TWST: Leisure is rather a broad category. What is it that you cover?

Mr. Hardiman: The names we cover really run the gamut. We cover the power sports players, such as Harley-Davidson (HOG), Polaris (PII), Arctic Cat (ACAT), as well as the boating companies Brunswick (BC) being the boat maker, MarineMax (HZO) being the boat retailer and then we put Callaway Golf (ELY) in there as well. So that's six names. And then Cedar Fair (FUN) is probably the last. There is no great category for Cedar Fair. It's clearly a leisure name, but it's not so much a product company like most of our other names. We cover leisure and gaming and Cedar Fair has a lot in common with both. They obviously don't own any casinos, but Cedar Fair is a company that basically manages a portfolio of properties, which is very similar to what the big gaming operators do.

TWST: What makes the power sport companies appealing?

Mr. Hardiman: From a longer-term macro perspective, a lot of these companies target that higher end consumer. So, on average, a Harley-Davidson owner makes probably $80,000 a year; similarly, boaters and golfers make somewhere in that neighborhood, snowmobile owners a little less and ATV owners a little less than that. But clearly what we've seen historically is that the higher-end consumer is typically the last to see weakness and the first to recover. So with that dynamic, when you're dealing with cyclicals, you like to be dealing with cyclicals that are going to outperform some of the other cyclicals, and we think that targeting that high-end consumer is an interesting and positive place to be. That being said, right now that high-end consumer is feeling it as much as anybody.

TWST: How has this group done from a business perspective so far this year?

Mr. Hardiman: They're struggling, to say the least. The boat industry is probably doing the worst of the group. 2007 is shaping up to be the worst boat sales year, at least in terms of power boat units sold, on record, and that record goes back to 1971, so of 30 plus years, this is likely to be the worst. Similarly, ATVs and snowmobiles are seeing extended weakness. The snowmobile category has been off consistently in good and bad times over the last decade and this year should be no different. When you look at motorcycles, we're likely to see the first down year in terms of registrations for motorcycles. That being said, we're coming off of an all-time record last year, and this is an industry that has grown pretty much every year for as long anybody can remember. So the fact that 2007 is going to be down is certainly a concern, but of all these industries, we do believe that the motorcycle industry is still probably the healthiest.

TWST: Why this broad scale weakness? The economy is still pretty good.

Mr. Hardiman: There are a couple of things. There are ongoing pressures on the overall consumer from a number of different directions, but as we talked about previously, the higher-end consumer has been hit where it hurts more recently. Starting in 2006 with the gas prices skyrocketing and then you've got interest rates, which are still relatively low but have been off of historical lows over the last couple of years certainly that pinches all consumers. What we had seen from these high-end consumers is that they were somewhat resilient to those pressures. If you look back at the summer of 2006, when a lot of the gas prices really spiked, at least the motorcycle portion of things and the high-end boats and some of these other products, they did fine because somebody who's making $80,000 a year isn't going to be hurt by an extra $50 a month in fuel costs. That said, when we talk about the high-end consumer, it really comes down to this whole concept of "perceived wealth." These are the people who high priced gas isn't going to hurt, but it's the perceived value of their home and the value of their stock portfolios that makes a big difference. So when you talk about the weakness that we've seen in the real estate markets over the past year, I think that plays a big role. Then as we got into the mid- to late summer (August-September) time frame, a lot of the subprime issues hit the financial market, and so when somebody's stock portfolio is down 10% or 15%, the last thing they're going to do is go out and buy a motorcycle or a boat. So I think those two things combined have certainly hurt these companies. And to a large degree when we look ahead to 2008, I think the troubles that the real estate market is having will impact the leisure markets. Most people you talk to on the real estate side suggest that the housing issues are still going to take a while to work out some of those issues well into 2008. And similarly, my outlook for 2008 is tentative at best in terms of the consumer in general and the high-end consumer in particular. There is no reason to believe that some of the weakness that we've seen in the stock market won't work itself out to some degree. So I'm relatively bearish on the consumer. If you're looking to play the rebound of the consumer, however, I think some of these names are worth taking a look at.

TWST: How have the companies done in terms of adjusting to this changed environment?

Mr. Hardiman: It depends on the individual companies. I would say that among the companies that we follow, Brunswick and Harley-Davidson have probably done the best job of being completely forthcoming and very conservative in terms of their estimates going forward every step along the way. Both of those companies have scaled back production pretty dramatically in 2007. Retail trends are pretty poor, but both of those companies are at least trying to produce at a rate slower than retail so that inventory levels at retail don't get out of hand and hopefully improve. With everything that we follow, retail level inventory levels are the kind of thing that can make a bad situation a lot worse. We think Brunswick and Harley-Davidson have done what they can to work down inventory levels. Polaris is a company that has been a little bit more optimistic on the consumer and on the economy as a whole, particularly with their business. The consumer slowdown came at a particularly bad time for Polaris when they were looking to grow business and so their projections for 2008 and 2009 are pretty optimistic and don't completely gibe with what we're seeing, but you never know. At the end of the day, we believe a very conservative stance is appropriate, which I think both Harley and Brunswick have exemplified. Our favorite name in the space is Harley largely because their guidance for 2008 assumes a relatively sluggish motorcycle consumer, and I think things would have to be pretty bad for them not to get to their guidance. I think they have a number of levers that they can pull to get to or potentially exceed the guidance that they put out there.

TWST: So they've been very conservative.

Mr. Hardiman: They've been very conservative. This is a company that has bought back about 5% of their shares over the past year, and they're guiding to 4% to 6% earnings growth in 2008. So pretty quickly you can see it's not going to take a whole lot from the top line just to get to that earnings growth. Additionally, a number of these companies, Harley-Davidson first and foremost, but I think even Brunswick and Callaway to a lesser extent, have gone out and targeted a lot of these international markets and they're doing very well there. So even if the domestic market is flat to down in 2008, there are some pretty big offsets in a number of other markets South America, Europe to some degree, Japan and some of the Asian markets. Those will provide some nice offsets for the domestic weakness.

TWST: Since Harley is your favorite name, let's talk about it. The company has made a big point of the older generation stepping up to buy bikes. Is that a longer-term trend that will help them?

Mr. Hardiman: It is. Certainly this is one of the names that people talk about when trying to make a play on the baby boomer and certainly where the baby boomers are today is right in the wheelhouse of Harley-Davidson. The heavyweight motorcycle owner is in that 45 to 55 range; the overall range is much broader than that, but that 45 to 55 age range is really their bread and butter. Longer term, the fear is that as the baby boomers get up into retirement age, which they're not far from at this stage of the game, they will eventually get too old to ride those motorcycles. But that's a longer-term issue and this company has a number of longer-term things that they need to wrestle with here. Obviously, whenever you have an older customer base, there is a lot of work that you need to do to get younger and I think a lot of their initiatives do target a younger consumer, a minority consumer, a female consumer. Obviously they deal primarily with middle-aged white males and think that if they can expand beyond that, they'll have a lot of success.

TWST: Are these initiatives beginning to pay off or is it too early to tell?

Mr. Hardiman: It's probably too early to tell. This is not a new story at all. A lot of their effort has gone toward these initiatives over the past few years. Some of their bike lines that have historically not done exceptionally well are starting to pick up little bit. Their V-Rod bike line, VRSC, which is their high-performance liquid-cooled engine bike, and which struggled the first few years after its introduction, has actually done fairly well over the last year or so. They have this new V-Rod Night Rod, which is a good looking bike that I think definitely appeals to the younger consumer and to some extent the minority consumer and to some extent the international consumer, the European. When you look at some of the international markets, Europe in particular, some of the bikes that are less successful over here are more successful over there. If we talk about the criteria that people are looking for in a motorcycle, it's a bigger deal over there than it is over here and so the success of that bike has helped. The Sportster is an entry-level motorcycle for Harley-Davidson that has historically underperformed the rest of the product portfolio, but they came out with a Sportster Nightster this year, which, according to everybody that we're talking to, has been well received. And then you talk about a cheaper bike that's going to appeal to a younger customer with maybe less disposable income. So in the grand scheme of things they've got a long way to go, but I think there are a couple of things they can point to over the last 12 months that they've done that they've had some success with for some of those younger customers.

TWST: It's a tough time now, but how about longer term? What kind of growth is this company capable of generating?

Mr. Hardiman: Realistically we have seen a shift where, from an earnings perspective, more of the growth is going to come from share buybacks than it is from the top line. This is still a company that in a normalized consumer environment I think can grow their unit sales in the mid- to high single digits. And then adding on the share buybacks and even some of the pricing increases that they get, this could be a low to mid-teens grower from an earnings perspective. Obviously we're not projecting that to be the case in 2008, given what we are seeing, but from a longer-term perspective, there's no reason to believe that that can't continue.

TWST: You mentioned the share buybacks. Does that reflect the fact there's nothing else for them to do with the money they're generating?

Mr. Hardiman: From an acquisition standpoint, there hasn't been anything that has struck their fancy as of late, but both in terms of share buybacks and dividend increases, they've seen that as an appropriate use of capital for many years, and pretty much every year since they instituted the dividend, they've increased it pretty dramatically. They did that again this year. So the share buybacks, they've ramped that up. This is a company that even in bad times generates quite a bit of cash, and so I think that's a good means to return value to shareholders and Harley definitely agrees. The question becomes, are they going to do something that will ramp that up even more. If you follow what a number of companies have done, Polaris most recently in our space did one of these accelerated share repurchases where they lever up the company to some degree and buy back an even bigger portion of their shares in a one-time deal. Ultimately we haven't been a huge fan of that; a lot of that is financial engineering and window dressing. But at the end of the day, it's a good idea if you have the balance sheet to do it, and if your stock is undervalued, and I think both of these are the case here for Harley. The stock is trading at or near all-time lows: 12 times next year's earnings number, 6.5 times on an EV/EBITDA basis. This is a very cheap stock in a difficult consumer environment and so for a company with the balance sheet and the cash flow to be able to do this, it makes sense to some degree. Certainly if the cash flow is still in good shape and maybe some of the top line is under increasing pressure as we head into 2008, we wouldn't be overly surprised to see them make a move like that. There are a lot of investors clamoring for such a move and we get asked about that all the time. They're a conservative company by nature, so they wouldn't enter into something like that lightly, but it's certainly an option that's on the table.

TWST: What's it going to take to get investors to pay attention to Harley again?

Mr. Hardiman: One of the major sticking points with investors right now is the finance unit at Harley-Davidson and I think to some degree we're at this historically low valuation because people see Harley-Davidson Financial Services and say, "Hey I don't want to have anything to do with consumer financing at this point." I think that's somewhat misunderstood. That segment is about 13% of the earnings at this company and so even if you see a substantial downgrade to the performance of that segment, it doesn't mean a ton to the health of the overall company. So to some degree I think just a level of understanding of that Financial Services segment will help, but additionally I think they have to make it through a couple of quarters where they make their numbers. They scaled back their expectations in early September coming off of what was an awful August across the economy from a consumer perspective. I think people don't want to try to catch a falling knife here, they want to think that things are heading in the right direction. To the extent that they can just make numbers, and realistically I think they'll do that and have the potential to beat numbers largely because they have done a great job of tempering expectations, but I think as they make a couple of numbers here going forward (and potentially beat them) people will start to take notice.

TWST: Your feeling seems to be that the worst is behind them.

Mr. Hardiman: It's tough to say. From a perception versus reality viewpoint, I think the worst is behind them. The perception now is that things are tough and I think that's realistic, and so when I talk about playing 2008, I'm not real optimistic about what happens in 2008. Realistically we could see domestic shipments down again in 2008. To some degree I think a lot of people are expecting that, but when you talk about the whole risk/reward game here, even if things are down, I think to some degree that's expected. If we do see any sort of a turnaround, I think the stock runs and if you're looking to play any turnaround in the consumer, why not do it with a company that's trading at a historical, well-below-market multiple? Harley-Davidson is one of the better brands in the world, and is certainly the best among the leisure and gaming names that we cover, which gives them the kind of lasting power you look for in a value-oriented investment. It's ultimately a longer-term play, but I like the way that the expectations are shaping up for 2008. Certainly if anything happens domestically to give them a shot in the arm, that's great, but even if the international business continues as is, I think they could beat numbers.

TWST: Is there a second name that you would point investors to?

Mr. Hardiman: It's real tough in my space. The answer is no. MarineMax and Brunswick are two plays in that boat industry. If you've got an exceptionally long investment horizon, I do think that those are two companies that will eventually be much higher than they are today. Is that going to happen over the next six to nine months, which is what most investors care about? I can't say that for certain. Brunswick is at an all-time low or near it, MarineMax not quite as much, but these are two different plays. Brunswick is a long-term value play on the recovery of the boat market and MarineMax is a company that's gobbling up market share. Even in a down market there could be some pretty interesting opportunities for them to acquire some of the independent dealers that are having even more trouble than they are, so that when things finally do turn around, they could be in a pretty good position. So when I look at this space, one of the questions that we always try to answer as best we can is how much of the weakness here is cyclical and how much of it is secular issues facing these end markets. At the top of my list in terms of cyclical is clearly motorcycles. The vast majority of the issues here are cyclical and we consider Brunswick a little bit less so. I still think the majority of it is cyclical, but that being said, boats are not as popular as they once were certainly in the mid- to late 1980s and even the late 1990s and the earlier part of this decade. The availability of slips at marinas has decreased as a lot of that space is being used for residential purposes in Florida and a lot of other states, and so I think that hinders the ability for the marine industry to grow. But if we see any sort of rebound in that boat market, I think both of those stocks will run. We're relatively bearish on 2008. So, like I said, if you've got an exceptionally long time horizon, I think either of the stocks will eventually work. Going down the list, when you look at ATVs, I think ATVs are similarly faced with a lot of secular issues waning popularity, decreasing availability for trails, which are a big part of what's needed to really appreciate that sport. At the bottom of the list is snowmobiles. Forget about the cyclical issues which clearly hurt that segment, but just consider the amount of snowfall that we've seen over the past decade. At this stage of the game, it's clearly a trend that in key parts of the US, meaning the Midwest United States, a number of years in a row I think it's something like eight of the last nine or nine of the last 10 years there's been pretty paltry snowfall. If you had to handicap the weather going forward, whether you believe Al Gore or not that this is a global trend that will continue at the very least it's certainly a Midwest issue from the standpoint of bad snowfall numbers. So regardless of what the consumer is doing, who knows where the snowmobile industry is going to be five years from now?

TWST: How about Cedar Fair? What's the outlook there?

Mr. Hardiman: As much as possible we try to get a gauge for consumer trends and consumer sentiment on a geographic basis, and I think that helps us to see what's going on at Cedar Fair. Geographically, some of their bread and butter markets, their bellwether markets, are Cleveland and Detroit. Those are the two biggest markets for Cedar Point, which is their biggest park. If you look at the weakness that those two markets have seen over the last few years, it becomes pretty evident why Cedar Fair has struggled. When you talk about Detroit, the weakness of the automotive industry and the impact that that's had on not only consumer confidence but also employment and fears of unemployment, it should be no surprise that people are scaling back on a lot of their discretionary purchases, amusement park visits being one of those. Conversely, the Paramount Parks acquisition, which they made last year, was not a cheap acquisition. It did give them access to a number of markets that when you talk about the overall nationwide direction of the consumer as I just touched on, although Detroit and Cleveland are underperforming the rest of the nation, I think some of the markets such as Richmond, Virginia; Charlotte, North Carolina; and even Toronto, Canada, are outperforming the broader United States, and these are some of the markets that were acquired in the Paramount acquisition. At this stage of the game, a lot of this is wishful thinking, a lot of it is theoretical, but those are some markets that I think they will be targeting with all of their spending and improvement projects. If they can have some success there, it could to some degree offset the weakness that we've seen in their bellwether parks.

TWST: So they've got some things going for them longer term perhaps.

Mr. Hardiman: Longer term, and even shorter term, they have a couple of things going on. They recently closed down the Geauga Lake park, which is outside of Cleveland, Ohio, and that allows them to do a couple of things. There is a big plot of land there that, depending on how they dispose of that land, could either be a quick injection of cash into the company, or who knows maybe they'll enter into a joint venture with some partner that would allow them to convert some of that land into some equity to use in another project. But what it also allows them to do is take some of the great rides at the Geauga Lake park and distribute them to some of their other parks around the United States at relatively low cost to them. Moving a ride costs Cedar Fair probably half of what it would cost them to build a new ride and so certainly that's a relatively cheap way to build up some excitement to some of these newly-acquired parks. I would expect a lot of those rides to go to some of those growth markets that we just talked about.

TWST: Thank you. (TJM)

Note: Opinions and recommendations are as of 11/7/07.

JAMES HARDIMAN FTN Midwest Securities Corp 1301 East Ninth Street Suite 3232 Cleveland, Ohio 44114 (216) 592-1921