Bruce Byots - VP IR Dusty McCoy - Chairman, CEO Mark Schwabero - President, COO Bill Metzger - SVP, CFO.

James Hardiman - Wedbush Securities Greg Badishkanian - Citi Lee Giordano - Sterne, Agee Mike Swartz - SunTrust Randy Konik - Jefferies Jimmy Baker - B. Riley & Company Tim Conder - Wells Fargo Securities Gerrick Johnson - BMO Capital Markets Joseph Spak - RBC Capital Markets.

Good morning and welcome to Brunswick Corporation's 2015 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Bruce Byots, Vice President, Investor Relations. You may go ahead, sir..

Good morning and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO; Mark Schwabero, President and Chief Operating Officer; 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 Web site 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 also like to remind you that the figures in this presentation reflect continuing operations only, unless otherwise noted.

I'd now like to turn the call over to Dusty..

Thanks, Bruce, and good morning, everyone. We are now about three fourths of the way through the retail marine selling season and the U.S. and European markets continue to provide us with a solid platform from which to grow our businesses.

The second quarter results were in line with our expectations and represent the fourth consecutive quarter that constant currency growth rates have exceeded 10%.

Our recently launched new engines, boats and fitness equipment continue to generate market share gains and our 2015 outlook continues to reflect another year of strong earnings growth, free cash flow and investment in our businesses. Let's now walk through an overview of our second quarter results.

To more accurately reflect the operating in market fundamentals of our operating segments, we'll also present net sales on a constant currency basis, which excludes the impact of changes in exchange rates. Reported revenue in the quarter increased 6%.

From a constant currency basis, revenue increased by 11% with each of our segments reporting a double-digit growth rate. Strongest growth rates were reported by fiberglass stern drive, inboard boats, marine parts and accessories, fiberglass outboard boats and outboard engines. This growth also included a solid performance by our fitness segment.

Our gross margin was flat compared to the prior year. Operating expenses increased by 4%, which were 14.9% of sales. Adjusted operating earnings increased by 9% versus the prior year with operating margins of 13.5%, up 30 basis points compared to last year and slightly higher than our quarterly guidance.

As we detailed in our April call, we forecasted that second quarter operating margins would be flat compared to 2014 as we faced foreign exchange headwinds, the absence of 2014 favorable warranty adjustments in the fitness and boats segments and continued increases investments to support our strategic objectives.

In addition, our new product launch successes introduced additional cost and inefficiencies in the first half as we opened an expanded plant capacity to meet demand, continued to integrate a significant number of new products into production in each of our segments and ramped up production as our sales continue to experience significant growth.

Throughout the first half, our entire organization focused on cost reduction activities to mitigate these headwinds. These activities combined with certain operating expenses shifting into the third quarter enabled us to modestly exceed our second quarter operating margin target.

Continuing down the P&L, adjusted pre-tax earnings increased by 11% and diluted EPS, as adjusted was $1.05, reflecting a 12% increase over the prior year period. Our second quarter sales performance represents the fourth consecutive quarter of this strong growth rate.

Reflecting contributions from recent investments in new product launches throughout our organization, as well as solid market demand. On a constant currency basis, sales in our combined marine segments increased by 11%, while our fitness segment increased by 10%. From a geographic perspective, consolidated U.S. sales increased by 12%.

On a constant currency basis, European sales increased by 16%, rest of world sales increased by 4%. And, in summary, combined sales outside the U.S. increased by 9%. In the first half, on a constant currency basis, sales in our combined marine segments increased by 13%, while our fitness segment increased by 8%.

From a geographic perspective, consolidated U.S. sales increased by 14%. On a constant currency basis, European sales increased by 16% and rest of the world sales increased by 4%. In summary, then combined sales outside the United States increased by 9%.

Adjusted operating earnings were $154.2 million for the quarter, an increase of $12.8 million compared to 2014. Our adjusted operating margins of 13.5% reflects a 30 basis point increase compared to the prior year. For the first six months, adjusted operating earnings were $242.9 million, an increase of $19.6 million compared to 2014.

Our adjusted operating margin of 11.4% is 10 basis points higher than the prior year, slightly better than the guidance we provided in our previous two earnings calls. Adjusted pre-tax earnings increased by $15.2 million, or 11%, as we also benefited from lower net interest expense and higher other income.

For the six months, adjusted pre-tax earnings increased by $25 million, or 12%. Diluted EPS from continuing operations as adjusted for the quarter equaled $1.05 per share, an increase of $0.11. Diluted EPS from continuing operations as adjusted for the first half equaled $1.64 per share. This reflects a 12% increase versus the prior year.

I'll now provide our perspective on the marine market. In the first half of 2015, the U.S. power boat industry grew 5.4% based on preliminary data. As once again, outboard boats demonstrated the highest growth rates. The second quarter, which on average compromises about 45% of the year at retail, reflected a growth rate of about approximately 5%.

Given our assumption of a continuation of sub 3% annual GDP growth rate, we anticipate 2015 U.S. industry growth rates to be comparable with 2014. In fact, the first half growth rate in 2015 is currently identical to the growth rate in the first six months of 2014. I'll now provide some additional color on marine markets outside the United States.

Let's start with Europe, which in 2014 represented 12% of our combined marine segment sales. Overall, the retail boat and inter market for Europe in the second quarter was up by mid single-digit percentage. We're just experiencing solid strong growth included most of Scandinavia, Spain and Portugal, as well as the United Kingdom and Germany.

The French market was flat to slightly down. Eastern Europe and we include Finland there, suffered declines in the Russian market, which is more important to the engine segment than to our boat group, continue to see declines due to the weakening of the ruble and continued political concerns.

Continued ECB monetary policy should support continued slow growth in retail market demand in Europe because most Brunswick marine products sold in Europe is priced in local currency, the strengthening of the U.S. dollar hasn't affected retail demand.

However, the negative effects of the translation are lowering margins on product not manufactured in the region. For the full year, we are finding for overall demand in Europe to be modestly up.

In Canada, which in 2014 represented 9% of combined marine segment sales, second quarter retail was down approximately mid to high single-digit percent following a difficult first quarter. This was primarily due to the continued strength of U.S. dollar and the dwindling supply of inventory purchase previously at a weaker U.S. dollar.

The remainder of 2015 is expected to be down a greater degree, as dealers are now mostly selling products purchased at stronger U.S. dollar exchange rate. For the full year, we are planning for overall demand in Canada to be down high single-digit to low double-digit percent.

In Asia Pacific, which accounted for 7% of sales, retail markets experienced flat overall demand in the second quarter. Our plan reflects a flat market for 2015 compared to 2014. Finally, in South America, about 5% of 2014 sales, the retail market in the first half continued to be down significantly.

Approximately 20% compared to the same period a year earlier. The weakening real has severely limited boats being imported into Brazil from the U.S. or Europe. As a result, Brunswick brands manufactured in Brazil have picked up market share, but we're still challenged for sales due to an overall weak retail boat market.

For the full year, we're planning for the overall South American market to be down double digits. In summary then, global market unit demand for the year is expected to increase closer to the lower end for the long-term growth range of 3% to 5%. Now, I'll turn the call over to Mark for a closer look at our segment results..

Thanks, Dusty. I'll start with the marine engine segment, where second quarter sales on a constant currency basis increased by 11%. Overall, acquisitions contributed 5% to the segment's year-over-year growth. From a geographic perspective, sales in the U.S. were up 11%, reflecting increases in parts and accessories and outboard engines.

Excluding acquisitions, U.S. sales increased approximately 6%. Sales to Mercury's European customers, excluding currency changes increased by 16%, which included a 7% benefit from an acquisition completed in 2014. Sales increased in all major product categories in spite of the weakness in Russia.

Rest of world sales, on a constant currency basis, increased by 7%, as these regions benefited from gains in outboard engines, as well as parts and accessories. This growth was partially offset by lower stern drive inboard sales and the market weakness in Brazil. For the first half, the segment sales on a constant currency basis increased by 13%.

Overall, acquisitions contributed 4% to the segments first half growth.

On a product category basis, the outboard engine business reported solid overall sales growth in the quarter, which included benefits for Mercury 7590 and 115-horsepower four strokes that were introduced in 2014, as well as the new 350 and 400-horsepower engines launched in first quarter of 2015, which fortifies our position in targeted growth segments.

These engines have been well received by OEMs and consumers, particularly, for larger offshore boats and they have led to market share increases within these horsepower categories, including gains in our targeted saltwater, re-power and commercial markets. Our outlook for the U.S. outboard engine business continues to reflect favorable retail demand.

Europe and rest of world markets both demonstrated year-over-year growth with the exception of the high-volume, small horsepower engine market in certain regions, including Russia, due to the weak retail demand mentioned earlier.

Turning to the stern drive business, Mercury continues to expand upon its new engine, the purpose built specifically for marine use. The new 6.2-liter V-8 300 and 350-horsepower models were introduced earlier this month.

These engines leverage the investment from previously introduced MerCruiser 4.5-liter V-6 platform for the 200 and 250-horsepower engine. However, stern drive engine sales continue to be affected by unfavorable global retail demand trends.

Mercury's parts and accessories businesses delivered strong sales growth during the quarter, with gains in most major markets. Revenue benefited from acquisitions, new product launches and market share gains.

This includes product successes such as Attwood's portable and integrated fuel systems, as well as their new LED and underwater lighting system products.

Whale's new and award-winning range of intelligent control pump systems, Motor Guides new trolling motors, joystick piloting systems for outboard engines, a refreshed helm suite with new control and features, the award-winning ECO Enertia propeller and Quicksilver branded lubricants for not only our marine market, but also for motorcycles, ATVs and snowmobiles.

In addition, the continued sales records achieved by our distribution business portfolio, including Land 'N' Sea, Kellogg Marine, Diversified Products and the Bell recreational product businesses, demonstrate their ability to deliver on superior product availability, on-time delivery and product category expansions.

As a reminder, we completed our third P&A acquisition, BLA, early in the second quarter of 2015. Mercury's operating earnings increased by 8% compared to last year's second quarter. Operating margins were at 19.1%, 30 basis points higher than the prior year quarter.

The improvement in operating earnings reflected higher sales, including a favorable product mix benefit from the recently launched outboard products and the parts and accessory growth. Partially offsetting these positive factors were the unfavorable effects of foreign exchange and increased investments for long-term growth.

For the six months, operating margins were 16.5%; 60 basis points higher than last year. In our boat segment, second quarter revenues on a constant currency basis increased by 11% with strong growth in the fiberglass stern drive inboard boats and solid gains in fiberglass outboard boats, partially offset by declines in aluminum boats.

On a year-to-year basis, our boat brands continued to make progress in gaining share. This occurred not only in the U.S. market, but also, in key regions including Europe, Brazil and Canada.

Our share gains reflect the advancements made by our various product development teams, both in terms of lowering the period of time required to introduce new products across our brands and categories, as well as bringing fresh new concepts into the marketplace.

This has been demonstrated across our brands and categories, including Boston Whaler's Dauntless family of boats and the 320 Vantage. Sea Ray's 19-foot SPX and the L class yachts. Lund's 1750 Rebel SX and the Harris Dual Console Pontoon.

Our plan reflects continued share gains as we launch new models in the market, including Sea Ray's new 400 Sport Yacht and 280 SLX, which will be debuting in the third quarter. In the U.S., which represents over two thirds of the segments, sales increased by 16%.

In the quarter, European sales on a constant currency basis increased by 9% versus the prior year. This performance resulted from the introduction of new products, including larger, higher-priced products by our European manufactured outboard boat brands.

Rest of world sales on a constant currency basis decreased by 1%, which reflected the weaker demand in Canada, which was down 6% on a constant currency basis due to the conditions described by Dusty earlier in this call.

In the first half, overall boat revenues on a constant currency basis increased by 13% with strong growth in the fiberglass stern drive inboard boats and solid gains in fiberglass outboard boats. In the second quarter, Brunswick's global retail unit sales increased by 5% compared to the prior year, reflecting our continued market share gains.

Global wholesale unit shipments increased by 1% as declines in aluminum boats were partially offset by gains in fiberglass boats. This increase in wholesale unit shipments compares to the Boat Group dollar sales increase of 8%, as revenues benefited from a favorable shift in mix.

For the six months, global retail unit sales increased by 7%, compared to our prior year, while global wholesale unit shipments were up 1% versus an increase in dollar sales of 10%.

Regarding our pipelines, dealers ended the quarter with 31 weeks of boats on hand, measured on a trailing 12-month retail basis, compared to 34 weeks at the end of second quarter of 2014. Unit pipelines for aluminum products are up modestly compared to last year, due to an expanded distribution network and our new product introductions.

Fiberglass stern drive and inboard unit pipelines are up slightly versus the prior year, while the fiberglass out board pipelines are down. Our plan assumes that the wholesale unit growth rate for the full year will approximate the retail unit growth rate.

For the remainder of the year, we are planning for the wholesale unit growth to be a bigger contributor to our sales increase than the average sales price growth. In addition, the current pipeline levels are appropriate given our growth expectations in the various boat categories and we continue to be comfortable with these overall levels.

The boat segment second quarter adjusted operating earnings increased by $600,000 or 3% when compared to the prior year.

Operating performance in the quarter included planned manufacturing cost increases associated with new product integration, capacity expansions and production ramp up, partially offset by the higher sales including several new product introductions. In addition, the foreign exchange had an unfavorable impact on second quarter earnings.

For the six months, operating margins were 4.3%, 40 basis points lower when compared to the prior year as adjusted results. On a constant currency basis, sales at Life Fitness increased by 10% for the quarter. Growth resulted from higher sales in U.S.

health clubs and hospitality customers, as well as sales gains in international markets, particularly in Europe and certain developing regions. The segment continued to benefit from new product introductions in all regions and with this quarter representing its 11th consecutive quarter of year-over-year revenue growth.

Life Fitness continues to develop new products and services that are resulting in market share growth in the commercial cardio and strength categories.

Recent examples that have led to their share gains include the Explore Console for the Elevation Series, our PowerMill Climber, the FlexStrider, our E-Series cross trainers and the multipurpose Synergy family of training systems. In the first half, on a constant currency basis, sales at Life Fitness increased by 8%.

The segment operating earnings in the quarter increased $4.2 million or 22%, as favorable impact from higher sales along with benefits from cost management actions were partially offset by the impact from foreign exchange. Operating margins were at 13.3%, 180 basis points higher than the prior year.

In addition, Life Fitness incurred increased manufacturing costs associated with planned capacity expansion activities and new product integrations. For the six months, operating margins were 13.6%, 50 basis points lower than last year, reflecting the absence of a favorable warranty adjustment in the first quarter of 2014.

And now, I'll turn the call over to Bill for some additional comments on the financials, starting with the consolidated perspective on how foreign exchange affects our results..

Thanks, Mark. I would like to start with discussing the impact of foreign currency is having on our sales comparisons. As a reminder, approximately 20% of our sales are transacted in a currency other than the U.S. dollar. Our most material exposures include sales and Euros, Canadian dollars, Brazilian real and Australian dollars.

In the second quarter, consolidated sales comparisons were negatively affected by approximately $46 million or 4.3%, which was slightly higher than our previous guidance due to further strengthening of the dollar. For the full year, we're estimating a 4% impact on year-over-year comparisons.

The impact on operating earnings in the second quarter was approximately $8 million. For the full year, we're estimating that operating earnings comparisons will be negatively affected by $30 million to $35 million, or 8% to 9%. This estimate includes the impact of translation on all sales and costs transacted into currency other than the U.S.

dollar, benefits from hedging activities of $11 million and pricing actions taken in certain international markets in response to the strengthening U.S. dollar. Additionally, estimates for the full year assume that rates remain consistent with current rates for the remainder of the year.

Regarding our tax provision, our effective book tax rate as adjusted was 34% for the quarter. Our effective book tax rate for the full year of 2015 guidance is 34%, which excludes any benefit from the potential extension of the U.S. R&D tax credit, which would lower the tax rate by approximately 1.5% for the year.

Our estimated effective cash tax rate for 2015 reflects a low teen percent level. Turning to a review of our cash flow statement, year-to-date cash provided by continuing operating activities was $108.8 million, an increase of $45.2 million versus the prior year.

As planned, pension contributions were approximately $72 million in the first half of the year, an increase versus the prior year due to the timing of our 2015 pension contributions.

Normal seasonal changes in balances resulted in a use of cash in our primary working capital accounts and totaled approximately $87 million for the first half, which is substantially improved from the prior year.

If these changes occurred in accounts and notes receivable which increased by $59 million, accrued expenses which decreased by $43 million, accounts payable increased by $20 million and inventory increased by $7 million.

Year-to-date, our working capital performance has improved versus the prior year due to better inventory management and timing of collections. We anticipate a seasonal liquidation of working capital over the balance of the year. Year-to-date, free cash flow of approximately $37 million versus $17 million in the prior year, an increase of $20 million.

Capital spending was approximately $65 million, which included investments in new products and all of our businesses as well as capacity expansion process.

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 and enhance shareholder returns.

Cash and marketable securities totaled $609 million; the change from year end 2014 reflects year-to-date free cash flow of $37 million, as well as cash returned to shareholders through share repurchases and dividends of approximately $60 million and $23 million, respectively.

In addition, the change reflects net proceeds received from the sale of the Bowling Products business. Let me conclude with some comments on certain items that will impact our P&L and cash flow for 2015. Our estimate for depreciation and amortization is approximately $90 million. We expect pension expense to be approximately $12 million.

Any pension related charges associated with the second phase of the lump sum buyouts planned to be completed in Q4 are excluded from our adjusted EPS guidance. And interest expense is expected to be about $26 million. Combined equity earnings and other income are anticipated to be comparable to the prior year.

And, we expect our diluted shares outstanding for the full year to be approximately $94.3 million. The anticipated reduction in average shares outstanding reflects continued execution of our 200 million share repurchase program initiated in Q4 of 2014.

Over the last three quarters, we have purchased approximately $80 million of stock including $40 million in Q2. To-date, we have repurchased about 1.6 million shares of stock under the program. We expect to systematically complete the remainder of the program by the end of 2016.

On the cash flow side, our plan reflects approximately $75 million of cash contribution for our pension plan, which includes an amount that will be used to fund local lump sum benefit payment buyouts in 2015. Just to point out, almost all of these contributions have been funded in the first half to maximize returns and reduce our pension expense.

Our current plan anticipates working capital changes to result in a modest use of cash of $10 million to $30 million and capital expenditures of approximately 4% of sales with a substantial portion directed at growth and profit enhancing projects including executing against capacity expansion plans in each of our segments.

We plan to generate strong free cash flow for the full year in the range of $180 million to $200 million, which is an increase versus prior guidance and reflects improvements in working capital trends. I will now turn the call back to Dusty to continue our outlook comments..

Thanks, Bill. Our overall operating plans and assumptions for 2015 remain consistent with those we communicated in our last call. Second quarter produced results within the range of our guidance. We continue to target 2015 to be another year of strong earnings growth with outstanding free cash flow generation.

Our plan reflects approximately 6% to 8% sales growth, which includes benefits from the successes of our new products, market share gains and the continuation of solid market growth in the U.S. and Europe and completed acquisitions, partially offset by weaknesses in certain international marine markets.

We've also incorporated our assessment of the impact and changes in foreign exchange reflecting current rates. For the full year, we anticipate a slight improvement in gross margins and solid gains in operating margins.

Our earnings growth is expected to be more heavily weighted to the second half of the year reflecting improved manufacturing efficiencies and cost reductions as well as less challenging FX comparisons.

Earnings will benefit from managing cost through initiatives such as Lean Six Sigma and by implementing programs to improve product costs through supply chain initiatives and manufacturing efficiencies.

As a result of ongoing growth investments, full year operating expenses will increase, but as a percentage of sales are expected to be lower than 2014 levels, approximately 17% to 17.2%. For the second half of 2015, we expect the increase in overall operating expenses to be more modest than reported in the first half.

As a result, our full year pre-tax earnings should continue to demonstrate strong growth with 15% to 20%. Finally, with half a year behind us, we are maintaining our 2015 EPS guidance as adjusted, range of $2.75 to $2.85. Now, we look at 2015 third quarter indicates continued strong top line growth.

Forecasted in the 6% to 8% range and operating earnings to reflect incremental operating leverage in the low 20% range. Third quarter leverage reflects a greater rate of growth and operating expense than we reported in the first half.

Turning to our segments, the 2015 plan reflects continued revenue and operating earnings growth in our marine engine segment.

Specifically, we're planning for revenue growth in the mid single-digit percent range, with a solid improvement in operating margins despite currency headwinds and the continued negative impact on earnings leverage from acquisitions. In addition, we will begin to make significant investments at Mercury.

Our current plan reflects a stable pricing environment for our larger horsepower engine businesses. Looking at our boat segment, our plan assumes that we continue to successfully execute our large fiberglass boat strategy, which is the key part of an increasing number of new products that will be shipped into the market.

Our plan also reflects solid growth of outboard boats under 28 feet throughout the year. As a result, increases in average selling prices will be at a lower rate of growth versus 2014 with only modest increases planned for the rest of the year. We're targeting 2015 annual revenue growth in the high single to low double-digit range.

And we expect margins to be up with year-over-year improvement in the segments operating margins to be less than achieved in 2014. In our fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. In 2015, we're targeting revenue growth in the mid single-digit range.

We'll continue to make significant investments of Life Fitness, aggressively leveraging innovation to achieve competitive differentiation in its products and services, which should continue to enable market share growth and create business opportunities beyond its core business model.

Earlier this month, we announced the acquisition of SCIFIT, a leading provider of exercise equipment tailored to the needs of active aging seniors, as well as the medical wellness and rehabilitation market. This market represents one of several areas of growth opportunities for our fitness segment.

We're planning for margins to be [Technical Difficulty] of Life Fitness for the full year. In conclusion, we are well-positioned to continue to successfully execute our growth strategy and to create shareholder value. The management team and the 12,000 plus employees of Brunswick will remain focused on the following.

Bringing to market a steady cadence of new product introductions aimed at attracting and capturing sales in consumer-friendly features and capabilities. Expanding capacity throughout all of our businesses, engine, boat and fitness, to meet increasing demands.

Increasing efficiencies and streamlining costs by continuing to operate our businesses as successfully as possible. And, identifying and funding the best opportunities we see for growth, as well as managing and adjusting Brunswick's product portfolio as necessary. Thank you. And now, we will be happy to take your questions..

[Operator Instructions] Hearing from Wedbush Securities, we have James Hardiman online, please go ahead..

Hi. Good morning. Thanks for taking my call..

Good morning..

How are you doing?.

Okay..

So let's talk about the guidance a little bit, here, strikingly consistent on a consolidated basis versus what you gave us at the beginning of the year and even what you gave us three months ago. But maybe, walk through the very small components that changed a little bit.

It looks like the Boat segment, you're little bit more bearish on that segment versus three months ago; in the Fitness segment, maybe a little bit more bullish. Is that just the acquisition? How should we think about that? Increase cash flow expectations, twice now, through two quarters.

How should we think about that and what you are going to do with that incremental cash?.

Look at – between the segments, may be more niggling on our part than anything. We don't have, James, a significant change of view about our segments. The only thing about the Boat Group that causes us to be probably conservative as we're look at the remainder of the year, is continued concern about Canada.

Canada has been a significant portion of the market for our littler known businesses that include fishing and pontoon, as well as, our engine business. And it's just a tough place to be right now. And you heard as we gave our guidance for the market, we think the market for the year could be down as high as low single digits.

We'll certainly do better there, but it's a very tough place to be right now and we have a bit of concern for that. That's the only issue in our guidance that really popped up since we've been talking about 2015, beginning back in January. The Fitness business has had a really strong first half of the year in Europe. There are lots of reasons for that.

And something that our team over there has been telling us as we started in to what is now the end of a four quarter cycle that they were going to be able to do. But as we look at Europe, the rate of growth there in Fitness ought to slow a little, but our judgment is the rate of growth in the U.S. will get better in the second half and be offsetting.

So my point is, there is a little puts and takes, but I will take this opportunity to say, I'm incredibly proud of this organization. We're working against where 40% of our business is outside the U.S., and as Bill said, 20% denominated in non-U.S. currencies.

Our teams are doing a really great job of winning the unit war, if you will, wherever they are, and in managing our businesses so we can continue to hit growth rates and targeted earnings. That's a bunch of hard work for our team and in fact, as we look from the last call to the call today, the dollar continues to strengthen.

And what looks like for some people, a bit light on the top line is from my perspective, almost all explained by just a continuing strengthening of the dollar. Our teams are operating marvelously and we don't have much of a change in view between any of our businesses. I'll let Bill talk a minute about our ever increasing cash flow guidance..

Yes.

James, it just is a function of the fact as we went into the year, we had a view of working capital and as we've progressed through the first half of the year here and based on our performance, we just feel comfortable with guidance there that's a little bit lower and better than what we had started out the year with and it's really nothing more than that..

Okay. From Citi we have Greg Badishkanian on line. Please go ahead..

Great. Thanks.

If you could just kind of gradual a bit about – hey, can you hear me okay?.

Yes, sir. Absolutely..

Great. Thanks. Maybe, if you could just kind of walk us through what you've been seeing in the promotional and competitive environment since the beginning of the year just because it's always kind of come up with Harley and Polaris talking about some of the Japanese competitors, but you necessarily aren't seeing that..

I'll do this on a global basis. As we -- most folks want to bring this up, Greg, in the context of our Outboard Engine segment where we have three great Japanese competitors, but one that's significantly larger than the other two. One of the two smaller ones is being a bit disruptive, if you will, primarily outside the U.S.

and that's something our teams are dealing with. And again, I think they're doing a really good job there. As we look at boats, especially larger boats, I think we're beginning to see the first instances of European boat builders using the weak euro a bit to their advantage as they come in and price.

Again, as I look at our business, and all of our, especially larger boat models, particularly new ones because that's where we had a lot of discussion with the street. Our backlogs at retail continuing to be very strong notwithstanding that.

I think we're doing a little better in cutting down the delivery time from receiving a deposit at retail until the time we deliver, but we knew that would happen as the plants have become more efficient building the bigger new product. So it's not unlike what we would – what we expected as we went into the year.

If anything, I'd say our folks on the ground are managing it a little better than I think we even have any right to expect. So I'm relatively calm and when there's a little choppiness we just deal with it..

Great. Thank you..

Welcome..

From Sterne, Agee, we have Lee Giordano on line. Please go ahead..

Thanks. Good morning everybody..

Good morning..

Just on the boat industry, overall, can you just update us on your expectations for unit sales this year? And then maybe going forward, do you anticipate, or are you planning for -- ever getting close to the 300,000 units-a-year level again? Just kind of your thoughts on that would be helpful. Thanks..

You're welcome. Beginning back, I think, in 2012 and certainly in 2013, we described, sort of through the 2016 time that we thought global unit growth would be in the range of 3% to 5%. And this year in our prepared remarks, we said we think unit growth on a global basis will be toward the bottom end of that range.

And as we look through the first six months of the year, unit growth in the U.S. has been 5%. And it's right square on top of unit growth in the first half of 2014. We got the first look at second quarter GDP today and it's a whopping – and I say that very sarcastically 2 point something percent. And we think as long as GDP growth in the U.S.

with the rest of the world economies and political issues continuing to be as they are that we're gong to be living within this range and this year it's going to have to be in the low end of the range.

And again, I want to reiterate, this is all right square in the wheelhouse that we said we were going to be living in and operating, we've been fully prepared for this. And again, our teams are doing a great job at taking share all around the world.

This age-old question, is the market ever going to get back to 300,000 units? My own judgment has always been and it will continue to be that eventually the market will get back to 300,000 units.

I think it's going to take a while and I think when it gets back, it's going to be a different mix than it was say prior to 2005, when it was above 300,000 units.

I do not want to be sarcastic, but, because it's a fair question, a good question by any means, but within our business, many of you will recall, we've said for years, we built our business to be more profitable with higher margins with a market at 200,000 or less, than when the market was 300,000.

What's happened now is, in certain segments on a comparative basis, for instance, the Pontoon segment that market is approaching, within that segment, being at 300,000 unit overall market level, Aluminum Fish is close on its heels, the Fiberglass Outboard is growing fast.

And I'd like to say we're the smartest son of the guns in the world, but we would say we just work hard and we happen to be in the market where the market's is doing well. As outboard power continues to be ever more important in the marine market, we've been coming to market with some great outboard engines, as an example.

So we like to talk about where the market's eventually going to go. But, for us today and for the near future, it is a bit of an academic exercise because we have the goal of being more profitable living in the market we are and creating more shareholder value..

Great. Thank you..

From SunTrust we have Mike Swartz on line. Please go ahead..

Hey, good morning, everyone..

Hi, Mike..

I just wanted to touch on – and I think Mark made some comments around the Outboard Business and this strong growth you're seeing there in particular with some of the new 350 and the 400-horsepower that you introduced in February.

Could you maybe give us a sense of just how successful those have been and maybe frame the longer-term opportunity as we talk about the saltwater market in general?.

Yes. I guess I'd frame the answer that we were expecting that when we brought out the 350 and the 400, particularly the 350 that we'd probably see more of the 300-horsepower transitioning up to 350.

And Mike, what's actually happened is that our 300 volumes have stayed pretty consistent, and yet, we're getting some strong 350 there as well, with a lot of customers who are putting twins and trips and quads on the back of boats and of course, that applies to the saltwater market and that applies to one of our targeted segment.

So we've been real pleased, not only with the take-up rate on those new engines, but the continued strength that we've had with even like the 300-horsepower offering..

Okay, so it sounds like it's actually --.

I would add and Mark can correct me if I'm seeing this wrong, but I think I'm going to be in the ballpark. I think these engines are – the great engines are a great piece of this, but we've begun to move our outboard saltwater share from high teens, so we're now scouting around mid-to high 20% range..

That's correct, Dusty..

Okay. Great.

And then just on the fitness side of the business, as we think of a broader fitness portfolio with the workplace initiatives and the recent acquisition and kind of the active aging vertical, how do you see that evolving over the next three to five years? And maybe, you can give us some context to the profitability of businesses in those verticals versus your core fitness business?.

The acquisitions we've done, the new business that we're starting think of those as foundational, on which then we will begin to generate growth over and above, just for instance, the SCIFIT acquisition, the revenue we are bringing in. As we look at product margins and we tend to think of these margins as the gross margin line.

Our view is that everything that's occurring will be similar to the margins that we get on product presently. So as we get into these businesses, they will not be dilutive to the overall fitness margin..

Yes. I think the only thing that I'd add to that, Dusty, is it'll tend to be something that happens and migrates over time. As they come as a portfolio, there could be instances, especially on the operating margin side where you're a little bit short, but then they'll be pulled up in line with the fitness margins over time..

And is that just because you're investing behind the distribution or are there other components to that?.

Investing in product first. For instance, as we make these acquisitions, as I've said, the business is a base from which we will be building. So you will see additional expense as we work on broadening and developing the product line. That will be the primary mover, Mike..

Okay. Wonderful. Thanks for the color..

You're welcome..

From Jefferies we have Randy Konik on line. Please go ahead..

Hey, great. Thanks a lot. I guess I just want some perspective if we're going to look out a few years, here. I guess first from a perspective of composition of the boating industry. You've had this explosion in pontoons, what have you.

Could you guys give us some feel for how you think the composition of the industry may look different five years from now in terms of particular models? Do you see any strength in your outboard, et cetera? Just curious there.

And then I guess if you think about the ratio of used boat sales to new boat sales as it stands today, how do you think that ratio kind of changes three years to five years from now? Do you expect the used boat sale market to kind of increase as a ratio to new and that kind of helps serve your acquisition front on the parts and accessory side? I'm trying to get a sense of how you think a few years out from now the new area versus the used area kind of plays out and how that affects the different businesses you are focused on in an acquisition profile? And then just again, on the boat side, itself, what areas of the market do you think are going to more explode versus others? Thanks..

Let me deal with the used new ratio because I can do a little more arithmetic in my head around that. I think over time the ratio of used to new will decline because the number of late model used boats that are out there will continue to decline.

And as we and many in the industry work hard to narrow the price gap between used and new I think we'll naturally see those two come closer together. The thing to understand about – and maybe we don't do a good enough job of walking folks through this.

A good portion of our P&A business, yes, it does serve boats that are in service, but we also sell lots of P&A with every boat, new boat and engine that we sell.

So our view here is that we are looking for businesses that are much less prone to economic cycles and we see that in P&A; businesses that take advantage of the big installed base that permit us to participate also in the new markets as it occurs; businesses that tend to be higher margin; and then lastly, businesses where we think we can do a nice job of consolidating and bringing real change to the industry.

So an example and maybe we overstress this, but we quietly went out and formed the distribution business we now call Land and Sea, it was in marketing's prepared remarks [indiscernible]. It's Land and Sea, Kellogg, Diversified and now, Bell. And what we've done is now we're the only folks who can get all this to dealers on a same or next day basis.

And we've talked in the past about how it's transforming dealerships because they don't need to carry as many parts on their shelves for the week. We can get them to them and they can keep their customers on the water. Then lastly, where we're going with P&A businesses, we think there's great adjacencies that we need to be pursuing.

We've talked about many of the parts we build for marine use have applicability in the RV and even motor sport portions of the business. We've just got to start understanding that and getting good at doing the engineering. And then we need a distribution base that also serves those adjacencies and that's why we did an acquisition like Bell.

So now back to we think new and used ratio will change over time. I, Randy, wouldn't begin to try to predict what the boat makeup in the market is going to be five years from now. We've invested strongly in both stern drive and outboard engines and we have ourselves in a position that we are ambivalent on a margin basis as to which ones we sell.

That's been very purposeful on our part because we want to be there to serve the market. If you look at our boat businesses, we participate now with great brands in every boat segment and that's been purposeful. And then our goal is to really keep the pulse of the consumer and be prepared to move quickly as we see changes in consumer behavior..

That's very helpful. Just one follow-up, if possible.

When you look at the boat portfolio and you've done a great job of introducing new models within the portfolio, do you feel like the strategy over the next few years would be more about product innovation, model innovation within the existing portfolio? Do you feel like there's slight areas of the boat portfolio where you'd want to develop new brands within that existing or in addition to the existing portfolio? Just curious, there.

Thanks..

The former, not the latter..

Perfect. Thank you..

You're welcome. Thank you..

From Wells Fargo Securities, we have Tim Conder on line. Please go ahead..

Thank you. Gentlemen, a few questions here, a couple of them, I think, will be pretty quick. On the U.S. marine industry, Dusty, you gave us some color, 5% to 6% in unit terms, your expectation for the year.

Any color on dollars? Then, again, I think you addressed this in your opening comments, but the decline in aluminum shipments all related to what you described what's going on in Canada?.

Decline unit shipments is all Canada. In terms of dollars for the industry, Tim, I don't have a good sense of that, but we've set our dollar growth. What we said is, unit growth in the industry in the U.S. is 5%, they're square on top of each other year-over-year. And my judgment is that ought to continue through the remainder of the year.

We said our dollar growth to be high-single to low-double digits. As to the rest of the industry, I just can't pretend, Tim, I can give you a good view of that..

That's fair. Thank you for your honesty, as always. A couple of other things. We met with you towards the end of May and at that time, I think you guys alluded to at that point you were not seeing any of the Europeans be aggressive with price as it related to boats and the Japanese Yamaha in particular, the same thing on the engine side.

With the boats though, your earlier comments, it sounds like you are starting to see some early stages of some maybe using the currency as a competitive weapon if you could expand on that.

And then domestically, it appears, in general, power sports, cars or whatever, we're seeing the consumer up contenting a lot and in boats, whether it be engine or parts and accessories.

Any color you can give on that?.

Let's do the European boats. I think it began, Tim, late second quarter to be something that we are seeing and noticing.

As to whether it's going to get stronger or harder, I don't know, but the key for us is we've just got to keep bringing all this great new product out and that's why I was careful to highlight, Tim, earlier that our backlogs, at retail, continue to be really strong.

And in fact, we've seen no change in our backlogs from say middle of the first quarter to now with all this new product we are bringing out and that is in and of itself, is fairly remarkable. Some of this product's been out there and backlogs at retail continue to stay very, very strong. So I'm just tickled to death at that.

Now I've talked so long I forgot your second piece of that question..

The up contenting on power sports, but boats in particular..

Clearly, that continues to happen. So it's interesting an aluminum boat will overall cost less than say a yacht but in each of those segments when somebody buys the product they in general want to buy a more expensive in the line with the most features on it..

And it's also helping the outboard business. People who used the power boat with 60 horsepower are now starting to get up to 75, 90 with the same boat..

Okay. And then gentlemen, two last questions. One for Mark and one for Bill. Mark, any update on the aluminum alloy licensing process, how that's gone? You guys made some commentary at the Miami boat show on that.

And then Bill, fair to say if it were not for the lack of visibility, so to speak, in currencies, that maybe your earnings outlook may have crept up a little bit?.

I'll go first, Tim. The milestones that we have established on the alloy, we're meeting all of those. Test and validation things are all coming along nicely. So we continue to have optimism about that particular program..

Tim, I would say that FX is a factor. I would also say just in general, Canadian demand is a factor. And as we go through the second half of the year, we're making an assumption that retail equals wholesale some reluctance to completely commit to that.

There's some chance that perhaps stocking is not at the same levels, and our guidance incorporates some of that potential as well..

Okay. Thank you, gentlemen..

From B. Riley & Company we have Jimmy Baker on line. Please go ahead..

Good morning. Thanks for taking my questions..

No problem, Jimmy..

First, just on Canada.

Are you seeing that headwind kind of equally across the region, or more focused in Western Canada?.

For our business, a bit more focused in Western Canada, primarily because in Eastern Canada, we have a brand that sources a lot locally, local labor, et cetera, and we're much less impact. In terms of overall demand, I would say overall demand is a bit lighter West than East, also, Jimmy..

Okay. Thanks. Just at a high level here, as you look across your business units, a lot of capacity expansion taking place recently.

Would you term this as an unusual year in that regard or is this something that we're going to be hearing from you consistently, from here on out as marine demand recovers and as you launch new products both in the marine and fitness side?.

I think in our marine businesses, when we complete this, we ought to be in pretty good shape for a while. I always say that the place where we've got to be the best prognosticator is in our engine business because we cast, tool, machine, assemble up there. And it's pretty expensive and it takes a while to get capacity in place.

So once we finish all of our capacity expansions up there, we want that to last us a while, if you will. In the boat businesses, we tend to cut it a little closer because we've been expanding capacity in our boat business right on through since 2010. And it's just easier and cheaper and faster to expand boat capacity.

And therefore, we can be a little closer to the line. But we ought to be, Jimmy, in my judgment, when we've completed all this in good shape for a bunch, a bunch of quarters, I'll say it that way, assuming the market continues to perform the way our plan says..

In fitness, we have seen expense involved around expansion, and I think we probably have – Mark, would you say, another couple of years of work to get everything done we want some capacity expansion?.

Yes. To Dusty's point, it's a little easier to add it and can always flex a little with the over time. So we're in pretty decent shape.

I don't see any significant step function, it will be a little bit of continuous maybe to a particular area, maybe it's a little bump to assembly, or it's a little bump to laminating, or something like that on the boat side, but I think the big pieces are pretty much in place..

I think, Jimmy, you tell me if I'm getting to the heart of your question. The disruption to margins and to leverage that all the expansion we put in place and we've been dealing with and talking about, ought to, over time, be going away for a while..

Yes. That's very helpful.

And just lastly, earlier you talked about shortening the delivery time on some of your larger boat products, is that just the natural progression of your recent launches? Is there anything that you're doing, or able to do, to shorten these launch curves that would allow for, let' say, higher initial rates of throughput for future launches?.

I just think it's a natural progression of getting better at building new products and having the plant absorb new products, which in many cases is incremental work with the footprint we have today.

I don't want to embarrass Mark, but I would also say, with Mark here as our Chief Operating Officer, he's a heck of a lot better than I've ever been in operations and I think Mark's beginning to have a real impact also in our ability to get up and running, if you will, Jimmy, with new products..

Okay. Great to hear. Thanks, Dusty. Thanks, Mark..

You're welcome..

From BMO Capital Markets we have Gerrick Johnson on line. Please go ahead..

Hey, good morning. My questions are similar to Jimmy's. Can you just give us an update on your various plan to upgrades, including Sykes Creek, Edgewater and also Fond du Lac? And then you discussed being better able to deliver some of the product to your dealers.

Can you just discuss some of the big stuff, like the 420 Outrage, 650 Fly? Last we checked dealers couldn't get your new product until next June or July.

What does the pipeline look there?.

Okay. Let me start with the upgrades of no particular order. But the expansion down at Edgewater on our Boston Whaler, that's totally up, running, products are coming off and meeting all of our expectations in that operation.

Sykes Creek, with the 590s they're building, we've got boats in the water, so we're making all the headway that we really want there. And when you go up to the Mercury side, their biggest thing they've embarked on right now is new things on coatings, new EDP system going in and that program will finalize out in 2016.

But it's actually replacing existing capacity that's in the plant by both new technology and incremental volume capabilities. So all of the major items that we have, whether it was Whaler, Sykes Creek, or the Mercury side, we're quite comfortable where those things are at.

I think on the throughput side, as Dusty mentioned, the delivery times are really trending down and that's because we're getting some dealer inventory on some of the products. Obviously, new things that are out there like the 1921 SPX, whether it's stern drive or outboard getting some stuff out there.

When retail sold orders come in, we're better able to respond because some of the inventory is able to handle that situation now that we've got some of that in the field. And on the big boats, we've been able to bring the delivery time down a little bit.

But I mean the other part is, from the time you start, it's like a custom home, you're talking about for instance on a 650, it, by definition is going to have months and months of lead-time because of the entire process can involved and the complexity on one of those large vessels..

Gerrick, we've talked about this before and again, I don't want to wear everybody out, but it's a point I think it's important to make. Having a big backlog and a reasonable length of time to deliver boats is very good for both ourselves and our dealers. We have a big backlog with boats and people are willing to wait, let's say, a year to get a boat.

The dealer doesn't have to discount and the consumer gets exactly what they want because we can get in early with them and talk about what needs to be in the product, rather than build for stock.

We are becoming increasingly confident about the power of our product in the marketplace because, while you maybe have to wait a year to get a new 420 Boston Whaler, six months ago and you still have to wait a year to get it today, but we're delivering them every day and the backlog continues to be just as high today as it was in the past and we're all making more money and consumers are happier.

From my perspective, the delivery date is not that big of an issue. The key is to make sure we continue with the backlog with the delivery dates we have and they're continuing very strong..

Okay. Sounds good. Thanks, Dusty. Thanks, Mark..

You're welcome..

From RBC Capital Markets we have Joseph Spak on line. Please go ahead. Joseph Spak your line is open..

Hi. I realize we're running over so just a couple of quick ones, hopefully some quick answers.

Just to clarify that European boat FX comment, are you seeing actions from competitors to gain distribution or to move boats that are out there?.

Moving boats that are coming in..

Okay.

But not necessarily new?.

They're just running both through the existing distribution and we're beginning to see lower pricing..

Okay. Second one, just on the boat guidance. So high-single – on the top line, high-single digits, was low double digits. The margin previously equal to less than and now just less than.

So I guess the question is, if you can still do low-double digits, why is the margin is still a little bit worse? Is that the Canada impact you mentioned, or is there something else we're missing?.

That's the big majority of it, is the Canadian impact, yes..

Final question from me.

The boat price mixed comment, where you talk about wholesales having a bigger impact than price for the year? Is that second half of the year comment, or for the full year?.

Second half..

Okay.

Any color for the full year?.

Bill, can you help me on that?.

I would say it's a little bit more balanced. First half of the year, we're obviously over-weighted towards ASP versus unit volume..

Right.

And then you have tougher comps in the back half, so could that actually be down, or sort of just more – pretty modest?.

It's pretty specific. I would say it's flat to more modest..

Okay.

And then last one, just on the marine margin commentary that one's a little bit maybe less granular than some of the other segments, but with only a couple of months left of meaningful sales, can we get anything more specific than solid improvement?.

No..

Figured I'd try. Thanks a lot, guys..

You bet..

Thank you. At this time, we will now turn it back to Dusty McCoy for final remarks..

Thanks for those who've held on for a very long call. I apologize for that and probably ought to apologize for the length of some of my answers. Bruce is looking at me like, yes. Thanks everyone, for their interest. We're really happy with where we are; feel like we had a great quarter and looking forward to finishing out the year strong.

So thanks, everybody..

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect..