high energy and food costs,” said Kevin Cassidy, senior credit officer at Moody’s Investors Service, in a statement.

S&P’s credit analyst Andy Liu, in a statement, said S&P based its concerns on the “cyclical and secular trends in the recreational marine industry and their effect on Brunswick’s credit quality.

“The ratings on Brunswick reflect our concerns about the declining recreational marine industry, which is being buffeted by rising gas prices, low consumer confidence and lower credit availability; the potential for bank covenant pressure from restructuring charges; and the effect that a steep decline in profitability is having on credit measures,” the ratings company said in a statement.

Responding to the credit rating downgrades, the boatbuilder said it expects to generate positive cash flow in 2008 and to end the year with cash in excess of $400 million, up from $267 million at the end of the first quarter of 2008. Brunswick said the downgrades would not have any significant impact.

“Both our strong balance sheet and ability to generate cash provide us with substantial liquidity and serve us well in economic circumstances such as those affecting the United States,” Brunswick said in a statement. “With regard to our $650 million revolving credit facility, there are no borrowing constraints resulting from the ratings action.”

The company does not anticipate any borrowing under the facility for the remainder of 2008.
Looking forward, Brunswick anticipates amending the revolving credit agreement to enhance its ability to remain in compliance with the facility’s leverage covenant and to ensure sufficient borrowing capacity if the recreational market downturn continues into 2009.

“We also intend to refinance our $250 million senior, unsubordinated floating rate notes due in 2009,” the company said.

— Editor Lois Caliri, Associate Editor Melanie Winters and Staff Writer Beth Rosenberg contributed to this report.

This article originally appeared in the August 2008 issue.

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