Bruce J. Byots - Vice President of Corporate & Investor Relations Dustan E. McCoy - Chairman, Chief Executive Officer and Member of Executive Committee William L. Metzger - Chief Financial Officer and Senior Vice President.

James Hardiman - Longbow Research LLC Gregory R. Badishkanian - Citigroup Inc, Research Division Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division Timothy A. Conder - Wells Fargo Securities, LLC, Research Division Jimmy Baker - B. Riley Caris, Research Division Craig R. Kennison - Robert W. Baird & Co.

Incorporated, Research Division Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division Gerrick L. Johnson - BMO Capital Markets U.S. Joseph Spak - RBC Capital Markets, LLC, Research Division.

Good morning and welcome to Brunswick Corporation 2014 Second Quarter Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President, Corporate and Investor Relations. Please proceed..

Good morning and thank you for joining us. On the call this morning is Dustan McCoy, Brunswick's Chairman and CEO; and Bill Metzger, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results.

Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filing 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 17, 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 this Bowling Retail and Products business which was previously reported in the Bowling and Billiards 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 Dustan..

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 boating -- bowling, I'm sorry. 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 continue to invest in numerous strategic initiatives. Adjusted operating earnings increased by 3% versus 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 on our combined marine segments increased by 4%. From a geographic perspective, consolidated U.S. 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% versus 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 U.S. increased by 1%.

In the first half, the Fitness segment reported strong top line improvement of 6%, while sales on our combined marine segments were flat due to, as you will recall, the difficult first quarter for the engine and bowl businesses. From a geographic perspective, consolidated U.S. sales increased by 2%. Sales to Europe increased by 4%.

The favorable impact from foreign currency accounted for more than half of the increase. Rest of the world sales declined by 4% versus the prior year due to weaknesses in marine markets and changes in foreign currency, offset by gains in fitness. In summary, sales outside the U.S. 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 operating expenses in the third quarter will increase at a comparable rate as we continue to fund various strategic initiatives.

A portion of the operating expenses we originally planned for the second quarter has shifted into the third quarter. For the first 6 months, adjusted operating earnings were $239.1 million, an increase of $2.9 million compared to 2013. Our operating margin, excluding charges, 11 -- of the 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 billion [ph] or 8%. For the 6 months, adjusted pretax earnings increased by approximately $15 million or 7%.

Diluted EPS from continuing operations as adjusted, for the quarter, equaled $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 U.S.

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 U.S. powerboat 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 unusually cold and wet spring led to a late start to the boating season. The currency variability is causing some consumers to delay or defer purchases. In South America, weaker-than-expected economic conditions is a primary factor causing lower market demand in Brazil, Argentina and Venezuela.

Consequently, our first half Global Marine retail growth is below our annual expectations. Now, I'll 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 U.S. 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 has 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 both 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 growth sales growth during the quarter with gains in both the U.S. 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 a 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 U.S., which comprises about 2/3 of this 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% versus 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 a 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 a segment, segment benefited from a favorable sifting mix across most of its outboard boat lines resulting in 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 2 weeks higher than the prior year level.

Pipeline for aluminum and fiberglass outboard products are up compared to last year, particularly in Canada, while fiberglass sterndrive inboard pipelines are down versus 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 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 2 recreational segments. Sales of Life Fitness increased by 6% resulting from strong growth in the U.S.

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 a slightly lower gross margin and continued investments and increases in investments in growth initiatives.

Sales for our Bowling & Billiards 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 of 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 versus 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 booked 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'd also like to note that our effective booked tax rates for 2014 exclude any potential benefit from an extension of the U.S. R&D tax credits. Turning to our review over year-to-date cash flow statement. Cash provided by operating activities was $77 million, a decrease of $30 million versus the prior year.

Seasonal changes in our primary working capital accounts total approximately $172 million. The biggest changes occurred in accounts and notes receivable, which increased by $98 million, inventory increased by $62 million, accrued expenses decreased by $50 million, and accounts payable increased by $40 million.

To date, working capital movements have been unfavorable versus the prior year due to 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 versus 2013.

And end [ph] the full year with a net usage of $40 million to $60 million. Total free cash flow amounted to $27 million versus 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 products -- 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 structuring 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 to 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 the growth demonstrated in the U.S. 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 affected -- effectively reduced by $0.20 to $2.20 to $2.35. Today, we'll change 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 segments, as well as our in Fitness segment. On a consolidated basis, we're planning for approximately 10% to 12% sales growth 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 mainly introduced or better reaching full production rates, including Sea Ray 650, 470, 510 and 350 SLX.

Bayliner's new development Excel will also contribute to second half growth. And Life Fitness will also have a strong lineup of new product hitting the marketplace in the third and fourth quarters, including its Insignia strength, PowerMill, SYNRGY BlueSky and FlexStrider 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 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'd like to focus a minute on some of Mercury's new product offerings.

Mercury Marine, which is celebrating its 75th anniversary, and was named Wisconsin's Manufacturer of the Year earlier this year, has once again launched a strong lineup of new innovative products. Mercury recently launched its new 75/90/115 horsepower FourStroke engines.

These new engines followed the excess 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 the rod-only [ph] engines, combined with a new FourStroke platform, well as the progress reignite with the 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 products' successes will enable Mercury to gain share in this sector over the next 3 years, from high teens percentage to a target in the mid-20s. 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 3 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 one I've just discussed.

As we look at our Boat segment, our plan continues to assume a 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 shall 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're targeting 2014 annual revenue growth in a 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 fourth quarter. In our Life Fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. Our 2014 and 3-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 the 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 the 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..

Maybe to start, let me try to bridge the gap between sort of the minus 2% retail for boats worldwide in the quarter and the -- I think it was plus 4% reported wholesale.

I guess first question, it sounds like international is a real problem child here, do you have the numbers that you could share in terms of what domestic versus international look like at retail? And then I think in your prepared comments, you made the point that the bigger piece of that delta is pricing as opposed to inventory fill.

Can you just sort of confirm that? And I guess, how do we think about that delta as we move forward in the back half of the year?.

Well, what has been the problem in the first half is fundamentally, Canada and South America. We've gone nicely in the U.S., 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 is -- retail has been down fairly dramatically. Again, it was driven by a very bad weather and what we tend to notice in Canada, if there's 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. In South America, it appears to be all driven by economics in that region.

And frankly, did we know that? And when we do businesses with South America, that's a part of doing business down there and you just got to be flexible roll with the economy, and I think our guys are all doing a great job there. And I would point out that we're up fairly significantly in 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 of the boats and helps [ph] revenue.

We're -- 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 over new products into the field.

We have significant ramp-up to do in all of our plans of 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. Is that -- it's a bit rambling.

Does that get you there?.

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

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

Probably both and probably more of the former than the latter. And we're going to be careful getting this new product into the marketplace, especially with the big Sea Ray product which I think sounds like it was referenced on the MarineMax call. I think you listened to it, James.

We waited a while to get the great, big, new product in Sea Ray into the marketplace. We knew that we were going to be losing share in these bigger boats as we went to a very careful planning process, 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 in future years of this brand, that this is one of the big foundations for future growth for the brand.

So if we ever error, it will be on slower making sure it's 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 did not include the extension of the 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 of days ago, basically 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?.

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

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

In terms of the promotional environment on the boat side, how's that been progressing since the beginning of the year with maybe boats sales not being as robust as maybe we would or basically in line just kind of 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 the new products we're introducing. But the market is, in general, behaving very well.

And as I say, we did a 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've been in the past.

So we're 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's a $0.20 impact, the difference, the upside in the $0.05 is the lower end of the range.

Would it -- can you give us a little more color on that?.

Why we raised the bottom end of the guidance?.

Yes. Yes..

Bruce made me. No, as we progress through the year 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 we ought to narrow the range..

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

Just wanted to touch on some of your commentary and MarineMax had echoed this with regards to the over 30-foot fiberglass inboard market and some of the, I guess, some of the strength you're seeing there versus the, I guess, 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?.

Well, 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 in our 350 SLX, especially sort of the 30 to 40 feet.

But we've been gaining lots of share there and the market is up there, in our view, over 5%. And that includes ourselves. And in fact, there's 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, can still be a bit of a tough place for everybody to play.

We've had to view for a long time that above 40 was going to be a good place to be, and that's why we spent so much time getting product ready going to that market, and my judgment is we'll be rewarded for that..

Great and then just shifting over to, I guess, some of your commentary around timing of investments.

How should we look at that? Were there just some things that you couldn't fit into the quarter? Or I guess, just general commentary?.

Yes. As our folks out 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 that they're working their way through a quarter.

The sun don't shine 365 days a year as they're working on our 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 and decide what they do next, and they don't just continue to throw money at it.

So we're 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..

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

Dusty, a couple of pieces here. I guess one is more near-term, one is a little bit more long-term. You talked about pipelines and you talked about specifically, Canada and Latin America.

Can you talk about July trends, what you’re seeing in just in general in retail in the U.S.? And please correct me if I'm wrong here, it would seem that even though your pipeline inventories are up a little bit in aluminum, the outboard fiberglass, that could be a little bit of the weather we caught in the early part of the second quarter now you're expecting that to improve.

So I guess that's all one collective question. And the second question would be 2016 goals. And part of the domestic your announcement you basically reiterated the base case and it appear also the optimistic case goals despite the $0.21 to $0.23 headwind.

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

First, pipeline and retail trend, June was a good month. July is feeling like June at this particular point in time. In terms of the pipeline and in aluminum are -- the only place we felt a little heavy on pipeline was in Canada, which is completely understandable in light of what has been happening to retail there.

We are probably going to need to add the pipeline in pontoon. As we went into our new plant in the third quarter last year and introduced a bunch of new models and model year.

We and our supply base we're unable to get in sync and keep up, and I think we got a little bit behind what the market wanted and what our dealers wanted, so 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 pleased and happy with what our guys have been doing out there. Why we stayed on the base case and taking $0.20 out is we think there are lots of levers, Tim, that we can pull as we go between now and 2016.

So 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 a 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 3 buckets, and I'll come back to the guidance, Tim. Investing in the business, taking care of the pension plan, 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 you -- one goes to work on acquisitions, you don't get them all. Buyers and sellers can't always agree with 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're probably 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 on 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 we're going to do strategically, but we are blessed now that we have all the free cash flow and cash we're going to have, we can begin to think about things a little differently and we're 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. And we're 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.

So we spent a lot of time on it..

Okay.

So I guess just to clarify then, are you saying that the acquisitions in share repo[ph] do or do not have, as parts of the path to get to that 2016 base case scenario? Or is that more of the optimistic scenario?.

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

Okay. And then one of the 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 continue to see a shift in the pontoons and maybe the ski-wakeboard segment as we've seen the last couple of years, is that ongoing in your view? And again, if you're picking up on the pontoon, I mean, not to say you'll care but I mean is on is are getting more of the engine feel pretty comfortable with that still?.

Yes. The one thing, the comment I would make, yes , clearly the sterndrive 130-foot product, buyers had a migration to both pontoons and [indiscernible] product. There's a big cut in here. We're beginning to see real movement now in outboard-based fiberglass product under 30 feet. It is not ski product and obviously not a pontoon.

And there's really nice growth there, all driven by different propulsion, difficult with the product. These outboard engines are becoming just magnificent pieces of machinery. So it's not all just pontoon and ski. We're now beginning to see an increase in outboard use product there..

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

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

But if you're looking at Mercury, let's say, excluding intercompany 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 and this business in addition to this white space, Jimmy [ph]..

Okay, great. And just a follow-up on the impact of this wave of new models that you have on your existing sitting pipeline inventory. Your comments seem relatively in line with Marine Max earlier today. You talked about becoming a little bit more promotional to help clear the deck ahead of the arrival of your new product.

And realizing that a lot of moving parts of the margin side of your business given the production ramp you're undertaking.

But can you just help us tease out how long this period will last or 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..

In the past, you've talked about incremental margin in the low 20 range, including some investments spending.

And I know bowling was fairly small, but I would wonder how that -- how you would look at incremental margin now that bowling is no longer part of the portfolio?.

Yes, 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 to do better than that.

And I would say some of it's just the benefit to the new product lift, 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 thought..

I want to comment everybody -- operator, this is not a criticism to you. We're getting questions, and then it feels like maybe the questioner is getting cut off really quick. We just wondered -- we're not doing that on purpose..

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

A couple of quick questions, and feel free to cut me off whenever you want..

That's just not our style..

The boat revenues, I think you used to give, [indiscernible] but can you update that between fiberglass outboard, fiberglass sterndrive inboard and then your aluminum business?.

In terms of -- I'm sorry, you sort of broke up there.

The first piece in terms of growth rate?.

The revenue split. It used to be like 40/40/20, and then it's been shifting.

Did you have an update on where that's at now given all the changes we've been making?.

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

I would agree..

Okay. Okay. And then....

[indiscernible] the growth we're going to experience, we're certainly getting a little bit more out of the rec fiberglass businesses, but we're going to get growth out of all of the businesses in the back half of the year. So there's not a dramatic shift that's occurring in '14..

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

Yes, we've been introducing some outboard runabouts, outboard deck boats. And as we look at second quarter, we add some nice market share gains with this product..

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

No. Some of it is in the market. There's more to come..

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

On Fitness it seems like the U.S. health club landscape is growing, but consolidating we've got a few bigger players out there.

Is their scale and 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 a quickly brought up to speed..

Sure. We talked about this before sort of to remind us all, we size ourselves for around 220,000 unit market 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 would -- especially in saltwater which would be our Whaler brand is going there very quickly. So we've made last year big investments in pontoon capacity. That will let us run for a long time.

We're completing a big investment in our largest aluminum fishbowl 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 prerecession levels and we 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 equivalent basis, it's exceeded where we thought the market would be at this point in time.

So we said we've been investing pick a numbers, say, 25 million a year, last year, this year and next year an increasing capacity at Mercury, it's not only in assembly, but it's in the casting, machining tooling and assembly. And that will all be done next year, and we all have a long runway ahead of us there also. So some places we've been tight.

We've been making investment. Other places we've got room and I think we'll be fine..

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

I guess my first question is just specifically in the quarter on the engine business. You had a little bit of over 3%. Sales growth and then operating income of more like 2.5. So the incremental margin was just like a little bit maybe 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 that it's just incremental investment spending. If you strip those 2 out there, their incremental leverage is just fine..

Okay. And then the -- you talked about being sold out on some of the new product and just being a little bit capacity-constrained again. So I mean if we think about maybe the industry overall, getting a little bit better here as we exit the season and maybe last a little bit longer.

I mean, how much are you really able to participate in that? Or are you just viewing that as sort of a better sign that sets you up a little bit better as we think about 2015 and beyond?.

If the industry increases -- with all the investments we've made in aluminum, fish, pontoon 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 these new product.

And what we try to convey, and I don't think I do a very good job in explaining this, is we introduce a new model, we know how many weeks, months, et cetera, it will take us to get to full run rate, and it's fairly complex actually. So let's take our new 650 Sea Ray.

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.

So as we start to ramp up we say, I'm going to make this up because I don't want to give anything away competitively. It'll take us 6 boats over 7 months. And again I'm 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're sort of coming out in ramp-up mode for the 51.

I think we're at a ramp up mode for the 35, the 350 SLX. But we've got 2 58s coming. And when we throw those in, it'll feel slow as we get started.

So our dealer network and a couple of people of reference, perhaps, the Marine Max call, and I'll need to go read the transcript, but I can understand where the dealer networks has said man [ph] I got to ramp up [ph] off-boat, I can sell, you can maybe 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 sort of change things over, was -- and I'm sorry if I missed this somewhere.

But was bowling about $0.02 in the quarter? So maybe on an adjusted basis, $0.02 lower versus what you guys actually printed?.

It would have been a penny. Closer to a penny..

At this time, I 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 our sleeves rolled up now because we've got a lot of work to get done over the coming weeks and months. Thank everybody for your interest and I'm sure we'll be seeing you as the weeks progress as we go through the second half..

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