賓士域 (BC) 2016 Q2 法說會逐字稿

Good morning and welcome to the Brunswick Corporation's 2016 second-quarter earnings conference call.

(Operator Instructions)

Today's meeting will be recorded. If you have any objections you may disconnect at this time. And now I would like to introduce Bruce Byots, Vice President of Investor Relations.

Good morning and thank you for joining us. On the call this morning is Mark Schwabero, 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.

During our presentation we're using certain non-GAAP financial information. Reconciliation of GAAP to non-GAAP financial measures are provided in this presentation as well as in the reconciliation section of the consolidated financial statement accompanying today's results. I would also like to remind you that the figures in this presentation reflect continuing operations only unless otherwise noted. I would now like to turn the call over to Mark.

Thank you, Bruce, and good morning, everyone. Today I will focus my opening remarks on our second-quarter results as well as provide insights into the global Marine and Fitness markets. Then Bill will comment in greater detail on our financial performance. Then I will come back and wrap up with comments on our current 2016 full-year outlook.

Our second quarter results reflect the continued successful execution of our growth strategy. About halfway through the Marine season indications underscore a healthy US marketplace which is consistent with the assumptions we've made entering the year. And our 2016 outlook continues to represent another year of strong earnings growth and free cash flow as well as investments in our business.

We're making outstanding progress integrating Cybex into our Business segment and we remain on plan to achieve our near-term and long-term financial objectives for this acquisition. Revenue in the second quarter increased 8.8% and on a constant currency basis the revenue increased by 9.1%, with acquisitions contributing approximately 4% of growth.

The strongest growth rates were reported by our Fitness segment, our fiberglass outboard and aluminum boats. Marine Parts and Accessories and our outboard engines also exhibited strong growth rates. Our gross margin was comparable to last year at 28.4%. Operating expenses increased by 11% and were 15.2% of sales. This compares to 14.9% of sales in 2015.

Excluding the impact of acquisitions, operating expenses increased by 5%. Adjusted operating earnings increased by 7% versus the prior year and operating margins were 13.2%, down 30 basis points compared to last year. And this is slightly better than our prior guidance of being down 50 basis points due to better-than-expected gross margins and lower operating expenses. Operating leverage for the quarter was approximately 10% on an as adjusted basis. Excluding the impact of acquisitions, operating leverage for the quarter was 16%.

Continuing down the P&L, adjusted pretax earnings increased by 6%, while diluted EPS as adjusted of $1.19 was up $0.14 or 13%. And finally, our year-to-date free cash flow totaled $130 million, or an improvement of $94 million versus the prior year. And now I'd like to provide a little perspective on the US marine market.

Based upon preliminary data, the second quarter, which on average comprises about 40% -- excuse me 45% of the year-at-retail, reflected a growth rate of approximately 3%. Outboard boats increased by approximately 5% and the fiberglass stern-drive inboard declined by 5%. So in the first half of 2016 the US power boat industry grew 6% which is comparable to the first half 2015 growth rate.

We are encouraged by the continued solid growth of the market and are maintaining our initial assumptions that the 2016 US industry growth will be similar to that of 2015. Based on this year to date preliminary data, it appears likely that the industry in the US is on pace to achieve its six consecutive year of growth assuming this current six month growth rate continues for the full year the industry total new unit levels would still remain at about 63% of the prior peak average of about 300,000 boats per year. This solid growth rate, which has been sustained in a continuing slow growth economic environment, has been supported by solid market fundamentals including stable boating participation and favorable replacement cycle dynamics.

In fact, earlier this month the NMMA announced that for 2015 the total boat registrations were 9.8 million, up from 9.7 million reported in 2014. As the chart demonstrates, the US boat park appears to be stabilizing at about 9.8 million boats. In addition to these positive factors, innovative products being introduced throughout the marketplace are also influencing new boat demand and our product successes in both our engine and boat segments have enabled continued market share gains and mixed benefits.

Next I would like to review with you our current marine market perspectives on the international region. In Europe, our full-year outlook continues to reflect modest retail unit growth. We continue to experience mixed regional results throughout the continent but overall demand remains relatively healthy. In Canada, markets continue to show weakness.

Dealers are managing inventories very conservatively and are looking for indicators that currency volatility and economic conditions will become less challenging before they restock. Our outlook assumes that the demand environment will continue to be challenged over the second half. In other rest-of-world markets, our outlook for Asia Pacific continues to reflect stable retail demand while Latin America remains a difficult market with retail unit declines anticipated to be in the low double-digit range.

So in summary, we are maintaining our view that the2016 global unit market will be towards the lower end of the 3% to 5% range and that our revenue growth will continue to outperform through share gains and mixed improvements as well as benefits from acquisitions in our parts and accessory businesses. Our Fitness business continues to benefit from solid demand particularly in the global health club and hospitality markets. This foundational core growth, combined with favorable trends in the rehabilitation and active aging category, as well as increased participation in group exercise activities is providing a healthy marketplace to execute our fitness strategy.

The group exercise category, which I will comment on in my concluding remarks, continues to grow rapidly as customers seek unique and differentiated exercise experiences. This chart depicts our year-to-date growth rates by region on a constant currency basis excluding acquisitions. These results reflect solid growth rates in the US and Europe, which represents just under three quarters of the segment sales.

The third-largest region, Asia Pacific, experienced strong sales improvement through the combination of market growth and share gains in both Japan and China. This performance reflects the success of our continued focus on expanding our presence in these important markets. And with that I will now turn the call over to Bill for additional comments on our financial performance.

Thanks, Mark. I would like to start with an overview of our revenue performance. For the second quarter on a constant currency basis, sales in our combined Marine segments and Fitness segment increased by 5% and 33% respectively. From a geographic perspective, consolidated US sales increased by 11%, while sales outside the US on a constant currency basis increased by 5%.

By region, sales on a constant currency basis increased by 14% in Europe and rest of the world sales were flat to prior year. In the first half on a constant currency basis, sales in our combined Marine segments increased by 6% while our Fitness segment increased by 26%. From a geographic perspective, consolidated sale -- consolidated US sales increased by 11%.

Sales outside the US increased by 6% on a constant currency basis. This includes growth in Europe of 14% and 1% growth in other international regions. Turning to our Marine Engine segment where second quarter sales on a constant currency basis increased by 4%.

From geographic perspective, sales in the US were up 5% reflecting increases in outboard engines and parts and accessories. Sales to Mercury's European customers, excluding currency changes, were up 10% led by strength in all major product categories. This performance reflects benefits from new engine products and our strategy to expand the parts and accessories business in this region.

Rest of the world sales on a constant currency basis were flat to prior year. Performance in these regions was mixed with growth in Canada and slight growth in Asia Pacific, which was offset by a decline in the Latin America, Africa and Middle East regions. On a product category basis, the outboard engine business recorded solid sales growth in the quarter. New products introduced over the past several years have resulted in market share gains in targeted saltwater, repower and commercial markets.

The retail environment for outboards continues to be favorable however, similar to boats, growth in wholesale shipments lagged retail performance in the first half of 2016. Wholesale and retail growth rates are expected to be more in balance for the full year which should benefit second-half growth rates. Stern drive engine sales continues to be affected by the shift to outboards and unfavorable global retail demand trends.

However, our share remains a strong as we continue to have growing adoption of our recently introduced purpose-built engines. Mercury's parts and accessories businesses delivered solid sales growth during the quarter. Revenue benefited from new product launches and market share gains including a successful execution of our international growth strategy.

Growth in the US in the first two months of the quarter was slower which we believe was due in part to unfavorable weather conditions. Demand trends for P&A were very strong in June.

Mercury's out board earnings increased operating earnings increased by 5% compared to last year's second quarter. Operating margins were 19.3%, 20 basis points higher than the prior-year quarter. The improvement in operating earnings reflected higher sales and cost reductions including benefits from lower commodity costs and savings relating to sourcing initiatives.

Partially offsetting these positive factors were increases in unfavorable effects of foreign exchange and growth related investments. For the six months, operating margins were 16.5% which is consistent with prior year. In our Boat segment, second-quarter revenues on a constant currency basis increased by 6% with strong growth rates in fiberglass outboard and aluminum boats.

As anticipated, sales of our stern drive inboard boats were down reflecting declines in larger boats which were partially offset by gains in runabouts. A decline in larger boats was due to the impact of preparing the channel for planned a second half product introductions and from large boat mix becoming more balanced. Our boat brands continue to make progress gaining share.

Regionally in the US, which represented 73% of the segment, sales increased by 10%. European sales on a constant currency basis increased by 21%, versus the prior year and benefited from recent product introductions and solid retail growth.

Rest of the world sales on a constant currency basis declined by 16% reflecting weaker demand in Canada and Latin America. For the second quarter, global retail unit sales increased by 4% versus the prior year while retail units in the US grew by 9%. Year-to-date, global retail unit sales increased by 6% and US retail units grew by 11%.

Global wholesale unit shipments experienced growth of 3% in the second quarter versus an increase in dollar sales of 5% as revenues benefited from a modest gain an average sales price. For the six months, wholesale unit shipments were down 1%.

Dealer pipelines ended the quarter at 29 weeks of boats on hand measured on a trailing 12 month basis versus 31 weeks a year ago with units down modestly. The year-over-year decline in pipelines on a weeks-on-hand basis reflects the impact of wholesale shipment growth rates trailing retail unit growth rates over the first half of 2016.

For the full year we are planning for wholesale and retail unit growth rates to be more in balance. Consequently, we anticipate that wholesale unit performance will a be bigger contributor to overall segment growth in the second half of 2016. Increases in average selling prices should continue to be modest over the second half.

The Boat segment's second quarter operating earnings increased by 9% when compared to the prior year. Operating margins were 6.2% which reflects a 20 basis point increase over last year's second quarter. Operating performance in the quarter benefited from higher sales as well as lower commodity costs and savings from sourcing initiatives.

Partially offsetting these items were the impact of lower sales of large stern drive inboard boats. For the six months operating margins were 5.5%, 120 basis points higher when compared to prior years results. Shifting to our Fitness segment sales increased by 33% for the quarter on a constant currency basis.

Excluding acquisitions, Life Fitness sales increased by 12% on a constant currency basis. Sales in the US were up strongly, excluding the impact of acquisitions, reflecting improvements in sales to health clubs and local and federal governments. International sales growth was solid, led by growth in Europe and Asia. Cybex and SCIFIT contributed about 21% to the segment sales growth in the quarter.

For the first six months on a constant currency basis, excluding acquisitions, sales increased by 6%. Segment operating earnings increased by $4 million as adjusted. Operating margins were 11.6% as adjusted, which was 170 basis points lower than the prior year.

Segment earnings were affected by benefits from higher sales, which were partially offset by increases in growth investments and unfavorable sales mix. Cybex delivered a modest contribution to the segment's operating results including purchase accounting adjustments of approximately $1.4 million during the quarter. The Life Fitness segment at approximately $2.6 million of restructuring and integration charge related to the Cybex acquisitions of the second quarter and $6.4 million year-to-date.

We anticipate $8 million to $10 million of restructuring and integration costs related to the Cybex acquisition for the full-year 2016. For the six months, operating margins were 11.3%, 230 basis points lower than last year reflecting the impact of the Cybex acquisition. Next I will discuss the impact that foreign currency is having on our sales earnings comparisons.

The second quarter consolidated sales comparisons were unfavorably affected by a slight amount and operating earnings were negatively affected by approximately $5 million. This earnings impact was slightly unfavorable versus expectations. Moving to full-year 2016, we are anticipating that consolidated sales comparisons versus 2015 will be unfavorably affected by approximately 1/2 of 1%.

Operating earnings comparisons are anticipated to have an unfavorable impact from currency of $12 million to $17 million or approximately 3.5%, which has increased from previous guidance primarily due to the strengthening of the yen as well as the strengthening of the US dollar against certain currencies. These estimates for 2016 assume that foreign exchange rate remain consistent with current rates for the remainder of the year. Our year-to-date effective book tax rate, as adjusted, for the second quarter of 2016 was 30.9%, 310 points lower than the 2015 rate.

This reflects the benefit from the US R&D tax credit as well as benefits from optimizing our international legal entity and cash management structures. Our effective book tax rate guidance for the full-year 2016 is 31%, as adjusted, and we are expecting our cash tax rate to be in the low double-digit percent range. This is an improvement in cash taxes versus our previous guidance.

Turning to a review of our cash flow statement, cash generated by continuing operating activities was $213 million, an improvement of $104 million versus the prior year. Net increases in our primary working capital accounts totaled $37 million. The biggest changes included accounts and notes receivable, which increased by $52 million; accounts payable, which increased by $30 million; accrued expenses decreased by $16 million and inventory increased by $4 million. The improvement in working capital of just over $50 million versus the prior year reflects the timing of payments and, to a lesser extent, better working capital management.

Year-to-date free cash flow was $130 million, versus $37 million in the prior year, an improvement of almost $94 million. Capital expanding was $90 million for the year-to-date period, which included investments in new products as well as capacity expansions in our Marine and Fitness segments. Our business units continue to remain focused on generating strong free cash flow which will allow us to continue to fund future investments in growth, including acquisitions, enhanced shareholder returns and increased contributions to our pension plans.

Let me conclude with some comments regarding certain 2016 P&L items. We have made modest updates to our previous guidance on two items. We now expect combined equity earnings and other income to be slightly less than 2015 and our effective tax rate, as adjusted, is now forecasted to be approximately 31%.

On the cash flow side, our current plan now anticipates working capital changes will the result in a usage of cash of $40 million to $60 million, which includes the payout of deferred compensation balances in connection with our recent management transitions. We're still expecting for capital expenditures to be 4% to 4.5%. This increased level of spending versus the prior year reflects substantial new product investments in our outboard engine business and continued capacity investments to support new products and growth which are driving expenditures a bit higher than our long-term planning targets.

Our plan now reflects approximately $70 million to $75 million of cash contributions to our pension plans, reflecting an increase from previous guidance as we execute our derisking strategy and funding plan. We anticipate our cash tax rate to now be lower and range in the low double-digit percent area. Netting together these factors, along with our anticipated earnings performance, we expected to generate free cash flow for the full year and excess of $200 million.

This guidance is unchanged reflecting improvements in cash taxes and working capital which are offset by our plans to increase pension contributions. Our plan assumes that share repurchases total approximately $100 million in 2016. But now I will turn the call back to Mark to continue our outlook comments.

Thanks, Bill. Our overall operating plans and the assumptions for 2016 remain relatively consistent with those we communicated in April during our Q1 earnings call. We continue to target 2016 to be another year of outstanding earnings growth and strong free cash flow generation.

Our plan reflects approximately 10% to 11% sales growth which includes the continuation of solid market growth in the US and Europe partially offset by weakness in certain international marine markets. Our plan also reflects benefits from the success of our new products and market share gains. We also are planning for wholesale and retail unit growth rates to be in balance for the year, which will benefit Marine growth rates in the second half.

We currently estimate that the acquisitions will account for about five percentage points of the 2016 growth rate, reflecting acquisitions that were announced in 2015 and 2016. We anticipate a slight improvement in our gross margin levels and in operating margins. Operating expenses are estimated to increase in 2016, but as a percentage of sales are expected to be slightly lower than 2015 levels.

Our plan in 2016 continues to include increased investment spending to support our growth. These investments will be directed towards new products, initiatives that help us advance our productivity, likely Six Sigma, and investments to support our growth plans including information and technology. Our decision to continue to proceed with these investments is based upon a favorable view of our markets, the long-term growth opportunities and our proven ability to deliver on previous investments.

The cost action taken in 2015 to respond to the currency headwinds continued to yield benefits in 2016. As we assess the full year and our operating plans, we are maintaining our full-year EPS guidance of $3.40 to $3.50 a share. An early look at the third quarter indicates strong top line growth rates at around 12% with stable to growing gross margins.

We expect operating margins in Q3 to be lower than the prior year by a similar amount reported in Q2 of approximately 30 basis points. This decline is primarily due to the increased investments to support our growth as I just described in the previous slide. We expect operating expenses to grow at a mid-teen rate in the third quarter and will moderate and Q4.

Turning to our segments, the 2016 forecast reflects continued revenue and operating earnings growth in our Marine Engine segment. Mercury's growth targets are based on a fresh and innovative outboard product platform. This growth is further supported by our market-leading P&A businesses that we plan to grow both organically and through acquisitions.

Specifically, we are planning for revenue growth in the mid to high single-digit percentage range with a solid improvement in operating margins. Our plan continues to reflect a stable pricing environment for our larger horsepower engine business. Looking at the Boat segment, we are targeting 2016 annual revenue growth in the high single-digit percentage range.

We continue to anticipate a solid year-over-year improvement in our operating margins of approximately 100 to 120 basis points. This reflects -- excuse me. This represents a rate of improvement in operating margins consistent with the first half of 2016. We remain positioned to achieve our long-term target of 6% to 7% operating margins.

Shifting to our Fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. In 2016, including announced acquisitions, we are targeting revenue growth in the mid to high 20% range, resulting in total revenue exceeding $1 billion. Our outlook, excluding completed acquisitions, continues to reflect mid to high single-digit growth based upon the underlying fundamentals of the market that we have previously described.

We are planning for 2016 operating margins, as adjusted, to be lower due to the impact of the Cybex acquisition, including the purchase accounting adjustments. The margin performance of this business will improve over the second half due to benefits from integration savings and the seasonality of the business. As we previously stated, Cybex margins have historically been lower than those of Life Fitness, largely due to a higher operating cost base on a percentage-of-sales basis.

However, after an initial period of margin dilution we expect to return the combined business margin levels to traditional Life Fitness margins by 2018 due to our cost reductions and the revenue growth. Lastly, we continue to believe that Cybex will contribute net benefits of $0.08 to our 2016 EPS as adjusted. Earlier today we announced that we entered into an agreement to purchase the Indoor Cycling Group.

ICG in 2015 had sales of approximately $41 million. The acquisition of ICG enhances our ability to serve the growing group exercise category. Over the past several years, Life Fitness has been addressing this growth trend by introducing innovative products, such as our SYNRGY360, our LifeCycle GX, and the Row GX Trainer.

The acquisition of ICG is consistent with our goal to achieve revenue of $1.5 billion at Life Fitness by 2020 and was considered in our 2016 to 2018 growth plan targets. The acquisition is subject to regulatory approval and we expect to close late in our third quarter. The benefits derived from the transaction include revenue synergy opportunities, our ability to leverage technology capabilities in group exercise, as well as the optimization of customer relationships and international distribution.

ICG is projected to have minimal impact on our 2016 results. And with that I'd like to thank all of you and Bill and I are ready to take your questions.

Thank you.

(Operator Instructions).

Our first question is from Greg Badishkanian from Citi.

Great. Thanks. So just wondering so when you look at retail sales, the best way to do it is to look at first half because I'm guessing weather was kind of uneven throughout the first six months of the year. Is that the right way to think about it?

That's a fair way, Greg. That's correct.

Okay. And then if you look at it, the growth rate has been pretty decent. Yet other segments, and we had the Harley report this morning, are seeing weakness within the overall leisure vehicle industry. So I'm wondering maybe some of the differences between the Marine and Boat industry versus other segments within a leisure vehicle industry.

Well, Greg, there things that we've pointed out before but I will be reinforce is that, obviously, we are at a different point in the recovery than some of those other industries have been in. I think the other case is that we've had a strong US market as part of that recovery and it's balanced across essentially all of the geographic areas. I think another thing that probably differentiates us is, we are probably a little less tied into some of the energy field or agriculture or some of the other areas, as well, with Marine versus some of the comparables you may be thinking of.

All right. And then just finally, is any quantified information or numbers on, through the oil-related markets, which have been pointed out by other leisure vehicle industries in terms of maybe second quarter versus the first quarter and any impact in your business?

Greg, you know we've never seen a correlation between fuel prices, going from oil to fuel prices. We've never seen a --

Geographic markets. I'm sorry the geographic markets. Like --

Yes.

-- and that would include maybe Canada as well, which you talked about. But, throughout North America.

Let me take it from a US perspective. If we take the top 20 states, which includes state of Texas as an example, we're seeing extremely nice growth rates. In particularly, even areas that you would relate to energy so I think some of the more recent state of Texas was -- almost 15% type gross.

I think other factors related to droughts and things in prior years have may be impacted us more when energy was strong and now it is helping us in the environment. But fundamentally, we are not seeing that relationship in the US market. As we look at Canada, clearly, the majority of the market tends to be the Ontario and the Quebecs. They represent about 60% of the market.

When we look at Ontario, or even some of the maritime areas there within Canada, we're seeing a little different response that where we see in the balance of Canada which has probably a little more energy bent to it. But again the vast majority of that market is sitting in the eastern provinces and maritime areas.

Yes. Thank you.

Our next question is from James Hardiman from Wedbush Securities.

Hi, good morning. I guess first I just wanted to make sure I understand the moving parts of guidance, obviously the overall guidance is unchanged. But it looks like, by my math, about a nickel negative from FX maybe a penny or two positive from the tax rate.

And then the remainder of that difference is made up from slightly better boat segment guidance? Is that how I should think about it and are there any other moving parts that I missed there?

James, I would -- when we take a look at all of the moving parts we are obviously fighting a little bit more of the headwind from currency. I think the fact that we've had a good solid start to the Marine industry in the US and we've had performance, quite frankly, that has outperformed that to a pretty nice degree.

All sets up as we look at what is going to transpire over the second half of the year. We feel pretty good about where our guidance is and kept it consistent with where we were three months ago.

Got it. And then I wanted to focus a little bit on your slide 18 which seems to have a lot of information in it. That talks about the boat segment metrics global versus US and wholesale versus retail.

I guess first, the global versus US, 9% -- looking at retail, 9% US, 4% global. Does that imply, I'm assuming international retail would of had to be down a decent amount of the second quarter. Can you give us that number and does that get any better?

You know, James, it is down. I'm not sure I'm going to give the split on that number but it's certainly down. It reflects weakness in Canada, would be to primary driver. Latin America has not been a very good market for us, as well. Europe has been a little bit on the positive side as Mark referenced.

Great. And then I guess lastly, year-to-date wholesale down 1%, retail up 6%. You said a number of times that, that should even out over the course of the year.

Is it as simple as saying that in the back half that wholesale should be 5% ahead of retail? I'm sorry, 7% ahead of retail? And regardless of what the magnitude is, how does that -- how is that dispersed between 3Q and 4Q? Do we get more of a cash up in one of those two quarters?

I don't think there's going to be any material difference in the catch-up Q3 to Q4 but some of that is going to have to play its way out, James. The one I would point out is that, as we sit here today, we've had what we consider to be a very solid start to the year both in the US and globally.

And as we sit here with retail as strong as it's been, and our pipelines in extremely healthy shape, down two weeks, agings being favorable, we think we're really set up for a really good opportunity in the second half of the year to restock pipelines with all of our current, new product.

And that is one of the reasons, you've highlighted the fact that wholesale units should grow at a much faster rate than retail over the second half. And assuming that retail continues to hang in here at strong levels that's certainly going to happen.

Okay and then, sorry lastly for me, ASP, still solid in the second quarter, up a couple percent, was much bigger the last couple quarters. I seem to recall you made a comment about, there was a decline in larger boats in the second quarter ahead of some second half introductions. Can you just repeat what you said on that topic and if that is the case, wouldn't may be ASP benefit a little bit more of the second half?

It continues to be relatively -- remember on the pipeline, James, that as a lot of the things we're talking about are higher-unit lower-dollar ASP sort of product and as we catch up on that at the back half of the year whatever sort of benefit we might get from big boat demand later in the second half, those two things tend to be a little bit more balanced.

Got it. Thanks guys.

Does that make sense?

Yes, very much so. Thanks. Good quarter.

Thanks.

Mike Swartz from SunTrust.

Hey, good morning guys.

Good morning, Mike. Mark, just wanted to touch on some of the comments behind your full-year outlook on the Marine business and, understanding that we are up 6% in the US here year-to-date, which is similar to last year. I mean the trend in stern drive seems to be materially better.

It seems to be stabilizing a bit so just given that outlook in your plans to exceed retail in the back half of the year in terms of wholesale, how should we think about that stern drive business? Can that grow in the second half of the year and I guess both on the boats and the engine side? Well, I think there's a couple of different things that are going to go on there, Michael. First of all, there is still a fair amount of product still all working through, transitioning from the phase outs and everything that both we and our competitors have done. So there is some dynamics working through the supply chain.

But from a pure retail standpoint I think you are still going to see a number of products coming out in the category that are going to be outboard-based. But clearly some of the things we are bringing out, I would take for example the new SLX product lines and things that we're doing.

And the success we are having with them are going to be stern drive products. We're going to see -- will see some growth in some of those areas. But I think it's a market that I don't think we are going to see these huge increases but stabilizing, slight increases are all in the realm of possibility.

I guess just following up, remind me when was the last time you actually saw an increase in stern drive? I guess maybe even for full-year basis. Whether that's, again, boats or engines.

I think on a full-year basis it would probably be pre-recessionary levels.

Okay. And then just touching on the Fitness, to the acquisition if ICG, you put some slides in the presentation but maybe just getting a better sense of what was the core the main criteria for making that acquisition.

Well as I mentioned in my comments, Michael, one of the things that we are clearly trying to do, and it's has been a part of our overall strategy is, trying to take advantage of an area where people are looking at different ways of fulfilling their needs from an exercise, and the group exercise is an area that we've been focusing a bit more on. So we've done some things product-wise around -- with rowing and cycling, in fact ICG, we've had supplier relationship with them for the last five years and have gotten to know them fairly well and understand their product and the capabilities.

We just see between our ability to get a deal with them and what's going on in the group exercise area to really put in much bigger stake and a bigger kind of foundational piece and what we're trying to do in the overall group exercise arena. And I wouldn't underestimate, there is some nice technology and IP that comes with them as well. They've got some really good things around their watt rate power meter and the coaching by color opportunities.

The intellectual property there can give us some opportunities to expand that into other areas also. As much as we did with something like SCIFIT, of really getting a -- creating a bigger nucleus than the rehab space, this particular acquisition gives us much more capability within the group exercise arena. And I guess we are really excited.

This is been -- we have known them for years. Berthe and the team over there, great set of people. We think there is a really strong cultural fit and we're really feeling good about being able to get a signed agreement here.

Anything you can disclose in terms of growth rate of the business?

No we haven't, we really haven't talked about that growth rate. I think it's going to have -- let me answer it this way.

It will have minimal impact in 2016 and I think as we are able to bring this to a conclusion in the third quarter and as we talk about 2017, we'll probably be able to talk about this a bit more. But right now we finished a signed agreement and we are very happy with it and we can probably give a little more direction around that.

Okay, great. Thanks.

David McGregor, Longbow Research.

And our next question is from Tim Conder from Wells Fargo Securities.

Gentlemen, a couple things here. In particular if you could drill into the European Marine trends? It appears that, that is slowing a little bit.

Is that more a function of just a -- it's still growing nicely but slowing. Is that more a function of the comparisons or is there anything that you are noticing, an underlying demand and then as it relates --

We lost you, Tim.

I can go to the next question. Go on Tim if you are back.

Are you there? All right, why don't you go back in queue and we'll get you up there.

We will go to Randy Konik from Jefferies.

Hi, great. Thanks a lot. Bill, I wanted to ask about your comments around working capital improvements. Where you think we are in the working capital improvement cycle? And you talked about the 29 weeks of supply on hand versus 31 weeks. Where should we be thinking about that trend over the next six months or so?

So the 29 weeks, Randy, is a dealer inventory metric not necessarily a Brunswick working capital metric. And as we sit here today we are not necessarily planning for or necessarily think that we've got big adjustments that need to be made to the level of inventory being held at dealers.

You know as we sit here today, we are two weeks lower than we were a year ago which I think is a reflection of just how strong our retail performance has been and our ability to exceed what markets have done and what our market expectations were. And I think as we look forward, we are not anticipating there to be a continuing decline of dealer inventories on a weeks-on-hand basis as we go throughout the remainder of 2016 and then into 2017 but, naturally, if we get in a period of time where retail continues to outperform, we may have a hard time closing that gap. Is I think is the best way to look at it.

Understood. And when you talked about the ASP trends continue to move higher.

But the way the boats are mixing, it seems to be on a like-for-like basis ASPs are going up but the mixed boat seems to be moving more towards a smaller, I guess, boat. How do you think about that on a long-range basis about where the trends should look out over the next few years in the industry?

So the way I would think about that is, is that we are seeing a nice growth across our portfolio. So we see people migrating into boats with bigger engines, more content, et cetera, at the low end of our product offerings all the way to the high end. So that is part of what is driving that -- our view of what ASP growth is going to be on a long-term basis.

And we feel pretty comfortable that, that's going to continue mostly because it has been part of the evolution of the market over the past 15 years. As people have desired to trade up, buy new, to achieve things that they can't get in the used market, that actually brings with it bigger engines, more control technology. You've seen a lot of success that we've had there, introducing things like joystick and active trim and things on the engine side.

That all makes its way into boats. And it all makes its way into higher a average selling price.

Right. So I guess my question would be, if we been talking about that theme of, don't necessarily believe that we are going to go blow past the prior peak unit volumes in the industry, it's more of an ASP kind of story that's been developing in the industry. How do you think about the discrepancy between how ASPs trend on the low end versus ASP growth potential on the high end? How should we be thinking about that?

Well, I would think, naturally on a percentage basis there's probably going to be a little bit more elasticity on the high end than the value end. Randy, but what could play out here is, is that if you end up in a -- in kind of this stable recovery mode where we've got pretty nice balance between recovery at the high end and the low end, I think it's reasonable to assume that this ASP growth continues on at its current trajectory. If you end up seeing a reemergence of value and greater growth rates on the value side we might have a little bit more upside on units which could put pressure on ASPs.

Great.

That and we still get to the same dollar amount.

Perfect. My last question would be, when you think about Canada, been a little bit of a thorn in the side as this US market continues to do very well, how do you think about mileage posts on -- or at least the duration of the difficulty there. When you think we could see some sort of improving trend in that geography going forward. Thanks.

Randy, I think one of the things if you take it from a historical perspective, dealers and the consumer and Canada, once they really start seeing stability, and I will say stability in the currency, they tend to adapt to it and we see recovery or things happening.

Again if you do that from a historical. So I think one of the real questions is at what point does the currency have a little less volatility and with the new government of Trudeau and stuff, how does that all play out to create that? Some early indicators, looking at housing prices and sales of homes and stuff in the market, are giving indications that some of that is starting to happen from a consumer perspective. But I think that is what's really got to play out is people just seeing less volatility and a little more stability in the currency.

Great. Thanks a lot. Appreciate it guys.

And we will go back to Tim Conder from Wells Fargo.

Thank you, gentlemen. A couple of things here. As it relates to the US marine market versus the international market.

How would you characterize each of those over the last 90 days versus your expectations? As expected? Stronger? Weaker? And then the discussion you had about wholesale exceeding retail of the back half of the year sort of to catch up predominantly in the more entry-level part of the market. Catching up supply with demand.

Does that factor in any expectations for what you are going to see at a lot of the dealer order periods here that are coming up through August or could that be further adjusted post those meetings?

Yes let me kind of go through that series of questions. Tim, the first one was the US -- there is strong retail but if you look at the first six months, for instance, it's playing -- we've said it would play out pretty similar to 2015 and it's playing out very similar to 2015 so I don't know that US is looking a lot different than we expected. Europe is a little stronger than we expected.

And I think that bears out, maybe not so much from the market, as bears out from some of the success we're having with new products and things on both the Engine and Boat sides over there. So I think that's maybe more us than the market.

As it relates to the wholesale/retail, as we go into dealer forms and dealer meetings and the launches of the 2017 product, all indications would be that we'd have pretty strong orders from dealers coming in because of where the pipeline and because of dealers confidence based upon this last year. So I think as we go through the third quarter and hold those various meetings and forums, the order rates we'll -- the orders we'll be receiving are probably going to be affirmation of what Bill and I have just talked to you about, about the second half wholesale performance.

Okay.

That's going to play out over the next -- literally the next month or two.

Okay and then any (technical difficulty).

You are breaking up a little bit. I think the question is, then we would look at things, obviously as we have our next call in the October timeframe, relative to what that all looks like. As well as continuing to get a little more data filling in the second quarter and some early looks at how the retail is continuing into the third quarter.

Okay.

All of those things would give us a little more information.

Okay. And then as it relates to Europe in particular, just to get the Brexit thing on the table, anything that you've seen since then? And as you said, Mark, the trends a little bit better than you thought. So just the slowing we're seeing is the difficult comparisons but still obviously pacing along pretty nicely?

We've had a little more benefit on the north side -- Northern Europe. But we are starting to see some improvement in the Southern Europe and that's really where some of the bigger marine markets are. But as it relates to, Tim, the question on the Brexit side, it's a bit early to know where that is all going to go.

But the other thing from the standpoint of dealers or distributors bringing in boats or engines, from a lot of perspectives we can say this season's probably almost complete. From the standpoint of that.

So I'm not sure we'd be able to measure really Brexit at this point. But it is way too early and number two, I'm not sure how or where we would really see it at this point anyway.

Okay fair. Last question relating to Fitness. If you look at share trends year-to-date, either excluding Cybex or on a pro forma basis. How are those going?

I'm going to -- there is not a lot of good share data out there but I will just kind of tee it up this way to you. If you see our growth now, we talked about where the industry growth was going to be and when we look at the fact we've been able to get our core business growth to be in line now, as we've reported in the second quarter. I think as other -- we have some of our people who are competitors that are in the public arena and I think as they report some of their results, you are going to be able to see that our growth rates are exceeding their growth rates, which fundamentally I believe, bodes well for the fact that we are taking share.

Great. Thank you gentlemen.

Next question is from Jimmy Baker from B. Riley and Company.

Hi, good morning, guys. Just want to start with a couple of questions on Mercury. So first could you speak maybe to regional strength and weaknesses in the domestic P&A business, based on I guess weather and any other factors you think are worth calling out. And that I know you don't talk about this often but how do you feel about channel inventory levels in the P&A business? Ad then if I could just ask a more speculative question in the context of your exposure to Bass Pro and Cabelas, any thoughts on the implication to you if there was a potential combination there?

Well, let me go to the first point. From a regional perspective you know we had, as we mentioned on the call, the early part of the second quarter our P&A was the impacted being weather and, that I would say if you really think about the weather patterns I don't like to use weather as a reason, but clearly there were weather implications in the early part of the quarter. The month of June has been very, very strong for us, which was great, and came through okay.

So I don't think there is a fundamental change on the business. It's really some timing and nothing that really pops out geographically when we look at the various areas as well, Jimmy. So we are confident in terms of the pipeline, I think we've talked about this before, given the fact that our P&A distribution business is really around same day, next day delivery. Our whole model is basically not too rely on a dealer stocking his shelves.

It's a lot more around our ability to get them what they need, when they need the product and be a very reliable supplier of theirs. So I'd give you pipelines, dealer inventories of P&A is not really something that we worry ourselves. In terms of the Bass Pro and the Cabelas, there's rumors out there. I just really -- they are both great customers of ours and I would rather not speculate on what the results if those things happen or what might happen or the impacts to us but they're two really good customers for business.

Okay. And then not to beat a dead horse but just want to come back to the Boat group for a moment. This trend of stronger increases in wholesale shipments during the back half of the year is something we've seen from you each of the last several years and it seems that at least from our work, more of a Brunswick phenomenon than an industry phenomenon.

So could you just talk about you know if there's been any kind of seasonal change in your dealer buying patterns? Are they increasingly holding off for your new model changeovers given the success that your new model shave had? I'm just wondering what's driving, not just this year, but this multi year trend of tilting your wholesale growth to the back half.

Well I think there's a whole bunch of things going on that make us different there, Jimmy. I would start with the fact that we have been bringing out new product at a rate much greater, faster and differently than the rest of the industry. I think part of it is given that the model year changes midyear, roughly around the first of July-ish timeframe. You know there is a natural tendency to want the inventory at a dealership to pull down a bit and they want to stock up with the new product that's coming out and available in the second half of the year.

And again, just the rate at which we are bringing new products out and the types of new products we are bringing out, I think that is different than what goes to the rest of the industry. I think the other standpoint is that -- I think people have understood we are a pretty reliable supplier and as a result of being the reliable supplier and our manufacturing capabilities, I don't think people feel they have to quite stock up to the same level that maybe they thought about having to do in the past.

And the other is our whole business model with our dealers is much more on a pull-basis than a push-basis. We are not out to -- take two trailer loads of boats and here's the discount. It is really more looking on a market-by-market and what the demand is and what we think they will need to have.

So I think it's more from a business perspective than a stock up perspective. I think there is a number of those factors that come into play why we're probably a little different than some of the others.

I think the only thing I'd add to that, Jimmy, would be share performance. I think when you take a look at the last couple of years we've had pretty good share performance in the marketplace. And I think that's naturally going to create a situation where we may trail wholesale a little bit, trail retail a little bit with our wholesale shipments as we go throughout the season and then catch up in the back half.

That makes sense. Thanks a lot for the color.

Our next question is from Joe Spak from RBC Capital Markets.

Thanks. Good afternoon, everyone, and I know we are over the hour here so I will make it quick. I just wanted to dive in a little bit to the performance in Marine Engine in the quarter.

I know you guys talked about, and I think even of the slide mentioned, increased investments way down but it still looks like the incremental margin was pretty good to so I was just wondering if there was any shift in timing of some of the investments? And maybe that bleeds over into the third quarter as to what -- why you see another down 30 basis points in the quarter?

Yes, I would say from a timing perspective we do have a little bit more investment weighted towards the third quarter versus the second. I think that's a good observation. I mean I don't think there is anything from an -- outside of that I'm not sure there's anything else that is worth talking about.

Okay. So the invest -- to summarize on the investment, if we go back a quarter, you are talking about higher investment even the second quarter. Seems like maybe some of that was more geared towards Fitness and then in the third quarter maybe a little bit more towards engine?

I would say there was some in both periods. In both businesses.

Okay. Okay. And last one, on the decision to fund the pension a little bit more. I know you said derisking. Does that have anything at all with where you see the fund, saw something up in light of the rate movements?

No, I would say, it's really as we've continued to shrink the plan, buyout obligations from participants, remember those plans are frozen. And we don't have any employees are earning a benefit in those plans today. We are marching toward a goal of trying to get those plans fully funded but let's call it by 2020.

And I think the amount of money it's going to take for us to put in every year probably is closer to $70 million a year than where we had pegged our initial indications this year, which would be in more of the mid-$30 millions. And we you take a look at what we talked about in terms of cash tax rates, we've got some upside their in 2016 that continues on in 2017 and 2018.

And is one of the reasons why we feel like we could put a little bit more in the plans, get ourselves focused on getting employee funded by a date. So we can proceed with an orderly kind of exit from those obligations because they don't really relate to the operations we are having. And operating today.

Right and I know you mark the obligations only on December 31st, but di you have an indication as to where the fund size would move if you had to mark it at current rates?

It would be -- The funded status is challenged because of discount rate movements but some of that has been offset by contributions we've put in.

Okay.

And maybe a little bit of a decrease in funded status but nothing material.

Thank you.

Remember, we have a lot of our investments in the plans today and fixed income, so as interest rates start to move around we get some nice offsets through investment returns to counter some of the impact of liabilities.

And we have Rommel Dionisio from Wunderlich.

Thanks. Just a quick question on the Fitness Equipment business. Given the acquisition, given the growth you are seeing in Europe and Asia, I wonder will you guys need additional infrastructure, whether it be distribution or manufacturing, in some of these overseas markets?

It's not something I've heard you mention in the last few years so I just wonder if this going to be some CapEx there necessary over the next few years? Thanks.

If you get into a little more detail part of -- we've made an expansion already that's all happened in our Hungary facility. We've already done physical expansions to our Ramsey, Minnesota facility. One of the things we talked about that we were really -- a real asset for us in the Cybex acquisition was their Owatonna, Minnesota, facility. Both from standpoint it was an underutilized -- under capacity utilization but also the opportunity to grow it.

You may have seen during the quarter, we made the announcement we have broken ground. We, in fact, are expanding that facility. That's already all in our plans and guidance to grow the business, grow that facility.

And then when you take things like the SCIFIT acquisition, it had manufacturing capabilities. When we take the ICG with our signed agreement there, fundamentally it has the manufacturing capabilities so it's not taxing any of our existing facilities. Net-net is we think our capacity plans are very much aligned with -- and quite frankly benefiting some of the acquisitions.

Okay. Thanks very much, Mark.

And I'll now turn it back over to Management for closing remarks.

Well I will close this down by really coming back to where we start. We think we've had a great quarter. I really want to thank all the employees of Brunswick for their contributions and for making all of this happen.

We think we are staying very much aligned with our overall strategy of the business that we laid out at our Investor Day. And so the fact that the growth is coming through, we're working the strategy that we presented.

We are growing share in the market. We are meeting the expectations of our investors. It's a great quarter and we look forward to the balance of the year.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.