賓士域 (BC) 2013 Q2 法說會逐字稿

Good morning and welcome to the Brunswick Corporation's 2013 second-quarter earnings conference call. All participants will be in a listen-only 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 Corporate and Investor Relations.

Good morning and thank you for joining us.

On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO, and Bill Metzger, 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 that our actual results could differ materially from these expectations. The 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 www.Brunswick.com.

During our presentation today, we are using certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation, as well as in the supplemental information sections of the consolidated financial statements accompanying today's release. I would also like to remind you that as a result of our announced intention to sell the Hatteras and CABO businesses, the results of Hatteras and CABO continue to be reported as discontinued operations for all periods. The figures in this presentation reflect continuing operations only, unless otherwise noted.

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

Thanks Bruce and good morning everyone.

I'm going to start with an overview of our strong second-quarter results. We reported continued gains in sales, margins and earnings. Reflecting our ability to execute against our growth and debt reduction plans, in spite of challenging market conditions in certain of our businesses. Revenue in the quarter increased 4% and was led by growth in outboard marine products, marine parts and accessories, fitness equipment, and US retail bowling, partially offset by declines in fiberglass, sterndrive, inboard boats and in our Bowling Products business.

Gross margin increased by 60 basis points, mainly due to improved operating efficiencies and cost reductions in all four segments. Operating expenses increased by 2%, including at 13% increase in research and development expenses, as we continue to invest in programs that support our numerous growth initiatives. Adjusted operating earnings increased by 12% versus prior year, with our marine engine segment being the primary contributor.

Continuing down to P&L, net interest expense, excluding debt extinguishment losses, was reduced by $4.9 million, reflecting the benefit from our substantially completed debt reduction plan. Diluted EPS from continuing operations as adjusted, increased by 18% to $1.23. For the year, we are increasing our estimate of 2013 diluted EPS, as adjusted, to a range of $2.55 to $2.65 per share. This is the result of our solid first-half performance in uneven market conditions, our favorable outcome on our debt refinancing transaction, and the lower-than-anticipated tax rate. As I mentioned, sales in the quarter grew by 4%.

Solid top-line improvements were experienced in our marine engine and fitness segments. In our boat segment, the Aluminum and Fiberglass Outboard Boat businesses continue to deliver strong sales growth in the quarter, while the Fiberglass Sterndrive business remained weak. From a geographic perspective, consolidated United States sales increased by 5%. Sales to Europe increased by 6% and rest of world sales were up 1% versus the prior year.

In the first half of the year, our sales also increased by 4%. Consolidated US sales increased by 6%, sales to Europe were up 1%, and rest-of-the-world sales were flat versus the prior year. Our first half growth rates in Europe were mixed, both by country and business segment. We will provide some specific commentary on this region during our segment discussions.

Adjusted operating earnings were $140.7 million for the quarter, an increase of $14.8 million, or 12%, compared to 2012. Operating margins ex charges increased by 90 basis points to 12.8%. The increase in operating earnings reflects solid sales growth and continued gross margin improvements, partially offset by modest increase in operating expenses, resulting from increased investments and growth.

Operating earnings, excluding restructuring, exit, and impairment charges, were $236.2 million for the first half, an increase of 17% compared to 2012. Operating margins ex charges increased 130 basis points to 11.3%. Net earnings for the quarter were $0.85 per share, including $0.04 of charges for restructuring, $0.32 of losses from debt retirement, and a $0.02 charge from special tax items. Excluding these items, our diluted earnings-per-share as adjusted, equaled $1.23 per share. This compares to net earnings of $1.02 per share in the prior year, which included $0.5 of losses from debt retirement and a $0.03 benefit from special tax items. Again, excluding these items, 2012 second-quarter EPS equaled $1.04.

In summary, our EPS, as adjusted, increased by $0.19, or 18%. Net earnings for the first half were $1.43 per share, including $0.10 of restructuring charges, $0.32 of losses from debt retirement, and a $0.14 loss from special tax items. Excluding these items, our diluted earnings per share would have been $1.99 per share. This compares to net earnings of $1.53 per share in the prior year, which included the losses from debt retirement and a $0.02 benefit from special tax items. Excluding these items, 2012's earnings per share would have been $1.56. As adjusted, our first half EPS increased by $0.43 or 28%.

Now let's look at our operating segments and we will start with the marine engine segment. From a geographic perspective, second-quarter sales to US markets were up 9%, with growth in all major product categories, Sales to Mercury's European customers increased 4%, led by a more favorable mix of higher horsepower engine sales. Rest-of-the-world sales were up 2% year-over-year as a result of higher sales in most major markets.

In the aggregate, Mercury's sales increased 7% for the quarter. From a product category perspective, our US outboard engine business delivered strong sales growth, reflecting solid performance in the aluminum and fiberglass outboard boat categories. Strong demand continued for our 150 hp FourStroke as well as for the Verado engine family and engines in the 75, 90 hp and 115 hp ranges.

Unfavorable global retail demand trends, along with reductions in boat dealer inventories, continue to affect revenues from sterndrive engines. As you may recall, in the first half of 2012, demand for outboard engines increased double digits, which outpaced Mercury's production capabilities, leading to a higher level of backorders at the close of that period. As Mercury entered the back half of 2012, they have successfully taken several actions to increase capacity and production flexibility and made excellent progress over the second half of 2012 lowering the level of backorders and increasing sales.

This dynamic contributed to the sales growth of the outboard business in the first half of 2013, as Mercury successfully met demand of products in the period. This relationship is somewhat reversed in the second half of 2013, as the benefit from shipments to decrease high outboard product backorders in the second half of 2012 will not be repeated in 2013.

Mercury's Parts and Accessories businesses reported solid sales increases in the United States and rest-of-the-world markets. reflecting stable boating participation, new product launches and market share gains. European sales for our P&A business experienced a slight increase in the quarter.

Record sales were achieved by Attwood and Land N Sea in the quarter and year-to-date. Attwood's award-winning portable and integrated fuel systems continue to be an important contributor to Mercury's P&A business, and maintenance income continues to grow through product line and distribution expansion. Mercury's adjusted operating earnings increased by approximately $14 million during the second quarter with operating margins at 18.9%, which is 100 basis points higher than the prior year, on an adjusted basis.

Positive factors included higher sales, particularly in the 75 to 150 hp outboard range, as well as in the parts and accessories business. Also contributing to the higher operating earnings were favorable product mix of higher horsepower engines, as well as improved cost in operating efficiencies. These positive factors were partially offset by spending on growth initiatives and higher warranty expense as continued improvements in claims experience were more than offset by a more favorable working adjustment in the prior year second quarter.

Now, turning to our boat segment. There, second-quarter revenues were up 1% compared to the prior period. In the US, which represents about 2/3 of the segment, sales were flat, reflecting continued growth in US aluminum and fiberglass outboard boat categories, which was offset by continued weakness in retail demand for fiberglass sterndrive boats and the impact of our related strategy to reduce large-boat pipelines.

In the quarter, our sales to Europe increased by approximately $4 million. For the six months, sales are down 10% which we believe is more consistent with marine retail demand trends in Europe. Rest-of-world sales decreased by 3% as higher sales into the South American market were more than offset by declines in other markets.

Now let's take a look at the United States power boat industry statistics, provided by Statistical Surveys, Inc., to get a view of how demand is unfolding by boat category in the United States. As we stated in our first-quarter conference call in April, it appeared weather was influencing both 2012 and 2013 demand metrics, which continued into the second quarter. Specifically, a warmer-than-normal spring in 2012, combined with a colder and wetter-than-normal conditions experienced in 2013, are believed to have had a significant influence over market demand in certain categories.

Based on the preliminary second quarter data, aluminum and fiberglass outboard boat markets demonstrated solid growth, and that improved compared to the first quarter of 2013, but the pontoon category, as reported in Soundings Trade Only, leading the outboard market with the 5% year-to-date growth rate. The fiberglass, sterndrive, inboard boat market experienced double-digit declines during the quarter, and for the year-to-date period, again as reported in Soundings Trade Only, fiberglass sterndrive boats less than 30 feet in length were down approximately 14% year-to-date. We believe weather continued to be a factor in the second quarter in this category.

Consumer shifts from this category to other boat types, such as pontoons, as well as continued economic down drafts on a typical buyer in this category, are also contributors to the lower industry sales. Overall, the entire US retail power boat market grew 3% in the quarter and remained modestly down through the first half of 2013.

Global retail unit sales of Brunswick boats in the second quarter were flat. And global wholesale shipments decreased by 2%. Also during the second quarter, most fiberglass and aluminum categories benefited from higher-average sales prices and as a result, overall segment revenues increased slightly in the period.

Regarding our pipelines, dealers ended the quarter at 32 weeks of boats on hand on the trailing 12-month retail basis, which compares to 31 weeks on hand a year earlier. Pipelines for aluminum product are up over last year's levels on a unit basis and weeks on hand determined on a trailing 12-month retail basis are also higher by approximately 3 1/2 weeks.

Retail activity in the first half trailed our expectations, which contributed to the pipeline increase. However, we believe the pipeline levels in this category are at appropriate levels and we do not expect second half wholesale shipments to be significantly affected. As prior-year pipelines were below desired levels for our dealers. Assuming retail sales are consistent with our full-year expectations, we expect aluminum wholesale unit shipments to grow slightly greater than retail demand in 2013.

Pipelines for fiberglass, sterndrive, inboard product continue to decline to record-low levels. As we have previously stated, we planned in the first half of this year for the continuation of declines in pipeline inventories, as we and our dealers responded to weak market conditions in the segment. As this market continues to be very weak, we now expect pipeline reductions to continue in the third quarter. In addition, our product plan contemplates the significant volume of new introductions in the fourth quarter and healthy pipelines facilitate the flow of this new product to the market.

The boat segment second-quarter adjusted operating earnings declined by $1.7 million when compared to the prior year. This decline resulted from the previous discussed declines in lower sales of fiberglass sterndrive inboard boats, as well as growth initiative investment spending and the absence of second-quarter 2012 legal and insurance settlements. Partially offsetting these negative factors were the benefits from higher aluminum and fiberglass outboard sales as well as the fiberglass boat cost reduction activities initiated in the fourth quarter of 2012. As a result of the incremental pipeline reductions we plan on taking in our fiberglass sterndrive categories in the third quarter, it is unlikely that we will achieve positive operating earnings in our boat segment in 2013.

Now let's turn our attention to our two recreational segments. Sales for Life Fitness products increased by 5% when compared to last year's second quarter. The increase reflected strong gains in international markets, including solid growth in the United Kingdom and Germany. Sales growth to US health clubs and hospitality customers were partially offset by lower sales to local and Federal Government customers. Second quarter operating earnings increased by 5% as the benefit from higher sales was partially offset by growth initiative investments.

Bowling & Billiards sales decreased by approximately $2 million, or 2% in the quarter. Lower sales in bowling products and the impact of a reduced retail center count were partially offset by an increase in US-equivalent retail center and billiards sales. We believe that weather and improved pricing were the main positive factors affecting our retail bowling center results. Second-quarter adjusted operating earnings increased by about $1 million as improved retail bowling operating margins were partially offset by lower sales and bowling products.

During the quarter, our bowling organization entered into an agreement to divest its European bowling center portfolio, consisting of seven locations. The elimination of these centers will be modestly beneficial to the segment's operating earnings going forward. This action is a reflection of the ongoing efforts that bowling retail team is pursuing to enhance our bowling center portfolio.

Now I will turn the call over to Bill will give us a closer look at our financials.

Thank you Dusty.

Let me start with a discussion on our debt outstanding, which at the end of the second quarter was $472 million, representing a $359 million reduction over the last 2.5 years. In early May, we issued $150 million of 4.625% debt. The proceeds from this issuance, along with cash and marketable securities, were used to retire the remaining 2016 notes in June, thereby eliminating the 11.25% coupon from our debt portfolio. These transactions substantially completed our planned debt reductions.

Net interest expense, which includes interest expense and interest income, was $12.3 million in the quarter, a decrease of $4.9 million versus the same period in 2012. The reduction was a result of lower debt balances. Beginning in the third quarter, our new quarterly run rate of net interest expense is about $8.25 million. Therefore, for the full-year, we expect net interest expense to be approximately $43 million, excluding extinguishment losses associated with debt retirement.

Foreign currency had a minimal impact on sales and a favorable impact on operating earnings comparison for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements and includes the impact of hedging activity. For the full-year 2013 versus 2012 comparisons, we currently estimate that exchange rates will have a slight unfavorable effect on sales and a positive impact on operating earnings. This assumes that rates remain in line with current levels for the remainder of the year.

On an adjusted basis, our tax provision was $12.5 million, compared with $13.1 million in the second quarter of 2012. These amounts exclude the tax impact of one-time charges, such as restructuring charges, debt extinguishment losses, and any nonrecurring special tax adjustments. The effective tax rate on an as-adjusted basis was 9.8% for the second quarter of 2013 versus 12% a year ago.

Our current estimated effective tax rate for 2013 on an as-adjusted basis is in the range of 11% to 13% which is lower than the prior year and our previous estimate for 2013. These variances are largely the result of a more favorable mix of domestic versus foreign earnings. I would also like to remind you about the possible reversal of a significant portion of our tax valuation allowance reserves later this year. This non-cash earnings benefit is excluded from our estimated 2013 tax rate as adjusted. And as we have previously discussed, this possible change in treatment will raise our tax rate in 2014 versus 2013.

Turning to review of our cash flow statement, cash provided by operating activities of continuing operations in the first half was $107 million, a solid improvement of $41 million versus the prior-year. Seasonal changes in our primary working capital accounts resulted in a use of cash in the first half and totaled approximately $105 million. By category, accounts and notes receivable increased by $74 million and inventories increased by $27 million and accrued expenses decreased by $55 million.

Given the seasonality of sales in our Marine businesses, we anticipate the liquidation of working capital over the balance of the year with the corresponding benefit to free cash flow. Capital spending in the first half increased $25 million versus the prior year, to approximately $61 million, which included investments in capacity expansion -- which Dusty will discuss later -- and in new products in all businesses. Free cash flow also included approximately $7 million in proceeds from the sale of property, plant, and equipment in our marine segments. Total free cash flow from continuing operations totaled $53.6 million versus $50.7 million in the prior year.

Our business units continue to remain focused on generating solid free cash flow, which has allowed us to reach our debt reduction targets and will also allow us to continue to fund future investments and growth. In summary, cash and marketable securities declined to $330 million at the end of the first half, with the net impact of debt reduction activities partially offset by free cash flow. Supplementing our cash and marketable securities balance is the net available bond capacity from our revolver of approximately $279 million, which when combined with our cash and marketable securities balances, provides us with total available liquidity of $609 million.

Now let me conclude with some comments on certain items that will impact our P&L and cash flow for the full-year. We currently estimate that restructuring charges will be in the range of $13 million to $15 million in '13. Charges reflect activities pertaining to both segments plant consolidations initiated during the fourth quarter of 2012 and in the first quarter of 2013; as well as the previously mentioned divestiture of our European bowling centers.

Our estimate for depreciation and amortization is approximately $95 million. We expect our 2013 pension expense to be approximately $19 million, which is a decrease of $6 million from 2012. In 2013, the Company plans on making cash contributions to its defined benefit pension plans in the range of $50 million to $60 million.

We expect capital expenditures to increase versus prior years as we fund our growth initiatives. Our plan continues to reflect an amount that approximates 4% of projected sales with a substantial portion directed at profit enhancing projects. Our working capital performance will primarily be a function of revenue assumptions. Our current estimate reflects a use of cash for the full-year in the range of $25 million to $50 million. Despite higher spending levels and a usage of cash for working capital, we plan to generate positive free cash flow for the full-year generally consistent with prior year levels and maintain healthy levels of liquidity.

I'll now turn the call back to Dusty for some concluding comments.

Thanks Bill.

I will conclude by only providing you with our outlook for the full-year 2013. Our operating plans for the remainder of the year continue to reflect an uneven recovery in the US power boat market with our outboard boat and engine products and global parts and accessories businesses generating growth. Our assumptions continue to reflect weak market conditions for fiberglass sterndrive inboard boats, as well as further pipeline reductions in those categories. And we continue to plan for weakness in Europe for some of our businesses, albeit, at a reduced level compared to the declines experienced in 2012.

In our recreation businesses, positive health and wellness trends combined with some really exciting new products, have positioned our Fitness business to continue its strong top-line performance and deliver excellent results again in 2013 and our bowling business should further benefit from operating enhancements and capitalizing on its competitive advantages.

We are now targeting a 4% growth rate in overall revenue in 2013, which is consistent with first-half performance. Growth rates in the third quarter will be affected by fiberglass pipeline reductions, unfavorable comparisons in our engine businesses due to the factors I described earlier, and lower retail bowling sales due to the center divestitures. Our current four-year plan reflects a solid improvement in gross margin levels. As a result of the factors affecting the top line in our Marine businesses, third-quarter consolidated gross margins are expected to be in line with prior year.

Our organic growth platform will benefit from increased investments in capital projects and research and development programs, along with the SG&A to support them. As a result of these initiatives, full-year operating expenses as a percentage of sales are expected to be comparable to 2012 levels. Our planned increase in spending to support growth and innovation is heaviest in the third quarter, but we are currently planning that our operating expenses in the third quarter of 2013 will be up approximately 10% versus the same quarter in 2012.

Examples of these investments and our commitment to innovation and growth include the following, if we start in this chart at top left and go clockwise. Divestment continues at Mercury's Fond du Lac campus in Wisconsin, where a $20 million expansion project is underway to enhance Mercury's manufacturing capacity. Earlier this month, Mercury broke ground for an additional 38,000 square feet of manufacturing space for our horizontal machining and high-pressure die-cast machines. Separately, Mercury is also investing in the 17,000-square-foot facility, housing two new 18,000-gallon testing tanks to enhance and augment our product development and testing.

In the boat segment, we recently acquired a new content manufacturing location in Fort Wayne, Indiana, which is home to two of our popular pontoon brands, Harris FloteBote and Cypress Cay. The challenge for our pontoon brands has been to keep up with the strong demand, particularly in light of its current facilities. The new 360,000-square-foot replacement location offers about double the area of the current plan, allowing room for expansion. This new location, which is expected to be up and running in August, provides much-needed space and allows for improved operating efficiencies.

Moving on, by the end of July we will have two pilot locations for our New Brunswick concept in retail bowling in the Atlanta area. Brunswick bowling has been hard at work developing this upscale bowling and entertainment Center concept over the past 18 months. In addition to Marietta and Norcross, Georgia, a third location is planned for Buffalo Grove, Illinois in the fall. Our bowling retail organization has really honed in on delivering exceptional guest service including innovative cuisine from Tavern 45, a new name inspired by the founding of Brunswick in 1845.

Meanwhile, Life Fitness has been quite busy in an effort to advance its edge in technology and innovation, while also anticipating fitness trends and customer needs. The new Discover SE and Discover SI tablet consoles are the first to sync with android mobile devices, in addition to have our operating systems. This tablet console features an ultra-responsive touchscreen with swipe technology for superior navigation and a more personalized experience. Global trend reports predict sports and health-focused mobile app downloads will reach $1 billion annually by 2016.

With the launch of its cloud -based Life Fitness connect website and app, Life Fitness provides customizable tools to fitness facilities and exercisers looking to tap into this trend. Product development has always been a key focus here at Brunswick, especially during recent difficult times. We do so not only to change to meet a changing market, but to stay in front. It is imperative that we step up our already brisk pace in innovation to improve our products and the customer experience we offer throughout Brunswick.

Lastly, and to complete our outlook comments for the full year, we will also benefit from lower net interest expense and pension costs, as well as a lower effective tax rate on an adjusted basis. Partially offsetting these positive factors is the effect of higher diluted shares outstanding. As a result of our solid performance in the first half, the favorable outcome to the recent debt refinancing in a lower-than-anticipated tax rate, we are increasing our expectation of 2013 diluted earnings per share from continuing operations as adjusted to a range of $2.55 to $2.65 per diluted share. The midpoint of this range would represent a 24% growth rate over the $2.09 we earned in 2012.

Thanks and now I'll take your calls.

(Operator instructions)

James Hardiman, Longbow Research

Good morning, thanks for taking my call here.

We appear to be headed towards another year where sales are a little bit worse than expected, and certainly than what the street was anticipating, that margins are materially better than expected. I think general perception on the street this year was that you would only go so far as the industry and maybe some share gains would take you. And yet, here we are with guidance dramatically up from where was just six months ago. I guess my two questions are - how do margins and cost trended versus your own internal expectations this year? And, as we move forward in the back half of this year and into next year, what is left to do on the cost side of your business with the most obvious cost reductions, already in the rearview mirror? Is there a meaningful improvement over and above this leverage from here on out?

First, James, thanks for your question.

Secondly, when we talk about the top line, it is quite interesting. We have lots of pundits and even some industry people who like to talk about what they think the industry is going to do. But I would submit to you that the industry is performing just about like we said it would overall. If different from here to there, but if you add up the overall numbers, we are right in the range that we said it would be. And we had guided top line growth of 3% to 5% and we are settling now at 4%. So I start out with the market and industries look about like what we thought they would, and our top line growth is right about where we thought it would be. In terms of whether we've been surprised by the margins our business has been able to produce? In general, no.

I will say, though, that our folks are doing an absolutely outstanding job in a difficult economic climate in which we're working to deliver both top line and then leverage it to the bottom line, while making significant investments. Because we are very focused on continuing to grow, our margin expectations for the remainder of the year is that we will finish the year with our margins up solidly and I hope that everybody heard us. I think the third quarter is going to be a difficult gross margin quarter for us. And my judgment is that it will be flattish to last year. And then we will finish out the year with a nice, solid improvement in gross margins.

And that, from where I sit, is just absolutely outstanding in the sense that we had a very strong second quarter -- or second half of last year -- in a market that was growing better than it is growing this year. And therefore the ability of our team to come in and hold results in a more difficult market in the second half of this year is really great work. So I am tickled that that is what everybody is doing.

And what is left to do on the cost and margin improvements? We will start out by giving what I suspect is a lot of the CEOs answers all around the world -- that there is always more to do. And we have got really great operating people who are very much after every single thing that we can wring out of the business -- to the supply chain, through the manufacturing floor, through design for manufacturing, and through the way that we transport and deliver products. And ultimately, what the product experience feels like when our customers get it.

So my judgment is -- and I've talked about '13 -- we have still got more room in '14 and beyond. And a lot of the investments we are making -- for instance, and I just spoke today to the product development facilities at Mercury and capacity expansions at Mercury are all bringing efficiencies.

The new products that we are introducing -- which we have not talked about today, but we talked about in prior calls -- for instance at Mercury, in our judgment, are all going to be margin enhancers. And that generally is the case across all of our businesses.

Our goal as we move forward -- and we have been pretty open about it -- is anything we bring to the market needs to have a cost position equal to or less than the product it's replacing. And our folks have all done a really good job of hitting those so my judgment is; we are going to continue to grow margins. We will not get 200 hundred basis points of margin improvement in a relatively short time, but we have got more room and we will continue to do it.

Very helpful.

And then just secondly, I was hoping you could talk a little bit about some of your new products and what their availability currently is? I guess on the engine side of the business, you spent a lot of last year trying to catch up with demand on the 150 horsepower outboard. Have you caught up with demand there? And I guess similarly, on the boat side, you came into this year with some really compelling new products, certainly as we get towards the larger boats. Everything that we are hearing is that they're extremely popular, but that maybe you are not keeping up with demand. Is that ultimately, potentially, similar to engines this year or more of a benefit for next year once you hopefully catch up with some of that demand? Thanks.

Let's do engines first. We described on the call and I don't know that my words were particularly artful. I hope that everybody understood them, and I may confuse this even more by this discussion. But in the first half of 2012, for a whole bunch of reasons, we really could not meet demand. One of the reasons were just unbelievable demand in the first half in light of the very warm and dry spring we were having, so we went into the second half with a significant backlog. And we worked really hard to increase or improve our efficiencies, productivity, and units that we could push through our system in the second half in order to lower that backlog to manageable levels. And, of course in doing so, we pushed the sales line nicely in the second half. That is all on engines.

In the first half of this year, we did not have the same dynamic. And in the second half of '13 we are not going to have the same dynamic where we were chasing the backlog. Our backlog now is at a very nice and manageable level. I think our team at Mercury has done a great job of forecasting on the [S&LP] process and delivering product off the floor that is consistent with demand and our outlook for demand. So we generally solved all of that.

Now, over time -- and that is why we are making all of the capacity expansion expenditures that we keep talking about -- it's that we are going to need more capacity at Mercury because we are nearing, in the four stroke outboard categories, driven by demand there, but also our great new product, we are going to need more capacity in order to take care of never having those sort of backlogs that we have in 2012, and that is what we are investing to do.

On the boat side, a fair bit more complicated. If we first start with our aluminum products, fish boats and pontoons, a growing segment, we're taking share very nicely there. But I think our guys are beginning to feel like they could be hitting a capacity wall at some point, and that is why you heard us in the call today say that we are fine with having more boats and weeks on hand in the pipeline ending 2013 than we did in 2012, because we are always playing behind in that part of the business. And just a little bit of slowness in the first half -- particularly in the first quarter -- picked up nicely in the second quarter, primarily weather driven. I don't want to be The Weather Channel; I try not to talk about weather too much here. But it has permitted us to get a little ahead and we are going to work hard in 2013 to stay ahead, and in the aluminum business we can get a few more boats in the pipeline.

But ultimately, we may have to invest into more facilities for fish boats. And we have in pontoons -- the part of the commentary on the call -- we made a big investment in a new facility. We have not been able to meet demand, probably disappointed both consumers and dealers, so we are making investments to take care of that. If we look at our fiberglass outboard product -- which I particularly think of as one brand, Boston Whaler. Again, we have a heck of a lot of demand, growing share and as we look at the product portfolio going forward, it is likely going to be necessary that we are going to have to make some facility investments there, in order to keep up demand. And again, just like in that aluminum business, that is great -- we're happy to do it. And it says a lot for the brands and the products that we bring into the marketplace.

When we go to our fiberglass sterndrive inboard businesses, we have a bit different situation. Those markets are not recovering and as we look at that chart that we showed with the smaller under 30 feet down 14%, we said 31 feet to 40 feet is up 2.3% and that is 15 boats -- which is still an incredibly small marketplace. And then for the larger category, that is 41 feet to 62 feet, we said down 1.2% and that is 4 boats in the market. So we have continued to play in relatively small markets here in the US, so what we have done is -- first, we have taken out a lot of capacity. So our system is adjusting to meeting demand and a smaller footprint. And then, when we add to that, we have got a lot of new product coming and again our system has to incorporate that new product into a smaller footprint and I think there have been times that we would probably -- again disappointed some dealers and customers.

But, we have positioned ourselves for -- especially in boats over 50 feet -- for a lot of new product coming into the marketplace, that's why it's so important that we manage the pipeline for the remainder of 2013. And we are confident that our system now is prepared to incorporate these new boats into its production planning and get the boats out as we bring them to market.

So that is a very long answer to a short question, but we think of it in several layers here.

That's exactly what I was hoping for. Thanks guys.

You're welcome.

Mike Swartz, SunTrust.

Good morning, guys.

A question for you, Dusty. I think in the previous call, your outlook for the global marine market was kind of low, single-digit growth. I guess the first piece of this is - is that still your thought process for 2013? And are you seeing a level of maybe pent-up demand in the market that gives you a little more confidence going into the back half of the year, as well as 2014?

First, I'm not prepared to really talk about 2014 to any great extent right now. My judgment is 2013 will play on out within the range that we set at the beginning of the year. Slight -- I think I have said generally, we thought the market could be up slightly, but if it went any way different than that, it would be down and not up. That continues to be our view. And if we step back, the ultimate question for our investors and for those of you who follow us is ultimately -- where is this marine market going? And we -- I have probably worn everyone out talking about the factors that we think need to occur in order to really drive the improvement in this market. And we have always said -- everyone needs to make their own judgment about whether those factors are, in fact, coming into fruition. And our judgment had been -- we didn't think it was going to happen in 2012 and we were pretty open about that, but we think it is playing out that way.

Having said that, we remain very confident about the ultimate growth in this market because we would not be making all of the investments we are making if we were worried about this market. We are spending a ton of money in investment, in capacity, and new products throughout all of our Marine segments and in fact, all of our businesses. I think that we -- that is how we think of this industry and business immediate and in the long-term.

Here in the shorter term, which again, we don't worry much quarter-to-quarter, and rarely do we worry much year-to-year, about where the overall market has gone because we have a pretty good short-term view of what things are. But it is clear that consumers are continuing to want product. And if you look at the transactions, if that happened in used boats, they are up in the market today versus before the recession. So the boats are trading hands at significant numbers in the used market and that is an indication that consumers want different product, but right now they are going to use the market to get it.

That begins to inform us and we are doing a lot of consumer work and several 1,000 people have helped us have a real look at where we think the market is going on a shorter-term basis. Fundamentally, consumers are of the view that the investment they need to make in new products -- in dollars, time and effort -- is at a level they preferred to go look at used boats.

We are very comfortable with that and we are operating this company in that environment and we are continuing to view that this is all playing out generally as we thought it would, Michael, so we are relaxed. And we began believing long-term that everything is going to play out the way we'd hoped and we have the flexibility, the operating efficiency, and a bunch of great people on the ground to deal with all of the near-term fluctuations.

Thanks for the color, Dusty.

And then if we could maybe just shift gears to some of the new model year '14 product coming out -- I know it's early -- but could you maybe give us some more color on the feedback that you are hearing from dealers and others in the market?

Well, let's first deal with engines. My judgment is the market is eagerly anticipating all that we have coming to the marketplace in engines. When we think of, and let's think of this in a couple of buckets, the over 50 foot product, and we have one in both markets, we have one new product out in that range and that is our 51 Sea Ray. And I think the market acceptance has been outstanding. And as we look at what the production requirements are at Sea Ray, there are a heck of a lot of those getting built and it gives great comfort that the rest of that product line above those links -- of that link -- are going to be just fine. We have got a lot of product coming here in the second half below 50 feet, and again, through the work we do with our dealer network and through the voice of the customer, we are told that is going to sell well and we just now got to get it out there and get going.

Great thanks a lot.

You're welcome.

Tim Conder, Wells Fargo Securities.

Thank you.

Dusty, just a little clarification there. Your comment on the global market being up slightly. Are you talking global marine including engines? Or are you just commenting on the boat market? And then, if you could just also just your view on the US boat market for 2013?

Tim, my view on the global boat market is that what we have seen through the first half is like what we have favoring out to the rest of the year.

Okay.

And well, the global engine market, we will do fine globally in the engine market, because of our strong brand presence and our really strong P&A business. Those people continue to boat all around the world and use our product and we are going to be there to help dealers keep them on the water.

So the growth rates we see in the engine business in the first half aren't generally going to push on through the second half again. On a comparative basis, I think third quarter is going to be difficult for comparison sake, because when we pushed a lot of product out in the third quarter of last year and -- as I have been talking about -- we do not have a need to do that in the third quarter this year.

For the boat market this year in the United States, again, I don't see anything that is going to change the dynamics that we have seen through the first half, Tim. It is a pretty tough market. Some parts are really doing great and other parts are having trouble recovering. And where it is doing great we want to be there taking share in making more money. And where the market is weak we have got get our new product out and we have got to get our pipeline healthy in order to [get the dealers] through all that. Our judgment is that P&A will continue to be a real driver of top- line and earnings growth throughout the remainder of the year; but our P&A business is just so well-positioned with the share that we have and the fact that people continue to boat, and that will fuel that.

Okay.

I know, again -- you do not like to talk about weather that much.

(laughter) I mean, I have talked about it a lot, haven't I? For someone who does not like to talk about it.

Do you think, Dusty, and again -- the strength of the market continues to be, now, for the third year in a row, in the aluminum and in the outboard fiberglass. Do think that that market growth that we have seen year-to-date was restrained by weather? That it could have been more and therefore, obviously you are not that worried and given the lower dollar price points and so forth? Just any additional color on that.

Tim, I do believe weather restrained the market. It is difficult for me to give you an accurate statistical look at how much, but in my judgment, and I am a boater, I am out all the time, and I know where I boat, people are having to swim to their boats, because even when it is stock, because the lakes are so high. I boat on the Ohio River and I have not been able to get my boat out but once in the past three weeks because the Ohio's been flooding and so much debris is coming down the river and there are no other recreational boaters out.

Everywhere we go and talk to people and work with dealers, this weather has had an impact. Now, what we have to do as a business, and we talk about this a lot, is to be honest -- we have to ignore it. Because there's always going to be weather and if all we do is talk about the weather then that's all we're going to talk about because there's always weather. So we just have to keep working our way through this. But again, I think there is no question that boat sales -- not only in the aluminum and fiberglass outboard sales, but also the whole industry -- have been tamped down by the weather in the first half.

Okay.

And then a clarification point, if I may. You said that the operating profits on both will likely be negative this year. Again, are you excluding anything or is that just a straight reported basis? And then finally, looking at 2014, I know that you have not given a lot of guidance, but two things - number one is the investment spend. Would you anticipate that coming down as a percent of sales or being flattish in absolute terms? The same question goes for CapEx. As a percent of sales are running 4% in '13. Should that come down a little bit in '14? Either Dusty or Bill?

I'll do them both. There will not be any adjustments [on boats], that's just the way that we will be reporting it. And Bill, what do you want to say?

It is on an X items basis, Tim. So there's -- what's included in typical adjustments. On the investment spend side, CapEx, I think it's reasonable to assume that we continue to spend at the same levels on a percentage of sales basis that we are spending here in 2013. You know, some of the capacity investments and new product investments that we are investing in this year continue into '14 and we will keep them at that levels on the investment spending side -- R&D, operating expense sort of thing. R&D will continue to be strong, I would expect operating expenses to maybe level off a little bit, but still go up because we will continue to invest in growth initiatives.

Okay.

So operating expenses, Bill, up absolute dollars, but maybe lever a little bit of a percent of sales?

Correct.

Got it. Thank you, gentlemen.

You're welcome Tim. Thank you.

Craig Kennison, Robert W Baird.

Thanks for taking my question, I'll keep it brief.

Could you talk about your market share trends within both categories? Clearly you guys have a disproportionate number of fiberglass boats. But I'm interested in how your share trends are working within category.

Great, Craig, thanks the question.

Let me do it in three chunks if I may. The first would be aluminum, both fish boats and pontoons. We are growing faster than the market in both of those categories and we are taking share. In the fiberglass outboard category, we are growing faster than the market and taking share. In the sterndrive inboard range, we are -- if you give an overall answer -- we are losing share, but then let me chunk it up in three pieces so you will see where we are never happy we are losing share, but it is also understandable to us and we think we have a good feel for what is happening.

If we think of smaller, sterndrive boats, there are three dynamics that are in play there. First, there are several really great brands, great brand leaders, innovative people in the industry whose brands have not typically worked a lot above -- let's say 30 feet. And therefore, in a reduced market, they have really keenly focused down below 30 feet and are doing a great job at it. At the same time, we made the decisions for margin purposes primarily, that we would reduce our model count down in this low range. And then with those two, we have lost share.

We understood before we did this work that generally how it would play out and again, there are some really great competitors down there who are doing a great job. So that is all settling out like we thought it would. Let's say, sort of 30 feet to 50 feet, in the smaller size at the end of that range, we have lost some share at the end of that range, and in the larger end of that range we have gained some share.

Net/net again, we have a new dynamic in play for parts of this 30 feet to 50 feet segment. That is the US boat market as, even though it is not growing a lot, it is still the best boat market in the world for a lot of competitors to come to. And there are some great brands throughout the world, for instance in Europe, that are having great difficulty in their markets and they focus very much on coming to the United States. When all of those brands come -- and we are talking about such very low unit count -- remember I have said this 2.3% growth in boats 31 feet to 40 feet is 15 boats, across the whole industry.

So when you have a few of these really great brand names, coming to the US and trying to find a place to get some capacity. In these very low counts, five or six boats start to move share. That is what has been happening to us in that category and we have been losing some share and we got some new product coming.

Above 50 feet, Craig, we have been pretty open. Our product line was stale. We have got a lot of new product coming, the first one was the 51 and we think it is doing well -- we know it is doing great. So as we bring this new product to market, I think we are going to continue to have shared difficulty 'til all the new product gets out and then our anticipation is once it gets out, our share will be fine.

That is a very long answer to your very short question.

That's a great answer. Thank you very much.

Jimmy Baker, B Riley & Company.

Good morning and thanks for taking my questions.

Dusty, you just confused me a little bit, which is easy to do, but I think you mentioned that the market is trending like you thought and that the top line is trending like you thought. But then you also mentioned that you no longer expect the boat group to have positive operating earnings this year, so can you just kind of reconcile that for me? And I guess as a follow-up, if global retail demand was better than your --up slightly -- assumption for the second half, then do you think you can get above breakeven in the boat group?

First, sorry for the confusion, and it is not from your ability to understand -- it is from our ability to articulate it.

Overall, the market is performing just about like we thought it would. But within segment, there are differences. So we did not anticipate -- as we thought is fiberglass, sterndrive, inboard and what our view was -- it would be flat to down, with an orientation toward down. But we had not planned on, as an example, in under 30 feet being down 14%, on a year-to-date basis.

So, as that has begun to evolve, we felt that it is important that we make adjustments in our production in order to help manage pipelines in the second half. And as you know, those are pretty high-dollar, high-margin boats. And as we do that, that is what is causing our boat group -- in our view -- to have a high likelihood that it won't be profitable in '13. Now if the fiberglass sterndrive inboard market were to really take off, then I would tell you -- in our judgment, it is not, through the remainder of this year -- then yes, of course, we could be profitable very quickly. It is just strictly taking units out. Yes, we are managing cost, but we also want to be prepared for all the new product we have coming. Does that make sense?

That does. Thanks for clearing that up.

And if I could just sneak a quick one in on the fitness segment, I would just be interested in your outlook there for the balance of the year. Operating margins dipped just slightly year-to-date. Just interested what is driving that? If we see an opportunity to show operating margin improvement in that segment during the back half of the year?

Sure, we said as early as the spring of 2012, that we anticipated our fitness business would be under some operating margin -- pressure, driven by the fact that many of our fitness business competitors -- through a whole range of reasons and many times having nothing to do with their ability to operate in the product they had -- had been going through difficulty and our view was that beginning in '12 through '13 and '14 and '15, there were going to make a big effort to come back in the marketplace and we anticipated a significant pricing pressures at the customer level. That is all beginning to unfold, just like we thought it would. I think we had, in our 2012 big analyst meeting -- where we ranged our ability to produce earnings and margins through '14, we -- I think had lowered -- I'd say 12% to 14% would be the operating margins.

I think as we are watching that, it is not going to be on the low side of that. And I think we ought to finish out the year in general, with the sort of margins that you see us having produced in the first half. But I don't think there is a lot of opportunity for great margin improvement, because as we are watching this marketplace, it is really getting -- from a pricing standpoint -- to be a tough place to be, and we're holding up very well, and that is where we're so focused, Jimmy, on a lot of new product, so that we can begin to take the margin pressure off our business there.

Great, that's very clear. Thanks a lot for the time.

Thank you and you're welcome.

Joe Yurman, 1221 Capital Management.

Good morning, guys. Dusty, congratulations on taking another step to becoming a lot more boring. (Laughter)

Joe, thank you. I take that as the ultimate compliment. That's what I want to be is very boring.

Okay, so with that being said my question is about bowling retail. I've only just really started to take a look at this and so my first question is about, so we had 95 centers and now we have divested 7, so we have 88? Is my math right?

Yes.

Okay.

So now, how asset intensive is the business? Do we own these facilities, are the leased?

We own them.

60%, 60% to 65% are owned.

Got you. Okay.

Now, with respect to Tavern 45, I understand for competitive reasons you may not want to get into this and I'm hoping that you will get more into this on analyst day, but is this an in-house initiative? Have you been working with some third parties particularly in culinary and things like that? How should we think about that?

We have been working with a third-party to design the menus and train the chefs, to help us understand how to change the service experience. And I feel you heading towards exactly the right way about how to think about this. The typical bowling center has been experiencing movement from folks who come in to do group play to open play. Generally, across the industry, although we have been [bucking bad] on the same-store sales basis and within centers, but across the industry, the top lines have been under a lot of pressure. When the league players are not showing up because they are a great source of revenue, they are there every week, and they spend a certain amount, they know how to staff in order to take care of the leagues and all of that is a little bit different with open play.

But our bowling retail folks have begun to notice that there was a form of hybrid bowling activity that was experiencing double-digit growth fairly consistently. And that activity is one where bowling is the primary recreational activity, but there are also great food, great customer service, great lounge areas, et cetera. And you begin to think about those sort of activities, the restaurant assumes [the beverage] part of the business, begins to approach half the revenue. Of those sorts of centers and in our present centers, it is nothing like that. So then, our bowling retail folks begin to really think their way through how they need to continue to [permit] more. And the internal changes have become a business that is very, very customer -- consumer centered if you will. And they did a decision that they were going to pilot three places.

Two in Georgia, as I said, one here in Chicago, and about one open (inaudible) the second one will open, and the third one will open in the fall. And we knew, as good as our people are, we needed help to understand things we just didn't know. So yes, we have had outside help around food and beverage activity and we made a great addition internally, with food and beverage expertise and all of that was just quite confident that it is going to work out well for us.

And with respect to that, and it may be too early to quantify, but can you kind of maybe qualitatively just talk about the sales list as you kind of retrofitted these two facilities in the Atlanta area?

From a target perspective it is 50%.

Okay.

Then, my last question is - I picked up during your prepared remarks about, there are certain competitive advantages that you enjoy in your bowling business. All else equal, let's say that I was competing against Brunswick, in operating one of these centers, to what extent are these competitive advantages ROI-enhancing versus just maybe the one off of who will do this in the area?

Well because of the number of centers we operate, compared to only one other big operator who is coming out of their second or third bankruptcy, I kind of forget. We demonstrated an ability to bring both nice ROI, not particularly high, but steady; it is more bond-like if you will. We make the investment in these centers and we know how it is going to turn out returns over a very long period of time. And our competitive advantage here is we have great folks for a long time who are extremely disciplined and the way that we do it. They do not leverage these things way up and we just continue to turn through. So that is in our advantage.

Thank you very much.

You're welcome.

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

As always, we appreciate the questions we get, they're always very insightful, and actually we always look forward to this day. We are confident where we are going. We are relaxed. We wish we were getting more help from the marketplace, but we don't need it, and we are prepared to live in the world in which we have been handed cards. We're going to play these cards and do well. So thanks everybody for being with us on this call and we look forward to seeing you individually and in other group events as we get through the next quarter. And most importantly, we look forward to seeing you all in our November investor conference. Thanks very much.

Thank you. And thank you for your participation in today's conference. That completes the presentation. You may now disconnect. And have a great day.