賓士域 (BC) 2013 Q3 法說會逐字稿

Good morning, and welcome to the Brunswick Corporation's 2013 third quarter earnings conference call. All participants will be in a listen only mode until the question and answer portion. 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. For the details on 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.

During our presentation today, we are using certain non-GAAP financial information. Reconciliation of GAAP to non-GAAP financial measures is provided in this presentation as well as in supplemental information sections of the consolidated financial statements accompanying today's release.

I would like to remind you, as a result of our decision to exit and the subsequent sale of Hatteras and CABO on August 5, the results of these businesses and the impact of that sale are reflected in discontinued operations. These figures in the presentations reflect continuing operations only, unless otherwise noted. I will now turn the call over to Dusty McCoy.

I'll start with an overview of our third quarter results.

Revenue in the quarter increased 2%. We experienced growth in fitness equipment, marine parts and accessories, outboard boats and bowling product businesses. Partially offset by the clients in fiberglass sterndrive inboard boats, US outboard sterndrive engines, and retail bowling.

During our second quarter call, we stated that our revenue growth rates in this quarter were going to be affected by fiberglass sterndrive boat pipeline reductions. Challenging comparisons in our engine businesses and lower retail bowling sales due to the divestiture of our European centers. These factors unfolded as we had planned.

Our third quarter gross margins increased by 10 basis points compared to the prior year, which is consistent with our previously stated expectations. For the nine months, our gross margin is 80 basis points. This outstanding improvement in our year-to-date results reflects our ability to execute against our strategy and generate operating efficiencies and leverage.

Operating expenses increased by 6% and this includes an 8% increase in R&D development -- R&D expenses, as we continue to invest in our numerous strategic initiatives. Adjusted operating earnings decreased by 6% versus prior year with our Boat segment being the primary contributor to this decline. Year-to-date, our adjusted operating earnings are up 11%.

Continuing down the P&L, net interest expense, excluding debt extinguishment, losses was reduced by $8 million reflecting our strong free cash flow and the subsequent benefit from our substantially completed debt reduction plan.

Diluted EPS from continuing operations, as adjusted, increased by 18% to $0.59 for the quarter and up 25% for the nine months. For this year we're increasing our estimate of 2013 diluted EPS, as adjusted, to a range of $2.65 to $2.70 per share. This is the result of our solid year-to-date performance and a lower than anticipated tax rate.

As I mentioned, sales in the quarter grew by 2%. Life Fitness reported strong improvement of 9%. Mercury sales increased by 2%, which is lower than the prior two quarters, but consistent with our previous comments regarding second half growth rates.

In boat and bowling and billiards, sales declined by 2% in each segment, again consistent with our expectations. From a geographic perspective, consolidated US sales were flat in the quarter. Sales to Europe increased by 14% and rest of world sales were up 1% versus the prior year.

In the first nine months of the year our sales increased by 3%, slightly under our full-year guidance of 4%. Consolidated U.S. sales increased by 4%, sales to Europe were up 5% and rest of world sales were up 1% versus the prior year. Adjusted operating earnings were $66.7 million for the quarter, a decrease of $4.3 million or 6% compared to 2012.

Operating margins, ex-charges decreased by 60 basis points to them 7.5%. The decrease in operating margins includes the impact of a 6% increase in operating expenses resulting from investments and strategic in initiatives.

Operating earnings, excluding restructuring exit and impairment charges, were $302.9 million for the first nine months, an increase of 11% compared to 2012. Operating margins, ex-charges increased 70 basis points to 10.1% due mostly to improvements in gross margins.

Net earnings for the quarter were $0.61 per share, including $0.03 of charges for restructuring and a $0.05 benefit from special tax items. Excluding these items, our diluted earnings-per-share, as adjusted, equal to $0.59 per share. This compares, as adjusted, to $0.50 per share in prior year. In summary, our EPS, as adjusted, increased by $0.09 or 18%.

Diluted earnings per share for the first 9 months were $2.05 per share including a $0.12 restructuring charge, $0.31 of losses from debt retirement and a $0.10 charge for special tax items. Excluding these items, our diluted earnings per share would have been $2.58 per share. This compares to diluted earnings-per-share, as adjusted, of $2.07 per share in the prior year. As adjusted, the first nine month EPS increased by $0.51 or 25%.

Now, let's look at our operating segments and we'll start with the marine engine segment. From a geographic perspective, third quarter sales to US markets were up 2% led by growth in parts and accessories partially offset by lower engine sales. Sales to Mercury's European customers increased 8% led by a solid growth rate in all major product categories. Rest of world sales increased modestly year-over-year.

In the aggregate, sales increased 2% for the quarter. For the first nine months of the year, Mercury sales increased by 5%. From a product category perspective, our US outboard engine business sales were down as a result of the difficult comparisons to the third quarter of 2012.

As we discussed on our last conference call, in the first half of 2012, demand for outboard engines increased double digits, which outpaced Mercury's production capabilities leading to a high level of backorders at the close of the period. As Mercury entered the back half of 2012, they had 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. In fact, sales of US outboard engines increased by over 30% in the second half of 2012 versus 2011.

This dynamic contributed to the sales growth for the outboard business in the first half of 2013 as Mercury successfully met demand for its products in the current year. This relationship was 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, is not being repeated in 2013.

In any event, solid retail performance in the outboard boat category continued in the third quarter. As a result, Mercury continued to experience strong outboard demand, especially from the 150-horsepower 4-stroke, as well as for the throttle engine family and engines 75, 90, and 115 horsepower range. Favorable global retail trends, along with reductions in boat dealer inventories, continue to affect revenues from sterndrive engines.

Mercury's parts and accessories business reported sales increases in all major markets reflecting stable boating participation, new product launches and market share gains. Record year-to-date sales were achieved by Attwood and Land 'N' Sea through the third quarter of 2014. Attwood's award-winning portable and integrated fuel systems continue to be an important contributor to Mercury's [BNA] business. And Land 'N' Sea continues to grow through product line and distribution expansions.

Mercury's adjusted operating earnings were up slightly compared to last year's third quarter. Operating margins were 14.7% which is 20 basis points lower than the prior year on an as adjusted basis. This operating earnings performance reflects the benefit of higher sales, particularly by parts and accessories, which were mostly offset by spending on growth initiatives.

Now, let's look at our boat segment. The third quarter revenues decreased by 2% compared to the prior period. In the United States, which represents about two thirds of the segment, sales were down 3%. We continued to experience growth in the United States aluminum and fiberglass outboard boat categories, which was more than offset by our strategy to reduce fiberglass sterndrive boat pipelines in response to retail demand and to prepare for new product introductions.

In the quarter, our sales to Europe increased 12%. For the nine months, sales to Europe were down 4%. Rest of world sales decreased by 1% as a result of higher sales in South America, specifically Brazil, which were more than offset by decline in other regions.

Take a look at the United States Power Boat Industry statistics, provided by Statistical Surveys Incorporated, to get a view of how demand is unfolding by boat category in the United States. As we previously stated, it appeared weather influenced first-half comparisons for retail demand between periods. Preliminary third quarter data, as reported in Soundings Trade Only, indicates that aluminum and fiberglass outboard boat markets demonstrated excellent growth and have improved sequentially throughout 2013. With the pontoon category leading the outboard market with an 11% year-to-date growth rate.

This strong demand can be partly attributed to more normal weather patterns in the third quarter. The fiberglass sterndrive inboard boat market experienced declines in the quarter and for the year-to-date period. Weather combined with consumer shifts from this category to other boat types such as pontoons, competition with used boats and continuing reluctance of the typical buyer in this category, to reenter the market, contributed to the lower industry sales. Overall, the entire US retail power boat market grew 14% in the quarter and is now up 3% year to date.

Global retail unit sales of Brunswick boats in the third quarter increased by 11%, reflecting strong performance in our outboard boat categories. Global wholesale shipments increased by 2%, while wholesale dollars declined, compared to the prior year, due to the unfavorable change in product mix including the effect of pipeline reductions activities on our sales. Year-to-date, global retail shipments are up 3%, while wholesale shipments are flat versus the prior year.

Regarding our pipelines, dealers entered the quarter at 25 weeks of boats on hand on a trailing 12 month retail basis, which compares to 26 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 one week. The pipeline levels in this category are at appropriate levels as pipelines in the prior year were below desired levels for our dealers.

Pipelines for fiberglass sterndrive inboard product continue to decline to record low levels and weeks on hand are lowered by approximately two weeks, versus prior year levels, reflecting our continued efforts to lower pipelines as we and our dealers respond to weak market conditions and prepare for new product introductions.

Our plans for the remainder of the year contemplate favorable retail -- I'm sorry, favorable revenue comparisons in the segment as we raise dealer inventory levels in advance of the selling season, particularly, in higher growth outboard categories. We're also anticipating benefits from our operations in Brazil.

The boat segment's third quarter adjusted operating loss increased by $3.8 million when compared to the prior year. This earnings reduction resulted from the previously discussed declines in sales of fiberglass sterndrive inboard boats and increased product development related costs.

Partially offsetting these negative factors, were the benefit from higher aluminum and fiberglass outboard boat sales, as well as the fiberglass boat cost reduction activities initiated in 2012 and 2013. As a result of the incremental pipeline reductions we took in our fiberglass sterndrive categories in the third quarter, it's unlikely that we'll achieve positive earnings in our boat segment in 2013.

Now, let's turn attention to our two recreational segments. Sales of Life Fitness increased by 9%, when compared to last year's third quarter. The increase reflected strong gains in international markets including 25% growth in Europe, which is now up 17% year-to-date. Growth in Europe reflects benefits from new products in distribution enhancements along with the improved market conditions.

Sales growth US health club and hospitality customers were partially offset by lower sales to local and federal government customers. Operating earnings as adjusted increased by 9% as the benefits from higher sales were partially offset by growth initiative investments.

Sales and boating figures decreased by 2% compared to last year's third quarter. An increase in bowling products was more than offset by the impact of a reduction in retail center count, as well as the lower United States equivalent retail center sales. For the nine months, US equivalent retail sales are up modestly.

Third quarter adjusted operating earnings decreased by about $2 million, as improved bowling products earnings were more than offset by lower sales and earnings in retail bowling, as well as investment in growth initiatives. During the quarter, our bowling organization substantially completed the divestiture of its European bowling center portfolio consisting of seven locations. The absence of these centers will be modestly beneficial to the segment's operating earnings going forward. This action is a reflection of the ongoing efforts by the bowling retail team to enhance our bowling center portfolio.

Now, I'll turn the call over to Bill who'll give us a closer look at our financials.

Let me start with a discussion on our debt outstanding, which at the end of the third quarter was $465 million, a reduction of 107 million versus year-end 2012. During the quarter, we retired $7 million of our 2023 and 2027 notes and incurred a very small amount of debt extinguishment losses on these retirements. While our debt reduction activities are largely completed, we may continue to opportunistically retire debt to a balance below our target of $450 million.

Net interest expense, which includes interest expense and interest income, was $8.3 million in the quarter, a decrease of $8 million versus the same period in 2012. The reduction was the result of lower debt balances as well as a favorable interest rate on our 2021 notes issued in the second quarter of this year. Our quarterly run rate of net interest expense is about $8.2 million. For the full-year, we expect net interest expense to be $43 million excluding extinguishment losses associated with debt retirement.

Foreign currency had a minimal impact on sales and a favorable impact on the operating earnings comparisons for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements including the impact of hedging activity. We anticipate that these trends will continue for the full-year comparisons.

Our tax provision, on an as adjusted basis, was $3.3 million compared to $6.9 million in the third 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 adjusted basis was 5.6% for the third quarter of 2013 versus 12.9% a year ago. Our current full-year estimated effective tax rate for 2013, on an as adjusted basis, is approximately 10% which is lower than the prior year and our previous estimate for 2013.

I would also like to remind you about the possible reversal of a significant portion of our tax valuation allowance reserves in the fourth quarter. This non-cash earnings benefit is excluded from our estimated 2013 tax rate, as adjusted. As we have previously discussed this possible change in treatment will raise our book tax rate in 2014 versus 2013. We will provide more specific guidance on our book and cash tax rate for 2014 at our Investor Day in a few weeks.

Turning to a review of our cash flow statement, cash provided by operating activities for continuing operations in the first nine months was $157.7 million, a solid improvement of $22.6 million versus the prior year. Seasonal changes in our primary working capital accounts resulted in a use of cash in the first 9 months and totaled, approximately, $129 million.

The biggest changes occurred in accounts and notes receivable which increased by $66 million and accrued expenses which decreased by $58 million. Given the seasonality of sales in our Marine businesses, we anticipate the liquidation of working capital during the fourth quarter with a corresponding benefit to free cash flow. Total free cash flow from continuing operations totaled $71.1 million versus $90.9 million in the prior year.

Capital spending in the first nine months increased $30 million versus the prior year to approximately $96 million, which included investments in capacity expansion and in new products in all businesses. Free cash flow in 2013 also included approximately $8 million in proceeds from the sale of property, plant and equipment in our Marine segments.

Our business units continue to remain focused on generating strong, free cash flow, which has enabled us to reach our debt reduction targets and will allow us to continue to fund future investments and growth. In summary, cash and marketable securities totaled $348 million at the end of the third quarter. The decline from year-end includes the net impact of debt reduction activities partially offset by continued strong free cash flow.

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 -- the restructuring charges to be in the $15 million to $17 million range in 2013. Charges reflect activities pertaining to the Boat segment plant consolidations initiated during the fourth quarter of 2012 and the first quarter of 2013, as well as previously mentioned divestiture us of our European bowling centers.

Our estimate for depreciation and amortization is approximately $85 million to $90 million. We expect our 2013 pension expense to be approximately $19 million, which is a decrease of $5 million from 2012. In 2013, the Company plans on making cash contributions to its defined benefit pension plan of approximately $50 million.

Our plan continues to reflect capital expenditures that approximate 4% of projected sales with a substantial portion directed at growth and profit enhancing projects. Our working-capital performance will primarily be a function of our revenue assumptions. Our current estimates for working-capital reflect use of cash for the full year in the range of $35 million to $45 billion. Despite higher investment 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. I will now turn the call back to Dusty for some concluding comments.

Let's wrap this up with me providing you with our outlook for the full year of 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 unchanged market conditions for fiberglass sterndrive inboard boats.

In our recreation businesses, positive health and wellness trends, combined with 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 businesses should further benefit from operating efficiencies.

We continue to target 4% growth rate in overall revenue in 2013. Our current four-year plan reflects a solid improvement in gross margin levels. 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 the 2012 levels.

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 factors is the effect of higher diluted shares outstanding.

As a result of our solid year-to-date performance and lower than anticipated tax rates, we are increasing our expectation for 2013 diluted earnings-per-share for continuing operations, as adjusted, to a range of $2.65 to $2.70 per diluted share. The midpoint of this range would represent a 28% growth rate over the $2.09 we earned in 2012.

I'll also note that yesterday we issued a release announcing that our board declared a quarterly dividend of $0.10 per share payable December 13, 2013. This reflection increase over the annual dividend of $0.05 per share we paid in 2012. Increasing the amount of dividend reflects the confidence we have in our business strategy and our demonstrating capabilities to execute against that strategy.

Our progress and accomplishments during the most challenging of global marine market conditions are a testimony to the strength of our brands, the soundness of our business plan and most importantly, the capabilities and resilience of our employees around the world.

Before we start taking your questions, I'd like to remind you of our 2013 Investor Day scheduled to occur on November 12, in New York City at the New York Stock Exchange. We plan to communicate -- to update the investment community on progress made since we communicated our three-year strategic plan in February 2012, but more importantly to provide a new three-year plan reflecting the period 2014 to 2016.

If you have any more questions regarding this event, please feel free to give Bruce a call. Now, I'll turn the call back to the operator so that we can take your questions.

(Operator Instructions) Your first call comes from the line of James Hardiman from Longbow Research.

Dusty, let's talk about this uneven recovery in the industry just a little bit. Obviously, from an overall industry perspective, we saw a nice acceleration in the third quarter, but we continue to talk about this fiberglass sterndrive/inboard being down. I feel like that does you guys a bit of a disservice in that the assumption is that the big boats still aren't selling and that the little boats are selling, when within that fiberglass segment, at least what we saw in July and August suggests that the cruisers and yachts are actually doing really well.

Do you sort of agree with that? I know some of this was colored by September, where we didn't get the Coast Guard data, but the segments where it seems like you guys are focusing on, seem like from an industry perspective, are doing a little better. Can you speak to that? I don't know if we'd do ourselves a disservice by slicing and dicing the numbers as much as we do, but talk a little bit about that divergence.

Sure. Well, first, glad to talk to you and thanks for being on the call. Here's the -- what I think is the real world and we need to just step back for a moment. Yes, the cruisers and sport yachts and yachts, on a percentage basis, are up really nicely. In Q3, cruisers were up 11% or 12% and sport yachts and yachts were up 17% and those percentages sound wonderful, but there's a 'but' in here and that's why we're not ready to declare, James, victory, if you will, and that the market has done a turn.

The third quarter was a pretty good quarter. We had great weather and normally there's a fair bit of volume, but unfortunately in this market, the cruiser market being up over 11% was 28 units and for sport yachts and yachts being up 17% that was 27 units. That contrasts with -- where we see aluminum fish up 15% there we're talking about 1,000 units. Pontoons up almost 20% and that's 1,500 units more. And in fiberglass outboard, which is up almost 19%, that's 1,400 units. If the trend continues, yes, we're going to be extremely pleased, but because of the small volume in the third quarter, James, we're just not ready to say that we think the turn has really happened.

I think the other thing we've all got to acknowledge is, I think the pause button was hit by a lot of businesses in view of the debacle in Washington. And the folks -- our customers who buy these larger boats, are strong business people and as we have kicked the can forward in Washington to the first quarter, I think we've all got to be realistic that until the events in Washington unfold and hopefully something real happens, the pause button has probably been hit, but we're not fast forwarding right now. And we're just going to need to wait for that to unfold early in 2014 for us to get a real view of whether this is real and how it's going to continue.

Makes a lot of sense. My second question, I thought probably the most important revelation you gave us was that global retail -- I think you said global retail unit growth was 11% in the quarter -- I guess, first question, is that the right number?

That's the right number.

That seems like a really good number in a quarter where in some key segments you were looking to bring down inventory levels. Talk about the makeup of that 11%. You talked about industry cruisers being up 28 and yachts being up 27. Did you get your fair share of that, and ultimately, would that number have been a little bit higher if you weren't bringing down inventories? I guess another way to ask that is; what do you think the dollar growth looked like at retail in the quarter?

If I may, let me go at it this way. They're -- in the fastest growing segments in this market, our brands and our folks are taking share really nicely. And that's in aluminum fish, pontoon and outboard fiberglass. In our outboard fiberglass that's just one brand, Whaler, but our Whaler team has done a great job at taking share and increasing dollars.

When we get to the sterndrive/inboard product, we are not gaining share right now and in fact, my judgment is, we're probably losing a little share, but we probably need to point out to everybody, this is according to plan, right now, and that's why we're taking down pipelines. And if we look at it in the following way, the story unfolds this way. There's a lot of small product where we've just taken models out. We don't make that good of money. A lot of wonderful brands and great customers in Mercury are moving into those categories. It's very competitive and we've made the decision we'll not continue in a big way, as we did in the past, continue to put models in the marketplace there.

In other places, and let's give that a size range, that's, say under 23 feet. Then, as we get up to, say, 40 feet or so, again, it's a part of our desire to reduce the complexity in our operations. We have also made the decision during this particular timeframe to take some models out of the lineup. We carefully chose those models. We probably didn't have the margins that the models we kept have. And we wanted to get our business really positioned for what we believe will ultimately be a time of growth.

In the bigger boats, let's say, 40 feet and above, a couple of things are going on. I would say, sitting here today, that our model lineup is not as fresh as we would like and we've acknowledged that, but we're also making enormous investments in boats in that 40 foot to 65 foot timeframe. And they'll begin to come out. I think we've got a great one down at the Fort Lauderdale Boat Show and then we've got a whole string of boats, then, coming out in the remainder of 2014 and in the first part of 2015 in that category. As we knew we had those products come to the market, again, we made the decision; let's lower the pipeline, don't produce the boats, don't put them out there and get this market -- get our dealers and ourselves positioned for doing really well in those larger boats.

This is all, for us, according to plan. We're very relaxed about where it is. We're investing a ton of money, and I will make one under comment, James, it's not directly related to your question. If you notice, in every business segment, we're acknowledging that we are reducing operating earnings from what would normally be occurring because we're making significant investments in each of our businesses. We made the decision going into 2013 in this Company, that we were going to invest and grow in a significant way in and you're seeing it in our significantly increased capital expenditures and in our growing operating expenses led by R&D. I think we described in the quarter that our operating expenses are up 6%, but R&D's up 8%. And then of remainder of our operating expense that are up, other than R&D, it is in order to get ourselves bulked up to support sales, marketing and activities that will drive the growth as we get all of the new product ready. That's what we're about right now.

You hit the nail on the head in your question and it was a great question. We're -- we know what we're doing, this -- we're playing this out. Lord knows if we're going to be perfect in our plan, but we're pretty comfortable with our plan. And it's evolving the way we wanted it to.

Excellent, keep it up guys.

Your next question comes from the line of Greg Badishkanian from Citigroup.

Nice job in the quarter. I just wanted to follow up on the last answer you gave which is the significant investment. When would you expect to see the benefits of that hitting the P&L?

I'm going to try to encourage attendance at our November 12 meeting, Greg. Come to the November 12 meeting and you get -- (laughter) that's what I'm told.

Good way to build attendance there. This might be another question you push off as well, but just in terms of getting a handle on the relationship between retail and wholesale, in 2014, how should we be thinking about that relationship?

I think for everything but our bigger boats, we ought to easily fall back into wholesale equals retail. I think they're going to be in some bigger boat categories as we continue to roll out boats. New boats, Greg. We will not be putting some of the older models into the pipeline. I suspect as we go through 2014 it won't be nearly as equal, let's say, 50 feet and above, as you'll see it in other categories and, again, that's all per our plan.

Just based on the latest discussions you've had with your dealer customers, how has the retail environment been developing over the last month or so, which maybe wasn't reflected in the September stat surveys?

They tend to feel good. In spite of that, maybe until the last week or so, was driven by nice weather all around the nation. I actually, Greg, have forgotten where you live, but it's cold here in Chicago.

It is cold in New York, too.

I'm still boating on the weekends down in Kentucky, but I'm wearing a jacket.

Thanks a lot.

Thank you, Greg.

Your next question comes from the line of Mike Swartz from SunTrust.

I just wanted to touch on Europe, and I know we don't talk about it a lot, Europe being up kind of mid-teens. Could you give us some color around what's going on there? I know it's been week over the past several years in particular, but the boat business looked like it was up nicely and fitness has been growing there over the past several quarters, maybe just a little more granularity about what you're seeing there, if we're starting to see a turn?

Why don't we do it, if we could, just by segment. First, bowling and billiards wouldn't look as good because we sold the centers in Europe. Fitness, as we said during our prepared remarks, was really up nicely, I think 25% in the quarter. As we said, it's a combination of three things; new products, new distribution, and then we're seeing some growth in that market in the fitness industry and I think we're getting more than our fair share there.

In the marine business, it's probably more there that the market is slightly improving, rather than declining. Last year at this time we were still suffering some pretty tough declines. I won't say that the market is taking off in marine, but it has settled out, maybe some slight improvement, and again, I think we're getting our fair share. There are probably some dealers who were just too low. Some in P&A, and things like that, who needed it to get themselves stocked up in order to take care of demand.

In marine, I don't see any remarkable recovery, but, boy we have stopped the decline over there. If I do a little sub-segment, we have some great European boat models that we include in our boat numbers. We've had great new product and we had a particular brand over there in the Nordics, which has really come back strong through new distribution as well as new product. The other brand is doing it through new product. And we've seen nice increases in retail and wholesale there.

In terms of Europe, the marine market showing a little bit of stabilization, how does that play into how you think about the global marine industry going into 2014? In terms of -- in the past you've said your outlook was, base case of flat to up 5 growth, how does this change that, if it does?

Mike, what I'd like to do is wait until we get to our November conference and we'll talk about what we're thinking about markets look like after 2013. And in our earnings call in January, where we talk about what we think about 2014, I can give you a better look. I'm a little reluctant right now to get out on a limb about what we think the markets look like in 2014.

All right. Fair enough.

Your next question comes from the line of Tim Conder, Wells Fargo Securities.

Thank you. Dusty, congrats to you and the team, again, for ongoing great execution there.

Tim, thank you very much. I really appreciate that.

Well, sir, a couple of things here. Brazil, you called that out specifically as benefiting the growth rates and it's been a focus. You've got the assembly operation up and running there last year. Was that -- the driver, the benefit in the quarter -- was that more of the initial pipeline fills into the dealers, or how you've seen the sell-through? And then do you see here in the very near future, where do you see that normalizing and getting up to the plane, so to speak, on the water here with the run rate?

Tim, when we spoke about Brazil, we were really talking about fourth quarter and beyond. We didn't really see any benefit in this quarter from Brazil. Any significant benefit, enough to count. What's happening down in Brazil as we get to the fourth quarter, our plant's up and running; it's running nicely. We've gotten distribution -- we've gotten product into distribution now and we have great distribution. They've got some experience with us on quality of product and how to sell, et cetera. We just completed a big boat show down there and we did really well. We met all of our targets. That's a market where as you go in brand new, you start growing with the new plant, new distribution. It just takes time.

I'm, again, Tim, reluctant to tell you what run rates are going to be going forward, but I think as we -- we're just starting the season down there, I think by the time we get to January here, which will be mid-season there, we'll have a pretty good view on how that market is performing, but it's a market we're very upbeat about.

You'd talked here over the last year or so, now obviously, you're thankfully through all the challenges of the financial crisis. Yet, things are still ramping up slowly here domestically, from an overall economy standpoint. But looking at areas that you hadn't focused on, one's Brazil, obviously, we just discussed that, but maybe other geographic white spaces, can you briefly, again, Dusty, remind us there?

Would there be any product white spaces or segments of the marine market that you might look at? You're peeling off some of the areas where, obviously, volumes aren't that great and you don't anticipate them coming back that quickly, but maybe other areas you might look at?

Sure. Let's do geographic first. Then we probably need to focus on business segments again. We called out -- we're having great growth in our fitness business outside the United States. And as we look at continuing growth areas in those that could stay strong, we would say Latin America and Asia-Pacific, will be nice focuses for us in our fitness business. As we look at the engine business, we think, Tim, that probably the two biggest geographic growth areas for us will be P&A outside the United States and commercial markets for our outboard engines. That would be -- as we think of those commercial markets, a strong focus there in Asia-Pacific region.

As we look at product white spaces, I'm going to be careful here for competitive reasons, but I can call out one. We just introduced, our Sea Ray guys did, a new 35-foot bowrider. A really good segment has been those really large bowriders, twin-engine. Boats that would normally have been only cruiser type boats. And that's a place we've just not participated. We had a 30-footer, but we didn't have anything above 30-foot, and our 30-footers done really, really well. This 35-footer, as an example, we're really excited about.

And as we walk through both our engine and boat product plan over the next 5 to 10 years, and our guys do a very good job by having very long product plans, and we know where we're going to be investing and what we want to go do. We're pretty excited about a lot of the product white spaces. And perhaps, in our November meeting we'll try to raise the curtain just enough so that you see feet under there and know that it's real, but we'll try not to show you what they look like.

Your next question comes from the line of Jimmy Baker from B. Riley & Company.

Most of my questions have actually been answered, but I just have a couple follow-ups. First, sticking on the growth investments, I think you previously expected the Q3 operating expenses would be up about 10% year-over-year and it looks like it came in just under up 6%. I'm just trying to understand if any of those planned growth investments were deferred, or maybe you could help by providing some context on how expense growth will fare relative to sales growth as we head into 2014?

Great question. No, we haven't deferred anything. It's still pedal-to-the-metal and it's a timing issue. We just couldn't quite get everything done we had hoped to in the third quarter. But as we're looking ahead to the fourth quarter, my suspicion is we'll do a little catch-up versus what we did in the fourth quarter as well as continue with the spending we planned in the fourth quarter, Jimmy.

Maybe, I wasn't clear. I was interested on how that would fare as we moved into 2014 and maybe it'd be helpful if you can share an operating leverage target, or something to frame how we should think about expenses trending with sales into 2014?

Again, Jimmy, I'm going to keep encouraging attendance at our November meeting. We'll give you a good view of 2014 and beyond. And that leverage question is, we know, an important question for everyone. We'll try to do as good a job as we know how in laying that out so that people can see it and have a good feel.

I'll look forward to that. I think it was -- Dusty, in your response to James' first question on boat categories was really helpful, but I wanted to attack that from Mercury's angle. At the retail level there now seems to be a fairly significant divergence taking place where the inboard market is improving, but sterndrives continue to trend negative. Can you talk about how you see that impacting Mercury's business given the dominance in sterndrives? They have a very small presence in inboards. And as you pointed out, the difference in market sizes makes sterndrives so significant.

Yes. First, what we think is happening to some extent is a lot of former sterndrive customers are becoming outboard customers. We have great market strength, especially in freshwater outboard, and we've turned our outboard business around though a bunch of great work from our Mercury team and it's a pretty profitable business right now.

Yes, we would like the sterndrive market to come back and start growing, but it's not right now. So we're benefiting fine in the outboard business, especially, Jimmy, when it's freshwater and that's what most of this is. That sterndrive conversion and the people are going to outboard, is primarily freshwater. Our market share in freshwater is significantly higher than our overall market share is because we don't do as well in salt water as we do in freshwater.

From Mercury's perspective, we're doing just fine. We would like there to be more sterndrive customers. We're coming out with our new sterndrive engine next year. It is going to have lots of features that no consumer's ever seen on a sterndrive engine before. We think that's important. As we move away from the GM blocks and we own this whole franchise, that we bring something to the market others haven't seen. We're confident that will begin to stop the erosion in the sterndrive market. So that's how we're thinking about it.

That's very helpful.

The next question comes from the line of Craig Kennison from Robert W. Baird.

I wanted to ask about some of your new products like the Element. It does appear that you're -- there's an opportunity for you to enter both segments at lower prices and maybe generate more volume. I'm interested in the consumer reaction to that, if you will, lower-price strategy?

The Element is a tremendous success for us. We're actually making and selling a fair bit more than we thought we would. A question for us is - that a boat tight with the price target versus the competition that we would want to continue to grow with?

If we look back now to Jimmy's last question, which was a good question, the Element is an outboard product versus a sterndrive product. But, yes, we think there's room in the market for well-priced product and we think the Bayliner brand is a good place to bring that.

That's helpful. Dusty, occasionally, you'll comment on used boat prices at -- in both aluminum categories and some of the fiberglass categories.

Well, look, the used boat market, in my judgment, right now, continues to be the biggest competitor any boat brand in America has today. The used boat market is continuing to grow nicely. It's outgrowing new boat sales. And I get it.

Our judgment, again, is that over time, the used boat market will begin to convert to new boats and it's important that all of us to make new boats understand the price disparity between new and used and we've got to work hard to close that disparity. Because our judgment is that the used buyer really still wants to boat. They're boating. They want a different boat. They just made the decision to buy used right now. The number of great used product will, just by the passage of time, continue to decline. But, again, those of us who are boat builders really need to understand and make it one of our priorities that we reduce the cost of new boats.

Your next question comes from the line of Gerrick Johnson from BMO Capital Markets.

Any expense in the quarter associated with the cancellation of the jet boat project? And are there any thoughts of restarting that effort later on down the road? And, finally, were there any start-up costs associated with that that we won't be anniversarying next year?

Yes, Gerrick, yes, this is Bill Metzger. There were some costs recorded associated with exiting or deciding to terminate that program in Q3 that will not occur in 2014. And at this point in time there is no plan to get that back in that category.

Are those expenses flowing through the P&L? Are they in the restructuring?

No, no, they're flowing through the P&L, but not treated as restructuring.

Any idea what order magnitude those costs were?

I prefer not to comment.

You know, Gerrick, I suspect that'll be in our 10-Q.

The next question comes from the line of Joe Yurman from 1221 Capital Management.

Already had my question about the used boats answered and addressed. As a long-time holder, I completely appreciate the discipline and the prudence at which you're setting us up to compete most effectively in the boat business and the effect that's having on the dealer channel is going to be positive.

With that as a backdrop, with the investments that you've made, the investments you're currently making, has our ability to chase that emerging big boat demand, has that improved? And maybe something to get to at the meeting in a couple of weeks, but I want to get a sense -- so we're not chasing this first, [I'll respond to life] here in the category, now -- but have we improved our ability to do so?

We are improving our building. We're not there yet and that's all the investment that we're making that we keep talking about. Our view is that we're going to be in a great position in this market with the product we have, and the footprint that we've developed, and the ability to (technical difficulty).

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

As usual, we first thank everybody for being on the call. Secondly, for the great questions. We have a lot of really smart analysts who really understand our business and we appreciate the questions. I'm doing my best to pump up attendance at our November 12 meeting, the more the merrier because we're pretty proud of what our plan's going to be going forward and we look forward to sharing it with everyone. Thank you very much.