賓士域 (BC) 2014 Q2 法說會逐字稿

Good morning and welcome to Brunswick Corporation 2014 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 objection you may disconnect at this time.

I would now like to introduce Bruce Byots, Vice President Corporate and Investor Relations. Please proceed.

Good morning and thank you for joining us. On the call 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.

With the details on factors to consider, please refer to our recent SEC filings and today's press release. All these documents are available on our website at Brunswick.com.

During our presentation 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 results.

I would like to remind you that these figures in the presentation reflect continuing operations only unless otherwise noted. On July 17th, the Company announced the signing of an agreement to sell its retail bowling business and its intention to sell its bowling products business.

Beginning with the third quarter of 2014, Brunswick will report the results of its bowling retail and business, which was previously reported in the bowling and billiard segment, as discontinued operations. The historical and future results of the billiards business will be reflected in the Company's fitness segment.

The Company's second-quarter and year-to-date financial statements include the bowling business results as continuing operations. The 2014 second-half and full-year outlook statement reflect the bowling businesses as discontinued operations. I would like to turn the call over to Dusty.

Thank you, Bruce, and good morning, everyone. I'll start with an overview of our second-quarter results. Revenue in the quarter increased 4%.

We experienced growth in outboard boats and engines, parts and accessories, fitness equipment, and bowling products, which was partially offset by revenue declines in fiberglass sterndrive boats and engines, as well as retail bowling. Bill will provide more color on the segments' performance in his remarks.

Our gross margin increased by 30 basis points compared to the prior year. Operating expenses increased by 7% as we continued to invest in numerous strategic initiatives. Adjusted operating earnings increased by 3% verses the prior year.

Net interest expense was reduced by $4.1 million reflecting our prior-year debt reduction activities, which were enabled by our strong free cash flow performance. Adjusted pretax earnings increased by 8%, while diluted EPS as adjusted decreased by $0.28 to $0.95, reflecting a higher 2014 effective tax rate.

Our fitness segment reported strong top-line growth of 6% in the quarter. This is the sixth consecutive quarter of solid revenue growth for this business.

Sales in our combined range segments increased by 4%. From a geographic perspective, consolidated US sales increased by 5%. Sales to Europe also increased by 5% with a favorable impact from foreign currency accounting for a portion of that growth.

Rest of world sales declined by 2% verses the prior year period, due to weakness in marine markets and changes in foreign currency, offset by gains in fitness. In summary, sales outside the US increased by 1%.

In the first half, the fitness segment reported strong top-line improvement of 6%. While sales in our combined marine segments were flat due to, as you will recall, the difficult first quarter for the engine and boat businesses.

From a geographic perspective, consolidated US sales increased by 2%. Sales to Europe increased by 4%. A favorable impact from foreign currency accounted for more than half of the increase.

Rest of world sales declined by 4% verses the prior year due to weaknesses in marine markets and changes in foreign currency, offset by gains in fitness. In summary, sales outside the US declined by 1% for the first half.

Adjusted operating earnings were $144.4 million for the quarter, an increase of $3.7 million compared to 2013. Operating margins, excluding charges, decreased by 10 basis points to 12.7%. The decrease in our operating margin includes the impact of the expansion in gross margin, offset by the increase in operating expenses of 7% which was driven by increased investment spending.

We're forecasting that operating expenses in the third quarter will increase at a comparable rate as we continue to fund very strategic initiatives. A portion of the operating expenses we originally planned for the second quarter has shifted into the third quarter.

For the first six months, adjusted operating earnings were $239.1 million, an increase of $2.9 million compared to 2013. Our operating margin, excluding charges, of 11.3% is comparable to the prior year.

As a result of the modest improvement in our adjusted operating earnings performance, combined with lower net interest expense and higher other income, adjusted pretax earnings in the second quarter increased by approximately $10 million, or 8%. For the six months adjusted pretax earnings increased by approximately $15 million, or 7%.

Diluted EPS from continuing operations as adjusted for the quarter equals $0.95 per share. This compares to net earnings as adjusted of $1.23 per share in the prior year. As a reminder, our reported EPS for 2014 reflects a significant year-over-year increase in our effective tax rate.

Diluted EPS from continuing operations as adjusted for the first half equaled $1.56 per share. This compares to net earnings as adjusted of $1.99 per share in the prior year.

Before I turn the call over to Bill, I want to provide some perspectives on the global marine market. The US market is unfolding consistent with our annual expectations, and continues to benefit from solid growth in outboard boat and engine products, as well as in parts and accessories.

Year to date, the US power boat industry is up approximately 3%. On a rolling 12-month basis, the market has improved by more than 6%. In the fiberglass sterndrive inboard boat category, which also affects sterndrive inboard engine production, modest year-to-date unit growth in boats greater than 30 feet is being more than offset by declines in boats under 30 feet.

International markets, however, have experienced declines in retail sales, specifically in Canada and South America. In Canada, an usually cold and wet spring led to a late start to the boating season.

And currency variability is causing some consumers to delay or defer purchases. In South America, weaker than expected economic conditions is the primary factor causing lower market demand in Brazil, Argentina, Venezuela. Consequently, our first-half global marine retail growth is below our annual expectation.

Now, I will turn the call over to Bill for a closer look at our segment results and financials.

Thanks, Dusty. I'll start with the marine engine segment where sales were up 3% in the quarter. From a geographic perspective, sales to the US were up 3%, reflecting increases in outboard engines and parts and accessories, which were partially offset by the impact of lower sterndrive inboard engine revenues.

Sales to Mercury's European customers increased 5%, as growth in parts and accessories was partially offset by lower outboard and sterndrive inboard engine revenues. Rest of the world sales increased slightly, as gains in outboard engines exceeded reductions in parts and accessories and in sterndrive inboard engine revenues.

On a product category basis, the outboard engine business reported solid overall sales growth in the second quarter of 2014. Our outlook for the outboard engine business continues to reflect favorable retail demand in most markets in boat categories.

Sterndrive engine sales continue to be affected by unfavorable global retail demand trends. Diesel engine sales were down modestly in the quarter, but are still up year to date.

Mercury's parts and accessories businesses delivered solid sales growth during the quarter, with gains in both the US and Europe partially offset by declines in rest of the world. Revenue benefited from new product launches and market share gains. We again reported record sales in the second quarter at Land 'N' Sea and Attwood.

Mercury's operating earnings increased by 3% compared to last year's second quarter. Operating margins were at 18.8%, 10 basis points lower than the prior-year quarter.

Improvement in operating earnings included the benefit from higher sales, as well as the impact of the absence of favorable insurance settlements in the second quarter of 2013, and investments in growth initiatives.

In our boat segment, second-quarter revenues increased by 4%. In the US, which comprises about two-thirds of the segment, sales increased 7%. This included continued growth in sales of outboard boats, along with modest reductions in fiberglass sterndrive inboard boats.

In the quarter, European sales increased by approximately $8 million, or 27%, verses the prior year. This performance resulted from the introduction of new, larger, higher priced products by our European outboard boat brands. Rest of the world sales decreased by 9%, which reflected the weaker demand in Canada and South America referred to by Dusty earlier in the call.

Brunswick's global retail and wholesale unit shipments both decreased by 2% in the quarter. This compares to the boat group dollar sales increase of 4%. As the segment benefited from a favorable shift in mix across most of its outboard boat lines, resulting a higher average selling price.

Regarding our pipelines, dealers ended the quarter with 34 weeks of boats on hand, measured on a trailing 12-month retail basis, which is two weeks higher than the prior-year level. Pipelines for aluminum and fiberglass outboard products are up compared to last year, particularly in Canada, while fiberglass sterndrive inboard pipelines are down verses the prior year.

Our plan assumes that the wholesale unit growth rate for the full year will be consistent with our retail unit growth rate. Our current pipeline levels are appropriate given our annual growth expectations in the various boat categories, and we continue to be comfortable with these overall levels.

The boat segment second-quarter adjusted operating earnings improved by $3.2 million, or 19%, when compared to the prior year. This improvement resulted from higher sales as well as gross margin, which included benefits from cost reduction actions and improved net operating efficiencies.

Now, let's turn our attention to the Company's two recreational segments. Sales at Life Fitness increased by 6%, resulting from strong growth in the US to health clubs, combined with modest net sales growth in international markets.

Segment operating earnings in the quarter decreased by approximately $2 million, as the impact from higher sales was more than offset by slightly lower gross margin and continued investment, increases in investment in growth initiatives.

Sales for our bowling and billiard segment increased by 2%. This reflects gains in bowling products, as well as in equivalent retail center sales, including increases at pilot centers. This growth was partially offset by a reduced retail center count, particularly in Europe, along with a decrease in billiard sales.

Operating earnings as adjusted increased slightly in the quarter. Foreign currency had a slight net unfavorable impact on total consolidated sales with rest of the world sales affected to the greatest degree. Foreign currency had a minimal impact on operating earnings comparisons for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements including the impact of hedging activity.

For the full year 2014 verses 2013 comparisons, we currently estimate that exchange rates will have a slight net unfavorable impact on sales and a minimal impact on operating earnings. This assumes that rates remain consistent with current levels for the remainder of the year.

Now, I would like to provide some brief comments on our tax provision. Our effective book tax rate on a GAAP and as-adjusted basis was 34%. Our plan does not contemplate a change to the as-adjusted rate for the remainder of the year.

Our estimated effective cash tax rate continues to reflect a low double-digit percent level. I would also like to note that our effective book tax rates for 2014 exclude any potential benefit from an extension of the US R&D tax credit.

Turning to our review of our year-to-date cash flow statement, cash provided by operating activities was $77 million, a decrease of $30 million verses the prior year. Seasonal changes in our primary working capital accounts totaled approximately $172 million. The biggest changes occurred in accounts and notes receivable, which increased by $98 million.

Inventory increased by $62 million. Our crude expenses decreased by $50 million, and accounts payable increased by $40 million.

To date, working capital movements have been unfavorable verses the prior year due to the timing of receivable collections and changes in inventory movements due mostly to new product introductions. For the remainder of the year, we anticipate that working capital changes will be favorable verses 2013, and end the full year with a net usage of $40 million to $60 million.

Total free cash flow amounted to $27 million verses approximately $54 million in the prior year, a difference of about $27 million. Capital spending in the quarter was approximately $53 million, which included investments in new products in our marine and fitness businesses, as well as capacity expansion projects.

Our business units continue to remain focused on generating strong free cash flow which will allow us to continue to fund future investments and growth. Cash and marketable securities totaled $335 million at the end of the quarter. Decline from year end 2013 mainly reflects the Whale acquisition made in the second quarter and cash used for dividend payments, partially offset by free cash flow.

Let me conclude with some comments on certain items that will impact our P&L and cash flow for 2014. As a reminder, all of our outlook statements have been adjusted to reflect the bowling businesses, which will be reported as discontinued operations starting in the third quarter.

Our estimate for depreciation and amortization is approximately $80 million to $85 million. We expect our 2014 pension expense to be approximately $15 million, which is a decrease of $4 million from 2013. Net interest expense is expected to be in the range of $28 million to $30 million.

We anticipate our restructuring charges will be between $4 million and $5 million in 2014. And we expect our diluted shares outstanding to be approximately 95 million to 96 million.

On the cash flow side, the Company plans to make cash contributions to its qualified defined benefit pension plans of approximately $75 million to $80 million in 2014. This increase from prior guidance includes an estimated amount which will be used to fund planned lump sum payouts to term vested participants. Our restructuring charge estimate does not reflect any pension related settlement charges associated with this payout plan.

Our plan reflects capital expenditures of approximately $140 million, with a substantial portion directed at growth and profit enhancing projects, including meeting capacity expansion requirements at Life Fitness. Despite higher investment spending levels and a modest usage of cash for working capital, we plan to generate strong free cash flow for the full year in the range of $100 million to $135 million.

This represents a decrease from our previous guidance due to adjusting for the bowling business cash flow and the incremental pension funding. I will now turn the call back to Dusty to continue our outlook comments.

Thanks, Bill. Our operating plans and assumptions for the full year remain fairly consistent with those we communicated on our first-quarter call, after we adjust for the bowling divestitures.

We continue to target 2014 to be another year of strong earnings growth with outstanding cash flow generation. Our plan reflects 5% to 6% sales growth, which is supported by our increased investment in new products and by the continuation of growth demonstrated in the US in the second quarter of 2014, and growth in certain international markets.

We continue to anticipate a solid improvement in gross margin levels. As a result of ongoing growth investments, full-year operating expenses, adjusted for the divestitures, will increase, but as a percentage of sales are expected to be lower than 2013 levels. Approximately in the range of 17.6% to 17.7%.

As a result, our pretax earnings should continue to demonstrate strong growth of 24% to 30%. On our last earnings call, we established our 2014 EPS as adjusted guidance of $2.40 to $2.55. With the announced divestitures of our bowling business and the corresponding discontinued operations accounting, our guidance was effectively reduced by $0.20 to $2.20 to $2.35. Today we're changing our guidance to a range of $2.25 to $2.35.

Regarding our outlook for the second half, we're anticipating strong top-line growth in our marine segment as well as in our fitness segment. On a consolidated basis, we are planning for approximately 10% to 12% sales grow in the second half.

Some of the key drivers of the second half growth include new products being introduced at Mercury, which I will elaborate more on the next slide. The boat group has several new products being introduced or that are reaching full production rates, including Sea Ray 650, 470, 510, and 350 SLX.

Bayliner's new Element XL will also contribute to second half growth. And Life Fitness will also have a strong line up of new products hitting the market place in the third and fourth quarters, including its Insignia Strength Power Mill, Synergy Blue Sky, and Flex Strider equipment.

Additionally, we expect the improvement in gross margin this second half to be slightly higher than the first half. And our planned second half operating expenses as a percent of sales will be lower than prior year, with the third quarter's year-over-year growth rate comparable to the second quarter's rate. As a result, our plan continues to reflect strong improvement in adjusted pretax earnings.

Over the past several quarters, we've highlighted some of the new products that we have been introducing to the marketplace. For this call, I would like to focus a minute on some of Mercury's new product offerings. Mercury Marine, which is celebrating 75th anniversary and was named Wisconsin's Manufacturer of the Year earlier this year, has once again launched a strong line up of new innovative products.

Mercury recently launched its new 75/90/115 horsepower 4-stroke engines. These new engines followed the success of the 115 horsepower, which was introduced over 18 months ago. Reviews of these engines have been positive.

Also, the White Verado has been a huge hit with OEMs and consumers. The continued success of Verado engines, combined with the new 4-stroke platform, as well as the progress being made with its joystick docking technology, has contributed to the growth currently being achieved in freshwater, saltwater, and repower segments.

As we look at the saltwater market, we believe these product successes will enable Mercury to gain share in this sector over the next three years from high teens percentage to a target in the mid-20%s. Mercury's new high horsepower purpose built V6 250-horsepower sterndrive engine is also scheduled to start production in the second half of this year.

The full-year financial targets in our three operating segments remain largely unchanged. Our overall plan reflects continued revenue and operating earnings growth in our marine engine segment.

Specifically, we are planning for our full-year revenue growth in the mid-single digit range, with a solid improvement in operating margins. We will continue to make significant investments at Mercury, such as the ones I just discussed.

As we look at our boat segment, our plan continues to assume the successful execution of our large fiberglass boat strategy, which will help to accelerate growth in the second half of the year as an increasing number of new products are shipped into the market. As a result, we'll start to see the benefit from a more favorable sales mix and higher average sale prices.

Continued solid performance in outboard boats and contributions from our Brazil operations should also benefit the segment's growth in the back half. Year-over-year growth anticipates new product introductions, improved market share gains, and global industry growth. As a result, we are targeting 2014 annual revenue growth in the high-single digit range with a solid improvement in operating earnings.

Further, we anticipate significant year-over-year operating earnings improvement in the second half. This segment, however, is expected to have a modest seasonal operating loss in both the third and the fourth quarter.

In our Life Fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. Our 2014 and three year plans are both targeting revenue growth in mid-single to high-single digit range.

We'll continue to make significant investments at Life Fitness, aggressively leveraging innovation in order to achieve competitive differentiation in its products and services, which should continue to enable market share growth and create business opportunities beyond our core business model. And although Life Fitness' margins could decline slightly in 2014 as a result of these investments, our plan continues to reflect very healthy margins in this business.

As we look at the third quarter, we expect a lower operating margin compared to the third quarter of 2013, as benefits from sales growth are more than offset by investment spending increases related to new products and business opportunities. And with that, that concludes the prepared portion of our remarks, and at this time, operator, we'll be happy to take questions.

(Operator Instructions)

Your first question comes from the line of James Hardiman with Longbow Research.

Hello, good morning. Thanks for taking my call. Maybe just start, maybe try to bridge the gap between the minus 2% retail for boats worldwide in the quarter and the I think it was plus 4% reported wholesale.

I guess first question, sounds like international was a real problem child here. Do you have the numbers that you could share in terms of what domestic verses international looked like at retail?

And then, I think in your prepared comments you made the point that you know the bigger piece of that delta is pricing as opposed to inventory fill. Can you just confirm that, and how do we think about that delta as we move forward in the back half of the year?

What has been the problem in the first half is fundamentally Canada and South America. We've done nicely in the US. We did nicely in Europe.

And the big issue there, the big help there in our boat business has been some great new models, which tend to be larger and have a higher average selling price. Canada retail has been down fairly dramatically. Again, it was driven by very bad weather.

And what we tend to notice in Canada, if there is any variation in exchange rate, it sort of freezes the market a bit and then things begin to get back to normal. But we're getting late in the year. And I anticipate that Canada may have a hard time getting back to what we had hoped it would.

South America appears to be all driven by economics in that region and, frankly, that we know that when we do business with South America, that's a part of doing business down there. And you just got to be flexible and roll with the economy.

And I think our guys are all doing a great job there. I would point out that we are up fairly significantly in the fitness business down there and I just need to give a shout out to our business team there.

As we look to the second half, we will have improvement in units and even higher improvement in dollars. And again, this is driven generally across our fiberglass businesses with bigger models, with higher average selling prices, which will then pull up the average selling price for all the boats and helps revenue.

The biggest issue we have, frankly, around our boat business as we look at the second half, in my judgment is not demand, it's our ability to get all of our new product into the field. We have significant ramp ups to do in all of our plants that produce fiberglass products, and that includes Sea Ray, it includes Bayliner, and it includes Boston Whaler.

So this has now gone from in my judgment a market facing issue to an internal operational production issue, and we got a lot of confidence in our operating teams in these businesses and that's why we feel so strongly about the big second half growth. It was a bit rambling. Does that get you there?

That helps quite a bit. I guess to the last point, the ability to get all the new products into the field, I think Marine Max, again, you guys are in the enviable position to follow up your biggest customer. But they talked about maybe some of the Sea Ray products getting out a little bit slowly.

Was that just maybe a lack of communication? Or verses how you were thinking about things, of some of these new products, taking a little bit longer to get out there?

Probably both, and probably more the former than the latter. And we are going to be careful getting this new product into the marketplace, especially with the big Sea Ray product, which I think sounds like referenced on the Marine Max call, I didn't get to listen to it, James.

We waited awhile to get the great big new products at Sea Ray into the marketplace. We knew that we were going to be losing share in these bigger boats as we went through a very careful planning process and development process.

Now that we've got the product, we need to make sure when we build it and get it into the field, that it's really good product of high quality with no issues. So that it's a part of the really strong, as we look from future years of this brand, that this is one of the big foundations for future growth for the brand. If we ever err, it will be on slower making sure it is right rather than pushing out trying to get revenue.

Great. And then just last clarification question here. I think you said in the prepared remarks that your tax rate does not include the extension of R&D tax credit.

How should we think about what the tax expense is going to be if that does get reinstated? I think Polaris, for example, a couple days ago is assuming we don't get anything until the fourth quarter. And then it's retroactive then and it's meaningfully helpful to their numbers as a result.

Any way to quantify what it means to your business if that does get reinstated? Thanks.

It's 1 point or a little bit higher than 1 point. But right in that 1 point range, James. So the effective tax rate would go down by 1 point.

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

Great, thanks. In terms of the promotional environment on the boat side, how has that been progressing since the beginning of the year? With maybe boat sales not being as robust as maybe we would have thought, or basically in line with your expectations, but it's not extremely robust. So how have they been responding?

Our discounting has been right in line with our forecast and budget. I would say that as we've been helping our dealers get ready for all the new product, we have been helping them get some product off the showroom floors so that they'll be ready for all the new product we're introducing.

But the market is in general behaving very well, and as I say, we did up discounting a bit for some older product to make sure that the pipeline was clean. As we look at our pipeline in the field and we look at boats 0 to 100, 360 days, 18 months, over 2 years, et cetera, all of our statistics are down, that is, favorable, to what we have been in the past. So we are really getting our pipeline very clean.

Good. And then just to clarify again the guidance. You revised the lower end down $0.15, but there is a $0.20 impact, the difference, the upside in the $0.05 of the lower end of the range. Can you give us a little bit more color on that?

Why we raised the bottom end of the guidance?

Yes.

Bruce made me. (laughter) No, it's because as we progress through the year --

Yes.

-- and we're getting a better look at the marketplace, our margin performance, how the market's going to accept our new product, we're quite comfortable that we ought to narrow the range.

Very good. Thank you very much.

You're welcome.

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

Hey, good morning, guys.

Good morning.

I just wanted to touch on some of your commentary, and Marine Max had echoed this, with regards to the over 30-foot fiberglass inboard market, and some of the strengths you are seeing there verses the dichotomy with the lower or under 30-foot product. I mean, taking a step back, what's really driving the difference there?

Is it new product? Or is it something about the way the market or the consumer is coming back?

It's quite interesting. The under 30 feet with an outboard on it is all doing well. Under 30 feet with sterndrive on it continues to be a tough place to be. And that's what I think all the statistics show, Mike.

The over 30 feet is driven by, in my judgment, first, a lot of great new product. Our 350 SLX, let's do sort of the 30 to 40 feet, we have been gaining lots of share there and the market is up there in our view over 5%.

And that includes ourselves, and frankly some other builders, doing some great job of putting these large sterndrive runabouts into the market. And saltwater fish with outboard, which is of course fiberglass, continues to do very well and a lot of folks are putting a lot of great product in the market in that category.

Then when we move above 40 feet, as you look at the numbers, bigger stuff is doing pretty good. In the 40 range, it can still be a bit of a tough place for everybody to play. We have had the view for a long time that above 40 was going to be a good place to be and that's why we've spent so much time getting products ready to go into that market. And my judgment is we'll be rewarded for that.

Great. And then just shifting over to some of your commentary around timing of investments. How should we look at that where there is just some things that you couldn't fit into the quarter, or I guess just general commentary?

Yes. As folks out in who run our businesses gauge what they can get done within a particular quarter, our goal always is to really get it done right. Don't just go spend the money because we put it in the budget, et cetera.

And what you see with our operating unit heads many times is as they're working their way through a quarter, the sun doesn't shine 365 days a year as they're working on their project. I won't say they'll hit a snag, but they'll hit a point in which they want to think more about it, decide what they do next, and they don't just continue to throw money at it.

We are always encouraged when our operating units come in and say, I'm still going to spend the money, I still believe in the project, I believe the investment needs to be made, I believe it will fuel future growth, but I just wasn't quite ready to pull the trigger in this quarter. I'm going to do it next quarter.

We stay very relaxed about those things. And in fact, congratulate our operating guys for coming in and having that discussion.

Great. Thanks, Dusty.

You're welcome.

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

Thank you. Dusty, a couple of pieces here. I guess one is more near term, one is a little bit long term.

You talked about pipelines and you talked about specifically Canada and Latin America. Can you talk about July trends, what you are seeing just in general in retail in the US?

And please correct me if I am wrong here, it would seem that even though your pipeline inventories are up a little bit in aluminum in the outboard fiberglass, that could be a little bit of the weather we caught in the early part of the second quarter? Now, you are expecting that to improve?

I guess that's all one collective question. And a second question would be 2016 goals. And part of the divestiture announcement basically you reiterated the base case and it appeared also the optimistic case goals, despite the $0.21 to $0.23 stand alone headwind.

Can you give us a little bit more detail as to why you feel confident in that? Because you are effectively raising the guidance here on that 2016 goal.

First, on pipelines and retail trends, June was a good month. July is feeling like June at this particular point in time.

In terms of the pipeline in aluminum, the only place we felt a little heavy in pipeline was in Canada, which is completely understandable in light of what has been happening at retail there. We are probably going to need to add to pipeline in pontoons.

As we went into our new plant in the third quarter last year and introduced a bunch of new models at model year, we in our supply base weren't able to get in sync and keep up. And I think we got a little behind what the market wanted and what our dealers wanted, so if we need to use this third and fourth quarter to get ourselves right with our dealer network and consumers.

So that's a real goal as we go forward. So, again, in pipeline, we're quite, quite pleased and happy with what our guys have been doing out there.

Why we stayed on the base case and taken $0.20 out is we think there are lots of levers, Tim, that we can pull as we go between now and 2016. If we step back and this starts to bring us into the question of as a management team, what are we going to do with the significant amount of cash that we'll get from the bowling transaction, and with the significant amount of cash, free cash flow we're going to be generating both this year and in coming years?

And we sort of think of this in three buckets. And hen I will come back to the guidance, Tim.

Okay.

Investing in the business, takes care of the pension plan, and returning capital to shareholders. And we need to get the balance right of all those and investing in the business and returning capital to shareholders, if it's in a share repurchase program, both are additions to 2016 earnings.

Now, for the investment in the business, if it includes acquisitions then we're going to need to get them done in 2015. And we have a nice looking pipeline.

And when one goes to work on acquisitions, you don't get them all. Buyers and sellers can't always agree. Or as people go through the due diligence process, both parties reach a decision maybe not to go forward.

But we've got a nice pipeline of work to do there. We'll probably be adding some resources to ensure that we stay on track and on pace with our plan. So that's one area where we get comfort.

Obviously, a share repurchase program would benefit earnings in 2016. And it's something we likely need to put in place, but I want us to stay very focused right now on growth, and that involves both acquiring as well as starting new businesses as well as continue to look at what we can do with the assets we have today.

So we're doing a lot of work internally, as we always do, with what are we going do strategically, but we are blessed now that with all the free cash flow and cash we're going to have, we can begin to think about things a little differently and we are doing a lot of work in order to get there.

So from our perspective, 2016 is just not an issue. We will get there. What we're really focused on as a management team is it's 2016 and beyond. We are committed to 2016 and we'll do it.

The real question is what can we really turn this business into going forward? And this big strategic disposition we made has been a part of our thinking about what we want the business to look like in the future. And so we're spend a lot of time on it.

Okay, so I guess, Dusty, to clarify then, are you saying that the acquisitions and share repo do or do not have as part of the path to get to the 2016 base case scenario, or is that more the optimistic case scenario?

They're part of the path to get to the base case scenario in our thinking right now.

Okay. And then one other clarification, back to you mentioned about the pontoon pipeline. You probably need to bulk that up a little bit.

So the 19- to 30-foot portion of the sterndrive market, you continuing to see a shift into pontoons and maybe the ski wakeboard segment as we've seen the last couple years. Is that ongoing in your view? And again, if you are picking up on the pontoon, I mean not to say you don't care, but as long as you are getting more of the engine you feel pretty comfortable with that still?

Yes. The one thing, comment I would make, yes, clearly, the sterndrive under 30-foot product, buyers have had a migration to both pontoons and new product. But there's a big but in here.

We're beginning to see real movement now in outboard based fiberglass product under 30 feet that's not ski product and obviously not a pontoon. And there is really nice growth there all driven by a different propulsion, different look with the product.

These outboard engines are becoming just magnificent pieces of machinery. So it's not all just pontoons and ski. We are now beginning to see an increase in outboard based product there.

Okay. Thank you.

You're welcome.

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

Hello, good morning. Thanks for taking my questions.

Hello, Jimmy.

Looking at your updated guidance, the 10% to 12% top-line growth in the back half of the year. As we bring that down to the segment level, it looks like you'll have perhaps the strongest growth on the boat side and that obviously pulls Mercury with it.

But if you were looking at Mercury, let's say, excluding inter-company sales, are you expecting an organic acceleration in the back half? And if so what's driving that?

Yes, we do expect an acceleration from second-quarter rates. Let's say we don't count first quarter. And it's driven heavily by new product.

We continue to do a very good job of taking care of fill rates for P&A around the world. And we think we're going to be taking some market share with a lot of the new product that we have coming out in addition to just white space, Jimmy.

Okay. Great. And then just a follow up on the impact of this wave of new models that that has on your existing pipeline inventory.

Your comments seem relatively in line with Marine Max earlier today, who talked about becoming a little bit more promotional to help clear the deck ahead of the arrival of your new product, and realizing there is a lot of moving parts on the margin side of your business given the production ramp you are undertaking. But can you just help up pease out maybe how long this period will last where you need to support sell through of the legacy pipeline inventory before the true margin profile of your new product portfolio would be seen?

I think we're getting to the end.

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

Good morning. Thanks for taking my question. In the past, you've talked about incremental margin in the low 20% range including some investment spending. And I know bowling was fairly small, but I would wonder how you would look at incremental margin now that bowling is no longer part of the portfolio?

Hey, Craig, this is Bill. I would say that the 20% to 25% on a long term basis still holds true, but clearly in the short term we've been and are projecting that we're going do better than that. And I would say some of it's just the benefit of the new product list.

Some of it's the fact that our product quality has been a little bit better than we thought it had been in the plan and a little front-end loaded there. And our operations are just performing pretty well. So, I think long term that range is still in play, but clearly in the short term here we're doing a little bit better than what we had thought.

Thank you.

I want to make a comment to everybody. And, operator, this is not a criticism to you. We're getting questions and then it feels like maybe the questioner is cutting off real quick. And we just want to let everybody know we are not doing that on purpose.

Your next question comes from the line of Joe Hovorka with Raymond James.

Thanks, guys. A couple quick questions. And feel free to cut me off whenever you want. (laughter)

No, that's just not our style.

The boat revis that you used to give, I think you do it on a year base, but maybe can you update that between fiberglass outboard, fiberglass sterndrive inboard, and then your aluminum business?

In terms of -- I am sorry, you sort of broke up there at first speech. In terms of growth rates?

The revenue split, it used to be like 40/40/20 and then it's been shifting. Do you have an update on where that's at now given all the changes we've been making?

Anybody here in the room to help me with that?

I mean, it's not inconsistent with what the investor decks have been from the second quarter.

I would agree.

Okay, okay.

So Patrick the hold. The growth we are going to experience, we are certainly getting a little bit more out of the rec fiberglass businesses, but we're going to get growth out of all of the business in the back half of the year. So there's not a dramatic shift that's occurring in 2014.

And it sounds like, we all know about the product at the 35 to 65 feet that's been come up, but sounds like you've got some stuff coming in the sub 30-foot range in the Sea Ray brand including some more outboard boats, is that correct?

We have been introducing some outboard runabouts, outboard deck boats, and as we look at second quarter we had some nice market share gains with this product.

So is that product in the market already? I was under the impression that it's coming this fall.

No, some of it is in the market with more to come.

Okay. I guess that's all I had then. Thanks, guys.

Thank you, Joe.

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

Hey, good morning. On fitness, it seems like the US health club landscape is growing, but consolidating, we've got a few bigger players out there. Is there scale in buying power? Is that something that could put pressure on your margins?

Yes.

Okay. And then on capacity utilization, maybe you could update us where you are in the marine businesses? What kind of capacity you have available?

And then how long we are until we max out? And maybe an update on what's in mothballs and that can be quickly brought up to speed? Thanks.

Sure. We talked about this before, so sort of to remind us all. We sized ourselves for around 200,000-, 220,000-unit markets in terms of production capacity in marine.

Pontoon has exceeded that on an equivalent basis. Aluminum is there and going above, and we think fiberglass outboard, which especially in saltwater which should be our Whaler brand, is going there very quickly.

So we've made last year big investments in pontoons at capacity. That will let us run for a long time.

We are completing a big investment in our largest aluminum fish boat plant up in New York Mills, Minnesota. That's coming online as we speak. And that gives us a pretty good runway.

And we're in the let's say 20% through plant expansion at Boston Whaler, which will give that business plenty of runway. In our bigger boats, we've got lots of room, and the way to think of that is that market is still down fairly significantly from pre-recession levels. And we've got room for that market to go back to the equivalent of 200,000 units and it's got a good bit of runway ahead of it in order to get there.

At Mercury, the outboard market has grown faster than the sterndrive market, and on an equivalent basis, it's exceeded where we thought the market would be at this point in time. So we've said we've been investing, pick a number, say $25 million a year, last year, this year, and next year in increasing capacity at Mercury.

It's not only in assembly, but it's in the casting machine in tooling and assembly, and that will all be done next year and we'll have a long runway ahead of us there, also. So some places we have been tight. We have been making investment. Other places, we've got room and think we'll be fine.

Great. Fantastic overview. Thanks, Dusty. Thank you.

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

Thanks. Thanks for taking my question and congrats on the quarter. I guess my first question is just specifically in the quarter on the engine business.

You had a little bit over a 3% sales growth and then an operating income of more like 2.5%, so the incremental margin just looked a little bit below what you guys have talked about historically. Is that mostly mix related or was there something else that popped up in there in the quarter in terms of efficiencies or anything?

We referenced a couple of insurance settlements that occurred in 2013 that generated some income in the second quarter of last year. That was a headwind and then it's just incremental investment spending. If you strip those two out there, their incremental leverage is just fine.

Okay. And then, you talked about being sold out on some of the new product and being a little bit capacity constrained again.

So if we think about maybe the industry overall getting a little bit better here as we exit the season, and maybe it lasts a little bit longer, how much are you really able to participate in that? Or are you just viewing that as a better sign that sets you up a little bit better as we think about 2015 and beyond?

Well, if the industry increases with all the investment we've made in aluminum fish, pontoons, and investment we're making in saltwater, we can participate enormously. In the bigger boat, let's do smaller fiberglass sterndrive boats, we're fine.

In the bigger stuff, it feels like we're capacity constrained right now because we're in ramp up mode with all this new product. And what we try to convey, and I don't think I do a very good job in explaining is, is we introduce a new model, we know how many weeks, months, et cetera, it will take us to get the full run rate and it's fairly complex, actually.

So let's take our new 650 Sea Ray. If you think of everything that goes into that boat, we've got to coordinate the supply chain to have it all there, and we've got to train ourselves as we move that product from product development over to the plant floor on actually how to build it. And that's a fairly complicated dance with hundreds of people involved.

As we start to ramp up, we say, and I am going to make this up because I don't want to give anything way competitively, it will take us six boats over seven months, and again I am making these numbers up, to go from a standing start to normal run rate. Once we're at run rate, then we can increase run rate very easily because it's just then a matter of turning it over, if you will.

But as we go through the learning process we can't do much faster than the ramp-up process we designed. And we're in ramp-up mode, for instance, with the 650. We are sort of coming out of ramp-up mode for the 51.

I think we are out of ramp up mode for the 35, the 350 SLX. But we've got two 58s coming. And when we throw those in, it will feel slow as we get started.

Our dealer network, and a couple people have referenced perhaps the Marine Max call and I will need to go read the transcript, but I can understand where the dealer network says, man, I got a red hot boat, I can sell all you can make, give me more. And our answer always is, we'll get there, but we've got to get this model integrated and ramped up before we can begin to increase production rates.

Okay. And maybe just one housekeeping. So for modeling purposes, as we change stuff over, was, and sorry if I missed this somewhere, but was bowling about $0.02 in the quarter? So maybe on an adjusted basis, $0.02 lower verses what you guys actually printed?

Would have been a $0.01, closer to $0.01.

$0.01? Okay, thanks a lot.

You're welcome.

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

Operator, first thank you for your help today. As always, thanks everyone for being on the call. We love your questions. They're always good.

As you can see, we're predicting and forecasting and planning for a very strong second half, so you'll see the whole organization with their sleeves rolled up now because we've got a lot of work to get done over the coming weeks and months. I thank everybody for your interest and I am sure we'll be seeing you as the weeks progress and we go through the second half.

This concludes today's event, thank you for attending. You may now disconnect and have a great day.