賓士域 (BC) 2012 Q2 法說會逐字稿

Good morning, and welcome to Brunswick Corporation's 2012 second-quarter earnings conference call. All participants will be a listen-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 go ahead, sir.

Good morning and thank you for joining us. On the call this morning is Dustan 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 mind our actual results could differ materially from these expectations. For details of the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at Brunswick.com.

I would now like to turn the call over to Dustan McCoy.

Thanks, Bruce. And good morning everyone.

I will start with an overview of our second-quarter results. Our $0.90 EPS represents the 10th consecutive quarter of year-over-year growth. The quarter's increase demonstrates the continuing success of our business strategies. Short-term financial performance continues to improve. Even as we make increased investments for long-term organic growth.

As we had anticipated, consolidated sales were lower due to factors affecting our Marine segments. And to a lesser extent, our recreational segments. Preliminary US retail boat industry demand was up in the quarter with improvements continuing in aluminum and fiberglass outboard product categories, although at a lesser rate of increase that the first quarter. This is being partially offset by continuing weak demand in fiberglass sterndrive inboard categories, especially in boats larger than 30 feet, where demand continues to decline.

We experienced lower sales in Europe in all four of our segments. For the total Company, exclude Sealine, revenues declined about $41 million or 23% in this region. Revenues generated from our US and rest of the world customers increased about 3%. Ending boat pipeline inventories remained at healthy levels, and our weeks on hand, as measured on a trailing 12-month retail basis, declined. Our gross margin of 26% represents an increase of 90 basis points from the prior year.

Lower warranty, depreciation and pension expenses, combined with successful cost-reduction activities, contributed to the higher gross margin. Contrary to the first quarter, SG&A and R&D expenses in the aggregate decreased by 3%, as lower variable compensation expense was only partially offset by a Company-wide investment in growth initiatives. Finally, a lower income tax provision contributed to higher net earnings during the quarter.

For those of you who may have printed off the slides and are flipping through those, I will call out page numbers. We are now on slide 5. Sales decreased by 3% in the second quarter. Sales generated by our ongoing European businesses declined by approximately $41 million. Additionally, revenues from our Sealine boat brand, which we divested in Q3 of 2011, were approximately $20 million in the second quarter for 2011. I will comment in a few moments about some of the other major factors that affected our top line during the quarter.

In the first half of the year, our sales decreased by 2%. Sales from our ongoing European businesses declined by about $61 million during the first six months. Sealine sales during the first half of 2011 were approximately $32 million. Operating earnings, excluding restructuring, exit and impairment charges, were $116 million for the quarter, an 8% increase compared to 2011. Operating margins, ex charges, increased by 110 basis points to 10.9%. The increase from operating earnings reflect gross margin improvements, as well as the reductions in operating expenses that I previously mentioned.

Operating earnings, excluding restructuring, exit and impairment charges, were $184 million for the first half, an increase of 2% compared to 2011. Operating margins, ex charges, increased by about 40 basis points to 9%. Net earnings for the quarter were $0.90 per share, including a $0.01 charge for restructuring, $0.05 of losses on debt retirements, and a $0.03 benefit from special tax items.

Excluding these items, our diluted earnings per share would have been $0.93 per share. This compares to net earnings of $0.75 per share in the prior quarter, which included $0.01 of losses on debt retirements and a $0.02 benefit from special tax items. Again, excluding these items, 2011 earnings per share would have been $0.74. In summary, our adjusted EPS increased by $0.19, or 26%.

I am now going to page 10. Net earnings for the first half were $1.34 per share, including $0.01 of recent during charges, $0.05 of losses on debt retirements, and a $0.02 benefit from special tax items. Excluding these items, our diluted earnings per share would have been $1.38 per share. This compares to net earnings of $1.05 per share in the prior year, which included $0.05 of restructuring charges, $0.05 of losses on debt retirement, and a $0.02 benefit from special tax items. Excluding these items, 2011 earnings per share would have been $1.13. As adjusted, our first half EPS increased by $0.25, or 22%.

Now, let's turn to our operating segments, starting with the Marine Engine segment. From a geographic perspective, sales to US markets were up 8%. While sales to Mercury's European customers decreased 19% in the quarter. Rest of the world sales, or sales outside of US and Europe, were flat year over year. In the aggregate, Mercury sales were essentially flat for the quarter. US sales growth was led by strength in P&A, and by modest growth in outboard engines, partially offset by declines in sterndrive engines.

In Europe, difficult business conditions had an impact on all product categories. Sales were most dramatically affected in Southern Europe, where the economic weakness is most pronounced. Rest of world sales experienced modest growth from outboards and P&A. But were offset by declines in sterndrives. We continue to see weak conditions in Australia, offset by improving conditions in New Zealand, as they recover from last year's devastating earthquakes. Asia continued to demonstrate healthy growth rates.

From a product category perspective, sales on our US and rest of world outboard engine businesses delivered modest growth, reflecting an improving aluminum and fiberglass outboard boat marketplace, in addition to market share gains. This growth was more than offset by lower sales in Europe. In addition, outboard engine sales comparisons in the quarter were muted by strong prior-year quarter sales resulting from the impact of the earthquake on Mercury's competitor supply and production of engines and consequently enabled market share gains.

Also during the quarter, strong demand for our outboard engines, especially our new 150 four-stroke and engines in the 75-, 90- and 115-horsepower family, has outpaced Mercury's ability to meet immediate customer demands in these horsepowers. Although we expect this issue will affect sales for the remainder of 2012, Mercury is taking actions to achieve greater production flexibility and capacity in 2013.

Sales decreased in Mercury's sterndrive engine business, compared to year-ago levels due to overall weaker global market demand. Our Cruiser production ramp-up issues described in our first-quarter call have been addressed. We are currently meeting daily internal production goals and rebuilding safety stock levels to return to targeted lead times. Production of sterndrive engines in the second quarter was greater than the prior-year, but production volumes on a year-to-date basis trail 2011.

Now, page 14. Mercury's global parts and accessories business reported a solid increase in US and rest of world revenue, due to stable boat participation, new product launches and market share gains. Record year-to-date sales and earnings were achieved by land and sea in Attwood. Both of these organizations have done an excellent job of delivering outstanding products and services to a very demanding marine marketplace. This growth was partially offset by a decrease in revenues in Europe.

This slide summarizes the basic trends being experienced within the engine segment by product category and region. As you can see, looking at the box on the bottom right, almost 70% of the segment is selling products in the markets with either modest or strong growth, while about 30% reflect declining conditions. Mercury's operating earnings increased by approximately $5 million during the second quarter. The quarter benefited from strong performance of the P&A business, partially offset by weak European results.

This segment also experienced lower warranty and variable compensation expenses, partially offset by higher material costs and spending on growth initiatives. After taking into account all of these factors, margins, excluding charges, were just under 18% in the quarter. This represents a 100 basis point improvement versus the prior-year quarter.

In our Boat segment, second-quarter revenues were down 10%, compared to the prior period. If we exclude the impact of Sealine, revenues decreased by 4% for the quarter. On the international front, adjusting for the Sealine divestiture, our boat segment in Europe experienced a 43% decline in sales. Rest of world sales were down by about 4%. In the US, which represents almost two-thirds of the segment, revenues increased by 3%.

Now on slide 18. Now, let's take a look at the US power boat industry statistics, provided by Statistical Surveys, Inc., to get a view of how demand is unfolding by boat categories in the United States. As you can see, based on preliminary second-quarter data, aluminum and fiberglass outboard boat markets continue to demonstrate strong growth. Although, at a slower rate than the first quarter. The fiberglass sterndrive inboard boat market was down modestly.

If we look at preliminary results for the month of June, historically the largest volume month of the year, outboard products improved nicely. The sterndrive inboard fiberglass product volumes declined by approximately 11%. In SSI's industry report, that just today was published in Soundings, Trade Only, boats greater than 30 feet in length, which represents about 70% of our fiberglass sterndrive revenues, were down 16% in June, and 3% year-to-date.

So, with the US boat market up 14% year-to-date in units, I am sure the question is why is the Brunswick boat segment not enjoying sales growth in the second quarter? The answer lies in mix, the reality that we are a global business, and our production rate and pipeline management strategies. This chart demonstrates how current regional trends affect our specific mix of boat categories. While the worldwide recreational boat industry is more heavily weighted to outboard products, more than half of our global boat sales dollars are concentrated in the fiberglass sterndrive inboard category, which continues to experience market declines.

I am now on slide 20. During the quarter, Brunswick global retail sales in units grew by approximately 7%. Global wholesale shipments, on the other hand, declined by 6%, as the seasonal decline in dealer inventories was more significant than the prior year. This was the result of strong domestic retail demand. And our decision to increase pipeline inventories at the end of last year, in advance of the 2012 selling season, and expected strong growth in aluminum, fish and pontoon boat categories. As a result, we ended the quarter at 31 weeks on hand on a trailing 12-month retail basis, versus 32 weeks on hand a year earlier.

Our pipelines for aluminum product are up over last year's level, reflecting strong market growth. While our pipeline for fiberglass product 24 feet and larger is down and continues at record low levels. Assuming current retail trends continue, we would expect wholesale shipment trends in the second half to increase and better track retail growth rates, as we restore pipeline inventories to levels consistent with market dynamics. We would also expect to end 2012 with a modest increase in pipeline inventories versus the end of 2011.

The boat segment's Q2 operating earnings declined when compared to 2011, with margins excluding charges at 2.7%. The major factor for the earnings decrease was the sales decline, which, in summary, was caused by international weakness, primarily in Europe, continued declines in the fiberglass sterndrive inboard marketplace, and our production and pipeline management strategies I just discussed.

Now, let's take a look at our two recreational segments. Life Fitness completed another excellent quarter. Sales were up slightly compared to last year's second quarter, despite the 14% decline in Europe. Rest of world sales were down modestly in the quarter. US sales increased by 11%. Life Fitness's solid revenue growth over the last two years supports our longer-term outlook for this segment. Life Fitness continues to outpace its competitors and gain market share.

When we combine the organization's outstanding performance with positive demographic and healthcare trends in the fitness sector, Life Fitness is well-positioned to continue to deliver excellent results. Segment operating earnings in the quarter grew modestly, while operating margins remain strong at 13.9%. These are strong results, given the difficult comparisons to 2011, when sales grew by 15%.

Now, on slide 24. Sales in Bowling and Billiards declined 6% in the quarter. We were operating fewer bowling centers versus last year's quarter and equivalent center sales were down slightly. Although bowling products experienced declines in the quarter, sales and earnings growth during the first half have been strong. European sales were down 6%. The segment's operating earnings decreased modestly, as a result of lower sales, partially offset by improved operating efficiencies. Operating margins were higher by 10 basis points.

Now, I will turn the call over to Peter, for a closer look at our financials. Then I will come back to give you an update on our perspective of 2012 and beyond.

Thanks, Dusty, we are on slide 25.

I would like to begin with an overview of certain items included in our second quarter P&L. And I will also comment on some forward-looking data points.

Let me start with restructuring, exit, and impairment charges, which were approximately $1 million in the quarter. The net charge reflects continued manufacturing consolidation activities in our Mercury Marine segment, along with a modest gain resulting from the sale of Mercury store Oklahoma facility. Our current estimate for full-year 2012 restructuring is now in the $3 million to $5 million range, or $0.03 to $0.05 for previously-announced actions.

Net interest expense, which includes interest expense, interest income and debt extinguishment losses, was $21.6 million in the quarter. A slight increase versus the same period in 2011. Higher losses on the early extinguishment of debt, partially offset by the impact of lower debt balances, contributed to the modest increase in net interest expense in the quarter.

In the second quarter, we repurchased $22 million of debt. And earlier today, we announced our plans to accelerate our 2012 debt repurchase program, by calling all of the 11.25% notes due in 2013. This transaction, as well as the retirement of $6 million of our 7.75% bonds during July will result in approximately $8 million of extinguishment losses in the third quarter. Our estimate of net interest expense for the year is approximately $76 million to $77 million. This would result in a reduction in net interest of about $21 million, compared to 2011.

Moving to slide 27. As a result of our debt reduction activities in the quarter, our debt outstanding at the end of Q2 was $675 million. After completing our planned retirements in Q3, our outstanding debt will be reduced to below $600 million. We may opportunistically repurchase additional debt during the second half, but we don't anticipate the amount to be significant.

During the quarter, foreign currency had a less than 2% negative effect on our sales, due primarily to a weaker euro versus the dollar. Currency also had a modest negative impact on operating earnings, compared to the prior year, which reflected a mix of favorable and unfavorable exchange rate movements. This does include the impact of hedging activity, which helps to moderate the effect that currency exchange rate fluctuations have on our year-over-year earnings comparisons. We estimate that currency will have a similar impact on a full-year sales and earnings basis, unless exchange rates change significantly from current levels. They are changing as we speak for the better.

On slide 29, our effective tax rate for the second quarter was approximately 11%, compared to a rate of 20% in the second quarter of 2011. The reduced tax rate reflects our expectation that a higher percentage of our 2012 pretax earnings will be derived from domestic sources, which will not require a corresponding tax provision, due to GAAP requirements. In addition, our Q2 effective tax rate includes specific nonrecurring benefits from special tax items, which added $0.03 to our EPS. Our 2012 tax expense will continue to be comprised primarily, of foreign and state income taxes, as well as the effects of the nonrecurring special tax items. We now expect our overall 2012 effective tax rate to be approximately 16%.

Moving to slide 30, and turning to a review of our cash flow statement, cash provided by operations in the first half was $45 million. Some of the key items in this section of the cash flow statement include adjustments to earnings for non-cash charges, such as depreciation and amortization of $47 million. Our current estimate for D&A in 2012 is approximately $95 million.

Pension expense, resulting from our frozen defined benefit plans, totaled $12 million in the first six months, compared to $16 million in the prior year. In the first half, the Company made cash contributions to its plans of approximately $21 million. We expect our 2012 pension expense to be approximately $25 million, which is a decrease of $7 million from 2011. In 2012, the Company plans on making cash contributions to its defined benefit pension plans, in the range of $75 million to $85 million.

Turning to slide 31. Changes in our primary working capital accounts, excluding the impact of divestitures, resulted in a use of cash in the first half and totaled approximately $129 million. This change is largely due to the seasonal requirements of Marine customers by category. Accounts and notes receivable increased by $99 million. Inventories increased by just $1 million. Accrued expenses decreased by $70 million. And accounts payable increased by $40 million.

Given the seasonality of sales in our Marine businesses, we are anticipating that we will be liquidating working capital from now through year and. However, based on current assumptions, we believe that changes in working capital is likely to result in a use of cash for the total year. Capital expenditures in the first half were approximately $38 million. Our 2012 plan includes approximately $120 million of capital expenditures. The increase from 2011 primarily reflects amounts required to fund our growth initiatives. Partially offsetting our capital expenditures in 2012, were $18 million in proceeds from the sale of property, plant, and equipment in our Marine segments.

So, in summary, on slide 33, during the first half, we generated $28 million of free cash flow, which was almost entirely used for debt retirement. Supplementing our cash and marketable securities balances is net available borrowing capacity from our revolver of approximately $275 million. Which, when combined with our cash and marketable securities, provides us with total available liquidity of $784 million.

So, I will turn the call back over to Dusty now for some concluding comments.

Thanks, Peter.

We continue to be pleased with the progress we are making in our numerous growth initiatives, which are underway throughout our entire organization. I want to make a comment or two on some of them. Going clockwise on page 34. Mercury Marine's new 150-horsepower four-stroke engine, which was introduced earlier this year, continues to be extremely popular. Sales have been strong and the acceptance level in the marketplace is truly global. We are quite excited about this new engine platform.

Our Marine Parts and Accessories business continues to be a strong contributor to our performance at both the top and bottom line. Pictured here is an example of our innovative integrated fuel system from Attwood. Revenue from these systems is expected to double this year, as sales continue to grow with boat manufacturers. These systems were designed and developed by Attwood to help boat manufacturers economically and efficiently meet tighter EPA guidelines.

At the bottom right is our new boat plan in Brazil. Construction of the building was completed on time and on budget. And we expect to begin making a range of Sea Ray and Bayliner boats for the Brazilian and neighboring markets beginning in the fourth quarter of this year. Finally, Sea Ray recently announced that it will be entering the jet boat market with a 21-foot sport boat in the fall of this year, to be followed shortly by a 24-foot model. The development of the new jet propulsion sport boats is part of our ongoing effort to reach the full spectrum of recreational boaters. Also in the second half of the year, in response to market feedback, Sea Ray will offer 22- and 24-foot models of its Sundeck line, which will use Mercury Marine or Verado outboard engines.

Now on slide 35. New product activity is also strong in our recreation businesses. Life Fitness has introduced a number of new products recently. And the two we see here, Lifescape on the top left, and Synergy 360 on the top right, are during really well in the marketplace. Exclusive to Life Fitness, Lifescape engages the user in a truly personal experience through immersive outdoor adventures that bring workouts to life. The new Synergy 360 combines several popular total body dynamic exercises into a system that helps personal trainers more effectively train individuals and groups. Giving users fun, unlimited ways to exercise.

If you look at the bottom right, this at first may appear to be just Brunswick bowling pins. But it is really StringPin, a version of the game that is growing in popularity. Individual pins are each attached to a string, which facilitates setup during play. More economical to install and maintain than a traditional pinsetter, this allows string bowling proprietors to add lanes economically.

And, finally, we have seen substantial improvement in the performance at a select Brunswick Zone XL locations that have upgraded laser tag and other games. Recently we have seen excellent results at locations in Georgia, Colorado, and Pennsylvania, after installation of the laser arenas. Likewise, additional arcade and related games in Georgia and Colorado have exceeded expectations.

Now going to slide 36. Finally, I will conclude with a few comments regarding our outlook for the remainder of the year. We are increasing our 2012 GAAP earnings guidance to a range of $1.45 per share to $1.60 per share. During the second half of 2012, we continue to anticipate the successful execution of our strategic initiatives, a few of which I just described. Our current plan reflects the extremely diverse set of geographic and product demand trends that affected our top-line performance in the first half.

We anticipate continued strong US retail growth in the aluminum and fiberglass outboard marine markets, and solid fundamentals in the fitness industry. These positive trends, however, will be partially offset by weaker demand in fiberglass boat and sterndrive engine categories. We further anticipate sales in the European markets will continue to be under significant pressure.

As a result of these factors, we are now targeting low single-digit revenue growth for the full year, versus our previous outlook of mid-single-digit growth. We continue to believe that as a result of cost reductions and improvements in operating efficiencies, our target gross margin for 2012 will be approximately 24%.

And although operating expenses will be higher, we still anticipate a strong annual increase in operating earnings. Additionally, we now expect our effective tax rate, and restructuring charges for the full year, to be lower than our prior estimate. Despite the seasonal weakness in marine markets in the fourth quarter, our goal is to approach breakeven EPS in that quarter through the contributions of our recreational businesses and reduced interest expense.

That concludes the formal part of this session and we are now ready for questions.

(Operator Instructions) Ed Aaron, RBC Capital.

Maybe just to start with a quick clarification on the guidance. Obviously sales coming down a little bit, but the earnings guidance is going up with a lower tax rate and such. When you look at just the ex restructuring profit expectations at the operating line, have those changed on a net basis from your prior guidance at all?

Yes. They are a little better, because we are doing better on margins, Ed. We are seeing a nice gross margin pickup here in the first half of the year. We were able to manage operating expenses very well. We are going to take what we captured in the first half and run it through the rest of the year.

Okay, thanks for that. Dusty, at the start of the year you talked about plans for increased investment this year. I'm just wondering if either the level of that spending or the nature of that spending has changed at all, since you started the year?

No, not at all. We have been able to maintain our plan for the spending levels we had anticipated doing. And we are getting that cost in other places, Ed. But we have made a firm decision here that we need to continue to invest in all the growth initiatives that give us the opportunity to make the improvements in a difficult economic environment that we had described. We anticipate that our 2014, longer-term guidance still remains in place, notwithstanding what's happening in the marketplace. And it's going to be driven by our growth initiatives and it's therefore imperative that we continue to invest in.

Okay. And then just one last follow-up and I'll pass it along. When you think about the dynamics of the cruiser market, which has still been a big challenge, how are you thinking about allocating investment dollars in research and development and other areas toward that business in particular? Is that a business that you think you can move the needle through innovation? Or is it more a matter of the consumer just coming back at some point in time?

You know what? It's both. And without giving to much away, first, I've been pretty open on this call and a lot of investor and analyst meetings, Ed. This consumer -- the cruiser consumer -- still boats. Still buying used boats. And tell us they are going to buy new books. But they need the economy to improve, tax rates to be set, et cetera. All that is going to come with the passage of time. We think it's important that we stay well-positioned in this market. But the other side of this is, this market has gone from 6,000 units to 1,000 units. And there are, in round numbers, 50 models that are going into this market. We have a heck of a lot of market share there. And we think there is a good opportunity for us to continue to invest in innovative and new products, because we probably are one of the few people that have the volume to do it.

Thanks, everybody.

James [Chardon], Longbow Research.

A couple things I wanted to hone in on. You talked in the boat segment about a worldwide retail growth up 7%, wholesale down 6%. Obviously the two big factors driving the delta there. One, obviously pricing and mix, given what you sell. And, two, the inventory reductions. I was hoping you could maybe quantify the relative impact of those two items and help us understand how we should think about that going forward. I think you mentioned that inventories would be such that wholesale would more closely match retail. Or should I think that wholesale maybe even exceeds retail in the back half of the year a little bit?

It could exceed it a little bit in the back half of the year, as we try to get pipeline levels so that we go into 2013 feeling well. Here's what fundamentally happened at a high level. We added 2,000 units to the pipeline at the end of 2011. And I think we reported on that in our first-quarter call. That was primarily driven by our aluminum businesses. And I think our guys there made a fabulous decision, that the market had a real opportunity to be very hot and moving very fast. Their view was, let's get the product out there, then we can maintain production in a way that we've talked about before. If we have to increase production, say, more than 15%, or 20%, on a sprint capacity basis, we worry about quality and the greatness of the product we are putting out. Our guys made a great decision, there -- let's get them out in the pipeline. And it proved to be a perfect decision. Had great uptick. We gained nice share in the aluminum market. In fact, I would say outstanding share. And we have been able to run our plants in a way that we are maintaining the quality of product that we want.

So, what now has to happen in the second half, and we didn't call out by product type. We just said overall on boats we've had a one-week reduction in weeks on hand. The reduction in weeks on hand has been much more significant than that in our aluminum business. And our guys are going to have to get back and work with the dealer network to get them positioned, Greg, for '13.

In the fiberglass area, we have had almost no uptick in the number of units that we have in the pipeline. We are up a little bit on weeks on hand, but that's just because of weakness in the market. But we have always said the number of units we have there are driven by minimum stocking levels that we and our dealers talk about. But last year, we shut down a lot of our fiberglass plants for a good part of the early winter, in order to make sure that the result we are seeing now, that we got the right number of boats out in the pipeline, occurred. And even with relatively low selling levels, we are selling boats. And therefore, we are going to need to run our plants in the second half of this year, when we didn't last year. So, when we add all that up, our wholesale might need to be double digits in the second half of the year, in order for us to get our pipelines at appropriate levels. Does that help? I know it's a long explanation.

That's extremely helpful. Then along those lines, as I think about the fourth quarter, the comment you made about breaking even in 4Q would be an enormous accomplishment. Can you just give us a little more color on that? Obviously, the impediment previously to accomplishing that has primarily been the boat segment. Is it that we're going to see improvement in the boat segment? Or is it the other segments are going to be more than enough to offset that? How should I think about your commentary from a quarter or two ago that you're hoping to finish the year at breakeven-ish levels in the boat segment coming out of 2012? Thanks.

First, you'll see improvement in the boat segment, but you will also see improvement in our other businesses. So the answer there is all of the above. This goal of having our boat business on a run rate basis be running at breakeven, as we exit 2012, frankly, is going to be difficult in the market we are in. This European market is pretty tough. You saw our statistics and how far we are down there. I don't see that getting any better, as we finish out this year. So, that is a pretty big hill to climb. We'll talk about it when we get to year end us to where we are, James. But I am not going to be too upset if we are not on run rate, breakeven basis, leaving 2012, just because of what is happening in the marketplace.

Got it. Thanks, guys.

Jimmy Baker, Riley & Co.

I am hoping you could start by talking a little bit more about the tightness in outboard engine availability. And maybe how much that is a function of the overall market outgrowing your expectations versus share gains that you maybe retained. Some share gains from last year that you thought were more one-time in nature related to the tsunami. Or maybe a stronger-than-anticipated response to some of your new offerings.

It's both of those. But I think the first thing is, as we set production capacities, and it started with the new 150, we thought we made some fairly aggressive assumptions, Jimmy, about what market reaction would be. The 150s -- I hate to use too many adjectives -- it's dramatically exceeded our expectations. The other thing that's happened in the 75/90/115 category, is that a lot of the folks who are buying aluminum fishing boats and pontoons are moving the horsepower up. So we see things like people who normally would've bought a 60 now are buying a 75. People who bought a 75 are buying a 90. And, as a result, we have run, through the first half, substantially in excess of what our planning capacity was in these product lines for 2012. But, we have not met all the demand. We have quite a backlog around these horsepower categories.

Now, a couple things are going to happen here. Folks who have a backlog, as they walk out of the season, may or may not leave their orders in place. If they don't, we are going to be able to build some stock to take care of '13. If they leave their orders in place, which I am hopeful will happen, we have allocated capital and we're in the process right now in our Mercury organization of increasing capacity for '13, so that we can meet anticipated market demand. But fundamentally, in those categories, we are running at we had anticipated would have been 2016, 2017, maybe 2015 levels. And it came on us very suddenly. And this is all -- I want to be clear -- a really high-class problem. We have gotten a lot of questions over the years, as you guys have set your capacity -- What are you going to do if it's more. And we've said -- We will go and invest. And that's exactly what we are going to do.

My anticipation, though, is that we could lose a little share in these horsepower categories, in the coming months, because, I believe, there are customers who had boats to sell that we couldn't get them a Mercury engine in these horsepower categories. My judgment is they've likely gone to some of the competition. Hopefully, we will always get them back, because of the power of our product offering. But we need to be up-front that that is probably getting ready to happen to us.

Okay. That's helpful color and pretty much answers my follow-up. Although, I'll ask it just for the boat segment. I think you previously said you could service the US boat market at 200,000 to 225,000 units with your current footprint. But that's obviously very mix sensitive. I'm just interested to hear. You spoke about it now from the Mercury angle. But just from the boat group side, at what level, let's just say in the outboard market, could we get to before you would have to start making some pretty significant CapEx on that side?

I think we can make another turn in improvement in the outboard market before we would need to do capacity investment. But, there's a big difference, here. Capacity investment in engines involves more machining and tooling, which is a fair bit more expensive than what we have to do, especially in the outboard boat business. The CapEx it takes there to add additional capacity is fractions of what it is to add capacity in the engine business. And it's something we can do and move on a heck of a lot quicker than we can the engine business. I am anticipating our outboard boat guys -- and, again, I call this a great issue -- are going to show up in front of Peter and I here one of these days and say -- We need a little money to do capacity expansion. And we are going to say -- You got it, where do you want it, and how fast do you need to get it done.

Okay. Thanks. Last question from me and then I will back out. Just really outstanding operating margins at Mercury in the quarter. Up year-over-year against what I thought was a really strong quarter last year. And, frankly, it's a little bit difficult for me to reconcile the strength there with the fact that that business is running at or above capacity. Or at least on the outboard side. Can you talk a little bit about what drove that improvement? And how we should think about margins year-over-year in that business in the back half?

I think a couple of things. First, when you are running these lines as hot and heavy as Mercury is running them, and if you can do it efficiently, you start to get real market improvement on the plant floor. Even though our Mercury fellas, with the issues we had in bringing up the sterndrive line, and the over-capacity issues we have had with these outboard ranges that I previously spoke about, they have just done a magnificent job in keeping their heads and making every operation as efficient as it can be. I think that's number one.

Number two, we are getting really nice growth in P&A. P&A is good high-margin business. A lot of the growth is what I would call in lower-margin segments of our P&A business. Land and sea, which is primarily a distribution business, Attwood, which, for lack of a better term, is a bit of a specialty marine engineering company have had, as we said, record growth. They reported record quarters this quarter. Their margins are good. Not what a lot of other P&A margins are, but when you add all that together, that's where we are getting the margin growth.

Then, lastly, we are seeing the full benefit of the plant consolidation benefits. Then I can add one more. And, Jimmy, I know how you are. You're going to come back and want me to quantify each. I can't say enough, too, about the quality of the product that we have been sending out of Mercury. What happens, as you keep improving quality, you gradually, over time, see warranty get better. We have begun to see that from a lot of hard work our Mercury guys did three years ago, two years ago, a year ago. And now showing up in warranty rates for our product. When you add all that together, a lot of good operating sweat and muscle, keeping nose to the grindstone, by our Mercury guys to get all this.

Thanks a lot for the color. I really appreciate it.

Rommel Dionisio, Wedbush Securities.

At the Miami Boat Show, I think you guys talked about expanding dealership networks and distribution as a key focus area. I wonder if you could just update us on that with regards to the US boat market. And is that part of the reason why you are expecting wholesale to be fairly strong in the back half of the year? Is some of that inventory fill for these new dealers that you are adding?

We are continuing to add dealers, as we go through the year. And the way that works in the real world, lose a few dealers, add a few more. That's what all our boat brands are out there doing on a day-to-day basis. The increase in wholesale that we are talking about is not really going to be impacted significantly by these additional dealer sign-ups. It is back to, we really bled the pipelines down in certain categories and we need to get them refilled, so that the dealers can be well-positioned for 2013.

And just one quick follow-up. I don't want to quibble too much on data that's coming from a third-party source, but I noticed that the fiberglass sterndrive -- that you guys have a revise number for Q1 being up 6%. And that's a markedly different number from the flat trend that I think you guys had said on a prior conference call and been talking about. It just strikes me as being a pretty unique statistical anomaly. Is that something wrong there? Is it normally revised upward that significantly?

I'm sorry. Whose revising third-party data?

I just noticed on slide 19, Q1 fiberglass sterndrive is up 6%. I realize you are getting this from a third-party source. But all along we have been hearing a flat sterndrive market. That's a pretty big difference. So I just was wondering if there's something unusual there in the data.

I think it's little small boats. What we talk about is, for us, the type of boats that make us the most money our larger boats. But I would say, if you go to that slide, it's primarily driven by small boats.

Okay. Thanks very much, Dusty.

Craig Kennison Robert W. Baird.

Thanks for taking my questions and the excellent slides. Dusty, could you comment on used prices and maybe break that down by maybe lower-end versus higher-end boats?

From what we hear with dealers -- and I always want to be clear, our view about used pricing is a bit anecdotal, but it is something we have a lot of conversation about with our dealer network -- is these prices continue to hold up or even increase. Because in the, especially, let's say, cruiser product, there is a dearth of great used boats out there. Dealers do not feel they have enough. When they can get a good one, it's sold in a matter of hours and days. I believe the marketplace is gradually raising prices there. In terms of splits by brand strength, we continue to believe that the premium brands, not only ours but those brands that are out there in the industry, are having better price increases than are the value brands in the used market.

Thanks. As a follow-up, are you seeing any change in finance underwriting standards in the last few quarters, or the last year or so?

Are you talking at retail?

Yes, I am.

No. Everything seems to be continuing the same. But we need to be open, with one thought in our mind is, we need to watch Europe and see what really starts to happen over there. I haven't seen or heard of anything, but I wouldn't surprised if they don't tighten up there.

Great. Thank you.

Mike Swartz, SunTrust.

With regards to your guidance and in light of the strong double-digit declines out of Europe, what are you baking in for the continent for the second half of the year? Are you looking for it to continue declining at current rates or to decelerate even further?

We are thinking continued decline at current rates. But the second half is a fair bit different. And you really know this, for the way you cover us. We saw a lot fewer boats at retail in the second half. And, therefore, second-half risk is not like first-half risk for us. So, our view is that the declines we have seen are likely to be in the area, in the second half, that we saw in the first half.

Right. When you talk about just wholesale shipments being ahead of retail demand, you're talking specifically about the US?

Primarily, yes. No question. There may be a little bit but it's not going to move the overall needle, with some of our brands and models in the European market.

Okay. Great. Could you also maybe just comment on how Canada is performing on the Marine side?

Canada is doing well. I'm going to pull out something here, so that I can be accurate. Canada is fundamentally flat.

Okay. Great. And then one final question. On the fitness business -- and I know you have talked about this in past quarters about potential margin pressure coming down the pipe, as some of your competitors fight back on some lost share over the past year or two -- have you started to see any of that materialize? Or is it as is?

Our guys did a great job with the margins we reported. But I would tell you, in certain geographic regions, they are beginning to see very strong pricing pressure for some of, what I will call, the bigger opportunities. In fact, prices that we don't understand. But our guys are dealing with it.

Okay. Great. Thanks for the color.

Tim Conder, Wells Fargo Securities.

Dusty, thanks for the balance detailed color that you have given so far in the presentation here.

Bruce gets all the credit.

(laughter) Thank you, Bruce.

I just come in and do what he tells me, Tim.

Circling back to the sterndrive issues that you said you have corrected, any type of color or framework you can give us on what that cost you in the first half of the year as far as sterndrive engine revenue? And then, also, clearly those engines go into your boats and competitors' boats. So, the engine revenue on the one side, and then the boat revenue that maybe cost you. That would be question number one. And then, looking at Europe, could you just remind us what your expectations in general were for Europe entering the year, 30 days ago and then now, as it pertains to the whole 2012year?

First, on the engine side, we probably lost, in the engine business, mid-single-digit operating dollars, by the time it all shook out. On the boat business, it actually didn't impact us. The reason is not that we played an allocation game with our boat businesses and others. I think our fellas and a lot of our customers did a lot of adjusting as to what they brought to market. So that they were, almost on a weekly basis -- and I think this is happening throughout the industry -- varying their production in order to meet the engines that we were going to be able to get out in a particular week. So, I think our focus didn't really change much.

In relation to that, Dusty, then, granted, I think you said on the last call you don't anticipate making a lot of that up in the back half of the year. And that's somewhat similar to the commentary you made on the outboard engine side. But how sticky do you think some of that lost business was as far as carrying over into next year?

I don't think it's going to be sticky. In fact, Tim, as we are looking at share, we have yet been able to see that we lost any share. And a bit of that is, this sterndrive market -- and you see the statistics, especially what was published in Trade Only today -- if you look in June, this gasoline sterndrive market took a pretty tough hit. I think we saw demand continuing to decrease as we were ramping up. And it all came together in a nice way for us.

On your Europe question, Tim -- it's Peter -- we headed into the year assuming steady European economy. By the end of the first quarter, we had seen a 12% reduction in sales, and assumed, at that point, that's about what it would be for the remainder of the year. As you can see, in the second quarter, we were off 23%, ex Sealine, in Europe. And that equates, if you put the two together, about 20% down. That's what we are expecting for the remainder of the year. But it is a fast-moving target. And the events of this morning may even change it a little bit. Mr. Draghi is my new best friend. (laughter).

Okay. And expansion of Peter's Christmas card list. Dusty, I would ask you to put on your swami hat and bring out your crystal ball here just as an update. As things stand now for 2012, what are your estimates for the industry as a whole, for the US market, and then, globally, as far as retail unit boat sales?

I think the industry, as a whole, if we add it all up right now, it's up 14%.

Domestically?

Domestically, yes. I'm sorry. US. My guess is, it will stay up double digits. But it will decline a little bit from 14%, because we have seen progressive slowing as we have gone through the year. I think, as we go through the election cycle, people worry about the so-called fiscal cliff. The cliff is not so-called, what it's called is so-called. That's coming at us. I think it's reasonable to expect that we will continue to see some slowing, like we did in June. But we have got great momentum that continues in a lot of the really high-volume products, which is the aluminum products. And therefore on a unit basis, I think it will be up double digits. I think, when we look around the world, because Europe is the second largest marine market after the US, and because Europe is going to go through such difficulty, I think low to mid-single digits is likely to be what the entire world looks like, Tim.

Okay. And then, finally, revisiting the used boat market, in general, you talked about the cruiser segment. On the one hand, you've got a limited amount of product there. But on the other hand, as you move up, especially over 30 feet, you've said before that that segment of the market in the US continues to be challenged. Is it just people are hesitant, given the small business owners and the fiscal tax cliff, yet when they are buying they are maybe gravitating to the used boats? Is that the dynamic going on? And, then, taking a step further back, it appears -- and please correct me if I'm wrong -- that that broader dynamic of just the lack of used boats is further helping fuel the new boat side of the market. Just color on each of those two pieces, Dusty?

Of course. Yes. Those buyers, as they think about buying a new boat, in our view, continue to be strongly inhibited by the overall economic climate. Which includes the whole bundle of -- what are taxes going to be, what is unemployment actually going to do, what are we going to do about the fiscal cliff? All of that. But what's happening is, the used boat market, that category, is very robust, to the extent there are used boats available. So, what's happening is, dealers, I believe, are out mining the marketplace, trying to drum up every way possible to get their hands on one of those boats, because they can sell them.

And that's very important, as we think about this segment of the market going forward. Those buyers are still there. They have gone from 6,000 to 1,000, but the 6,000 are continuing to boat. (inaudible) says boating is a part of their DNA and their lifestyle. But right now, they only want to buy a used boat, versus a new, because they feel more comfortable about the purchase in their personal economic situation than they do the new purchase. That is the world we are living in. That's the world we are prepared to play in. It doesn't impact our view of the medium- and long-term health of that segment, for our brands that participate there. And our guys are just going to have to do a good job of managing expense and product development, et cetera, as we work our way through that dynamic.

Okay, great. Thank you, gentlemen.

At this time, we would like to turn the call back to Dusty McCoy for some concluding remarks.

Thanks a million. As always, I appreciate the interest, the quality of the questions that we get. I happen to believe that the folks who follow us are better than we see in most industries. I want to close by doing three things. I want to congratulate all of our employees who get on these calls. We always said, when we were going in the height of the downturn, life was easier for us as managers than it would ever be, because we knew what we had to do. It was pretty simple. We always anticipated that when we got to this part of the evolution of the economy, and our role in it, managing the businesses would be very difficult. Our guys are doing a magnificent job. The men and women who work in this company, and who are dealing with the really tough economic conditions and changing economic conditions, are hitting the ball every day. And I can't congratulate them enough.

Secondly, we are not perplexed or perturbed, at all, about what's unfolding in the marketplace. Of course, we would like Europe to be better. But, that's life. And Europe is going to be what it's going to be. And we've got to go do other things throughout the Company. And we will continue to do that. But the main thing is, we have got to stay focused on our growth initiatives and deliver against those growth initiatives, as we go forward. I got a question early on and it was a good question -- Are you still continuing to invest in your growth initiatives. And the answer is yes. Absolutely. And we will continue to do that. Even if we have to adjust our cost structure to live with the market, we are not going to back off on the growth investments.

And then, thirdly, and the tie up to all that, is, our management team continues to be confident in the 2014 guidance that we gave beginning in depth at the Miami Boat Show. And the one thing that is always true about guidance, out long-term, how you get there is never going to be the way you talked about. We like to say we know we are heading south but there are 14 roads to south and we are going to have to travel the ones that are open for us. And that's what we will be doing. But we are not backing off of what we think this Company can do. And we are confident in our ability to go do it.

So with that, I will close and, again, thank everybody for the time and attention. I'm sure Bruce will be more than happy to clear up all the confusion that I have created on this call. Thank you very much.

Ladies and gentlemen, that will conclude today's conference. Thank you for joining us. You may now disconnect. Everyone have a great day.