Apr 25, 2013
Executives
Bruce J. Byots - Vice President of Corporate & Investor Relations Dustan E.
McCoy - Chairman and Chief Executive Officer William L. Metzger - Chief Financial Officer and Senior Vice President
Analysts
Edward Aaron - RBC Capital Markets, LLC, Research Division James Hardiman - Longbow Research LLC Timothy A. Conder - Wells Fargo Securities, LLC, Research Division Jimmy Baker - B.
Riley Caris, Research Division Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division Rommel T.
Dionisio - Wedbush Securities Inc., Research Division Craig R. Kennison - Robert W.
Baird & Co. Incorporated, Research Division Joseph J.
Yurman - 1221 Partners, LLC
Operator
Good morning, and welcome to Brunswick Corporation's 2013 First Quarter Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded.
If you have any objections, you may disconnect at any time. I'd now like to introduce Mr.
Bruce Byots, Vice President, Corporate and Investor Relations.
Bruce J. Byots
Good morning, and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO; and Bill Metzger, CFO.
Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements. Please keep in mind that our actual results could differ materially from these expectations.
For the details on the risk factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com.
During our presentation today, we are using certain non-GAAP financial information. 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 release.
I would also like to remind you that as a result of our announced intention to sell the Hatteras and CABO businesses, the results of Hatteras and CABO continue to be reported as discontinued operations for all periods presented. The figures in this presentation reflect continuing operations only, unless otherwise noted.
I would now like to turn the call over to Dusty McCoy.
Dustan E. McCoy
Thanks, Bruce. Good morning, everyone.
I'll start the day with an overview of our first quarter results. Revenue in the quarter increased 4% and was led by growth in outboard marine products, marine parts and accessories and fitness equipment, partially offset by declines in fiberglass, sterndrive inboard products and in our bowling businesses.
Gross margin increased by 150 basis points, mainly due to reduction activities and improved operating efficiencies, including a solid improvement in the Engine segment, which also benefited from the absence of last year's sterndrive production inefficiencies and continued growth in demand for outboards in the 75- to 150-horsepower range. Operating expenses increased by 2%.
If we exclude a $5.5 million gain on sale of real estate, which was included in our initial guidance, operating expenses would have been up 6%. Research and development expenses were up 13% as we continue to invest in programs that support our numerous growth initiatives.
Adjusted operating earnings increased by 26% versus last year. Continuing down the P&L.
Net interest expense excluding debt extinguishment losses was reduced by $3.1 million, and a lower effective tax rate also improved our adjusted net earnings by almost $3 million. Diluted EPS as adjusted increased by 46%.
As a result of our solid first quarter performance in abnormal market conditions and a lower-than-expected tax rate, we're increasing our estimated 2013 diluted earnings per share as adjusted to a range of $2.30 to $2.50 per share. As I mentioned, sales in the quarter grew by 4%.
Solid top line improvement was experienced in our Marine Engine and Fitness segments. This growth was partially offset by declines in our Boat and Bowling segments.
From a geographic perspective, consolidated U.S. sales increased by 7%.
Sales to Europe declined by 4%, and Rest of the World revenues were flat versus the prior year. Adjusted operating earnings were $95.5 million for the quarter, an increase of $20 million or 26% compared to 2012.
Operating margins x charges increased by 170 basis points to 9.6%. The increase in operating earnings reflect solid sales growth and gross margin improvements, partially offset by an increase in operating expenses.
Net earnings for the quarter were $0.59 a share, including $0.05 a share of charges for restructuring and a $0.12 of losses from special tax items. Excluding these items, our diluted earnings per share as adjusted equaled $0.76 per share.
This compares to net earnings of $0.51 per share in the prior year, which included a $0.01 charge from special tax items. Again excluding this item, 2012's Q1 earnings per share equaled $0.52.
In summary, our adjusted EPS increased by $0.24 or 46%. Now let's look at our operating segments, starting with the Marine Engine segment.
From a geographic perspective, first quarter sales to U.S. markets were up 13%, and Rest of the World sales were up 1% year-over-year.
Sales to Mercury European customers decreased 1%. In the aggregate, Mercury sales increased 7% for the quarter.
U.S. sales growth was led by strength in outboard engines and parts and accessories.
The slight increase in Rest of the World sales was primarily a result of the improvements in Asia-Pacific outboard engine sales. In Europe, engine sales were up slightly, but offset by lower parts and accessories sales.
From a product category perspective, our U.S. outboard engine business delivered strong earnings growth, reflecting solid performance in the aluminum and fiberglass outboard boat categories.
Strong demand continued for our new 150-horsepower FourStroke, as well as the Verado engine family and engines in the 75-, 90- and 115-horsepower range. Unfavorable global demand trends continued to affect revenues from sterndrive engines.
These market trends were partially offset by increased sales resulting from the absence of our Q1 2012 sterndrive production and start-up inefficiencies. In spite of inclement weather and a late developing spring in much of the United States, Mercury's parts and accessories businesses reported solid sales increases in the United States and Rest of the World markets, reflecting stable boating participation, new product launches and market share gains.
European parts and accessories sales experienced a modest decline in the quarter. Record sales in earnings were again achieved by Attwood in the quarter.
Mercury's adjusted operating earnings increased by approximately $22 million during the first quarter. Positive factors included higher sales, particularly in the 75- to 150-horsepower outboard range, the absence of the Q1 2012 sterndrive production inefficiencies and a gain on sale of real estate.
These factors were partially offset by spending on growth initiatives. First quarter operating margins were 13.7%.
Now let's look at our Boat segment. Q1 revenues were down 1% compared to the prior period.
In the quarter, our sales to Europe declined 30%, reflecting soft market conditions and actions to reduce dealer pipelines. Rest of the World sales decreased by 6%, due primarily to lower sales in the Asia-Pacific market, partially offset by higher sales in South America.
In the United States, which represents about 2/3 of the segment, sales increased by 7%, reflecting strong wholesale shipments of aluminum boats. Before we take a look at United States powerboat industry statistics, to get a view of how retail demand is unfolding by boat category, let's take a moment to review some weather trends that were influencing retail activity in the first quarter.
Although we're always reluctant to cite weather as a factor, we believe warmer-than-normal temperatures that occurred in the first quarter of 2012 combined with colder-than-normal conditions in this year's first quarter for the eastern 2/3 of the United States contributed to the declines experienced thus far. In other words, we believe that retail sales occurred earlier last year, and this year, they remain potentially deferred to later months.
Therefore, as you can see, from the preliminary SSI first quarter data, weather and possibly certain economic factors influenced Q1 demand metrics, as aluminum and fiberglass sterndrive inboard boat markets decreased by 7% and 14%, respectively. Fiberglass outboard markets continued to show growth, but at a lower pace than in 2012.
In SSI's industry report, which is published in Soundings Trade Only, fiberglass boats greater than 30 feet in length but less than 63 feet, which represent about 50% of our fiberglass sterndrive inboard revenues, were up 1% year-to-date. Fiberglass sterndrive boats smaller than 30 feet were down 17%.
In the first quarter, global retail unit sales of Brunswick boats declined by approximately 1% and global wholesale shipments increased by 1%. Our wholesale dollars increased due to an unfavorable change in product mix.
Our dealers ended the quarter at 39 weeks of boats on hand on a trailing 12-month retail basis, which compares to 39 weeks on hand a year earlier. Pipelines for aluminum product are over -- are up over last year's levels on a unit basis, and weeks on hand determined on a trailing 12-month retail basis are also higher.
As a result of the negative influence inclement weather had on retail activity, wholesale shipments in the first quarter exceeded retail demand, especially in our fish boat category by an amount greater than we had anticipated. Assuming retail sales are consistent with our full year expectations, we would expect aluminum wholesale unit shipments to grow in parity with retail demand in 2013.
Pipelines for fiberglass sterndrive inboard product 24 feet and larger continued to decline to record low levels. As we stated on our January conference call, we planned in the first half of 2013 for the continuation of declines in large boat pipeline inventories as we and our dealers continue to respond to weak market conditions in this segment.
Understanding the market and working closely with our dealers on top line management is important for 2 reasons. Main pipelines enable us to respond quickly to the market upturn we will eventually see.
And in addition, our product plan contemplates a significant volume of new introductions, and healthy pipelines facilitate the flow of this product to the market. For both segments, first quarter adjusted operating earnings declined by $1.7 million when compared to the prior year.
This decline resulted from lower sales of large fiberglass boats due to the previously mentioned pipeline reduction actions and weak market conditions, as well as investments made in our growth initiatives. Partially offsetting these negative factors were the benefits from the fiberglass cost reduction activities we initiated in the fourth quarter of 2012.
Now let's take time to look at our 2 recreation segments. Sales in Life Fitness increased by 6% compared to last year's first quarter.
The increase reflected strong net gains in international markets and sales growth to U.S. health club customers and most other U.S.
distribution channels, partially offset by lower sales to local and federal government customers. First quarter operating earnings increased by 3%.
Higher sales combined with a favorable insurance settlement were partially offset by investments in growth initiatives. Sales in our Bowling & Billiards business decreased 5% in the quarter.
Lower sales in bowling products and a reduced retail center count were partially offset by an increase in United States equivalent retail center sales. We believe that weather was a favorable factor for our retail bowling centers, as consumers remained content with indoor activities with colder-than-normal conditions this year compared to the warmer conditions last year.
First quarter adjusted operating earnings increased by 3%, as increased United States equivalent center sales and improved operating efficiencies were partially offset by lower sales in bowling products. Now I'll turn the call over to Bill for a closer look on our financials.
William L. Metzger
Thank you, Dusty. Let me start with a discussion on our debt outstanding, which at the end of Q1 was $570 million, representing a $261 million reduction over the last 2-plus years.
Reducing outstanding debt continues to be a priority for the company, with targeted debt reductions of $100 million to $125 million planned for the year. Our plan contemplates the retirement of our 2016 bonds, thereby eliminating the 11 1/4% coupon from our debt portfolio.
This retirement would be funded using the combination of cash and proceeds from a new debt offering and will substantially complete our planned debt reductions. Net interest expense, which includes interest expense and interest income, was $14 million in the quarter, a decrease of $3.1 million versus the same period in 2012.
The reduction was a result of lower debt balances. For 2013, we expect net interest expense to be reduced by $13 million to $17 million, excluding anticipated debt extinguishment losses of $25 million to $30 million.
The exact timing of debt retirement is one of the factors that will determine where we fall within these ranges. Please note, since our guidance is on an as adjusted basis, the exact amount of the extinguishment loss will not affect our EPS guidance range.
Foreign currency had a minimal impact on sales and operating earnings comparisons for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements and including the impact of hedging activity. For full year 2013 versus 2012 comparison, we currently estimate that exchange rates will have a minimal impact on sales and a positive impact on operating earnings.
This assumes that rates remain in line with current levels for the remainder of the year. Our tax provision for the first quarter was $21.9 million on a GAAP basis.
This included a net charge of $11.1 million related to a valuation allowance adjustment for stock compensation activities that occurred in the quarter. On an as adjusted basis, our tax provision was $11.2 million compared to $9.9 million in the first quarter of 2012.
These amounts exclude the impact of onetime pretax charges, such as restructuring charges, debt extinguishment losses and any nonrecurring special tax adjustments. The effective tax rate on an as adjusted basis was 13.6% for the first quarter of 2013, which is lower than the prior year and our previous estimate for 2013.
These variances are largely the result of more favorable mix of domestic versus foreign earnings, as the company's tax provision continues to be comprised mostly of foreign income taxes. Our current estimated effective tax rate for 2013 on an as adjusted basis is in the range of 13% to 15%.
Turning to our view of our cash flow statement. Cash used for operating activities of continuing operations in the first quarter was $94 million.
Seasonal changes in our primary working capital accounts resulted in a use of cash in the quarter and total approximately $176 million. By category, accounts and notes receivable increased by $123 million; inventories increased by $29 million; accrued expenses decreased by $67 million; and accounts payable increased by $43 million.
Given the seasonality of sales in our Marine businesses, we anticipate the liquidation of working capital balances over the remainder of the year. Capital spending in the quarter was approximately $21 million, with the increase from prior year primarily reflecting the impact of our growth initiatives.
Free cash flow also included approximately $6 million in proceeds from the sale of property, plant and equipment in our Marine segments. Total free cash flow from continuing operations totaled a negative $108.9 million versus a negative $69.4 million in the prior year.
Please note that our plan anticipates improvement in year-over-year free cash flow trends over the remainder of 2013. In summary, cash and marketable securities declined to $305 million during the quarter, with a seasonal free cash flow usage accounting for the majority of the reduction.
Supplementing our cash and marketable securities balances is the net available borrowing capacity from our revolver of approximately $271 million, which, when combined with our cash and marketable securities, provides us with total available liquidity of $576 million. Now let me conclude with some comments on certain items that will impact our P&L and cash flow for the full year.
We currently estimate restructuring charges to be in the $11 million to $13 million range in '13, including those pertaining to consolidation actions initiated in the Boat segment during the fourth quarter of 2012 and the first quarter of 2013. Our estimate for depreciation and amortization is approximately $95 million.
We expect our 2013 pension expense to be approximately $90 million, which is a decrease of $6 million from 2012. In 2013, the company plans on making cash contributions to its defined benefit pension plans in the range of $50 million to $60 million.
We expect capital expenditures to increase versus the prior year as we fund our growth initiatives. Our current plan reflects an amount that now approximates 4% of projected sales.
Our working capital performance will be primarily a function of our revenue assumptions. Our current estimate reflects a use of cash for the full year for working capital in the range of $25 million to $50 million.
Despite higher spending levels and a usage of cash for working capital, we plan to generate solid free cash flow for the full year and maintain healthy levels of liquidity, although total cash balances will be reduced to fund debt reduction. I'll now turn the call back to Dusty for his concluding comments.
Dustan E. McCoy
Thanks, Bill. I'm going to conclude by talking about our outlook for the remainder of this year.
We continue to plan for global marine markets to unfold consistent with our initial planning assumptions, which reflect a global economic conditions that are generally comparable to 2012, with weakness continuing in Europe. First quarter U.S.
Marine sale demand was below our expectations. Clearly, weather conditions in important boating markets played a significant role in depressing demand.
Because of the significance of weather on demand, it remains unclear to us whether demand is also being impacted by consumers pulling back slightly as they absorb higher payroll and other taxes and other factors, which weaken consumer confidence in spending. We believe these non-weather factors are having a modest negative effect.
We expect in the remainder of 2013 to continue to experience an uneven recovery in the U.S. powerboat market, with our outboard boat and engine products, along with our global parts and accessories businesses, generating growth.
We continue to believe that weak market conditions will put pressure on the large fiberglass boat category, which will affect both fiberglass boat and sterndrive engine production and sales. Positive health and wellness trends, combined with exciting new products, have positioned our Fitness business to deliver excellent results again in 2013.
And our Bowling business should further leverage its competitive advantages, with improving sales expense expected in the second half of the year. So as we look at the top line, we continue to target 3% to 5% growth in overall revenue in 2013.
Our current plan also reflects a modest improvement in gross margin levels, as the strong increase we experienced in the first quarter is expected to moderate over the remainder of the year. As you may recall, the company's strong gross margin improvement in 2012 occurred mostly in the last 3 quarters of the year.
Consequently, we are facing more challenging comparisons as we move forward, you'd see a balance between positive and negative factors affecting gross margins for the remainder of the year. As always, we will continue to focus on identifying and implementing strategies which improve our gross margins.
Our organic growth platform will benefit from increased investments in capital projects and research and development programs, along with the SG&A to support them. And as a result of these initiatives, Q2 and the full year operating expenses as a percentage of sales are expected to be comparable to 2012 levels.
For the full year, we will also benefit from lower net interest expense and pension costs, as well as a lower-than-anticipated effective tax rate on an adjusted basis. Partially offsetting these positive factors is the effect of higher diluted shares outstanding.
So as a result of all of these factors, we're increasing our 2013 diluted earnings per share as adjusted expectation to a range of $2.30 to $2.50 per diluted share. The midpoint of this range would represent a very solid mid-teen percent growth rate over the $2.09 we earned in 2012.
Thank you, and now I'll turn the call back to the operator for your questions.
Operator
[Operator Instructions] First question we have comes from the line of Ed Aaron of RBC Capital Markets.
Edward Aaron - RBC Capital Markets, LLC, Research Division
Just wanted to start on retail. I think you said your global retail sales were down 1%, which is quite a bit better than where the U.S.
market shaped out for the quarter. Should we interpret from that, that you had some nice share gains in the U.S., or did the growth rate -- was the growth rate helped by just better growth in international markets?
And if it is more of a share dynamic, maybe you could elaborate on what segments you might be gaining some share in.
Dustan E. McCoy
Good question. Both -- the answer is, both those contributed, and our share gain is occurring in our aluminum outboard-based business and our outboard fiberglass business.
Edward Aaron - RBC Capital Markets, LLC, Research Division
Okay. And then as a follow up on the sum of gross margins, you came in quite a bit better than, I think, most were expecting for the quarter.
I understand that the absence of the sterndrive issue was a nice piece of that. Could you maybe quantify how much of it came from that particular factor?
Because it seems like that wouldn't have accounted for the majority of it. In which case, it's a little bit hard to understand why you might not be able to get some continued gross margin expansion as the year unfolds from here.
Dustan E. McCoy
Well, about 1/3 of the increase in the first quarter, Ed, came from the absence of the inefficiencies that we had in the first quarter of last year. Then as we look forward to the remainder of the year, I might let Bill walk you through what we're seeing on gross margins, if that's okay.
William L. Metzger
And maybe I'll touch on factors that affected this year. First, Ed, I'd like to point out that this is really the fourth straight quarter where we've had significant year-over-year gross margin improvement.
And as you look out through the remainder of the year, I think the comps get to be a little bit more difficult. Some of the other factors that affected Q1 -- we continue to get some tailwinds from a richer mix of engine products being sold.
The growth in the 75- to 150-horsepower category continues to be something where we see a benefit, and we really started to see that take hold kind of in Q2 last year and especially during the second half of the year. Boat sales are a factor, where we probably got a little bit of the headwind.
The mix change between selling higher margin large boats and smaller margin aluminum and fiberglass boats -- outboard boats has been a headwind for us in Q1, and it'll be something we expect to see until our pipeline reductions are completed. And then in the Fitness business, we've seen the margins in that business starting to flatten, which we've talked about.
As the competitive environment gets to be a little bit more difficult, we see that stuff occur -- that margins are starting to flatten.
Operator
Next question comes from the line of James Hardiman of Longbow Research.
James Hardiman - Longbow Research LLC
A couple of clarification questions. Certainly, when you look at things from a segment perspective, the big beat here was on the Engine side.
Fitness also did really well. Can you just clarify the couple items that were in both of those numbers?
I think you said you there was a $5.5 million gain on sale of real estate. Was that a gross number, a net number?
And then, could you help us quantify the insurance settlement? Was that meaningful on the Fitness side?
William L. Metzger
The $5.5 million is a net number for the gain.
Dustan E. McCoy
And the Fitness insurance was slightly over $1 million.
James Hardiman - Longbow Research LLC
$1 million, okay. And then I guess separately on the guide, basically, at the midpoint of your guidance, I think it's up maybe $0.07, $0.075.
It seems like the entirety of that is taxes, right? I mean, you lowered your adjusted tax rate, I get to about a $0.09 benefit from that alone.
I guess, if you were to boil down what's changed, and it sounds like there's about 50 things that have changed, what are the big items that have gotten better since the last time we spoke, and what are the items that have gotten worse? Because I think we see a pretty big first quarter beat, and yet, excluding taxes, the guidance is largely unchanged.
Dustan E. McCoy
We'll, first, your arithmetic is actually right. And we -- I, frankly, expected, James, questions along the line that you're laying out here, "well, why didn't you raise it for [ph]?"
It's not -- this is not to say, in the way we raise the guidance range, that we're not really confident about the year. But what we're frankly doing is we're very early in the retail season for -- in our Marine business, and it has been delayed by weather.
And we wanted to give ourselves room to take a turn here through this second quarter and begin to get a good view about what's going to go on at retail, if retail begins to come back and it begins to meet, on an annual basis, the levels we've been thinking. We feel really good about our year.
But we just need to let that develop here in the second quarter, and then we'll take a look and see what we ought to say.
Operator
Your next question comes from the line of Tim Conder of Wells Fargo Securities.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
A couple of things here, and I apologize, I got on a tad late in the call. The retail, any commentary on what you've seen in April here?
If you can give some additional color there. And then also on the gross margin question, the boat mix, Bill, if you could go over that and a little bit more detail, you're -- it seems like in the first quarter, you had called out before that you're lowering your shipments because of some of the new products coming in the second quarter that will be shipped in the second quarter.
So -- and maybe it's just some nuances between that and understandable with the aluminum boat, so just a little more color on that would be helpful, sir.
Dustan E. McCoy
I'll do April retail first, and then I'll provide one comment on gross margin and let Bill, who's a lot smarter than me, handle the rest of it. April retail is pretty interesting.
We've always said we didn't like to talk about the weather because there's weather every day, but we continue to talk about the weather here. Several of us were just up in Minnesota for a visitors review last week, and it was snowing in April.
Having said that, though, as we look at our liquidations through our BAC business, we're seeing a nice pickup in April. So we're just going to have to let all these unfold, Tim.
And again, looking at weather, even here in the Chicago area, the forecast for next week's a heck of a lot better than we've experienced this week. So again, our view is that this is primarily weather-related, and as we've surveyed dealers, a lot of dealers have a lot of sold boats sitting on their showroom floors waiting for better weather to deliver.
So we're not depressed by this; it's just a fact, and time's going to tell. But we're not overly pessimistic about what's going to happen.
On this gross margin question, the first thing I would say is, when we talk about new product coming, Tim, I don't think we've promised second quarter. We just said for the year, we need to get the pipeline positioned for a bunch of new product coming, and there's a lot coming in our larger fiberglass business, but we've not really timed it around the second quarter.
And I don't really want to get into timing because I don't want to give away competitive information.
William L. Metzger
I think the only thing I'd add to that would be that Q2 was probably a tougher period year-over-year comparisons for big boats than Q1 was.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay, okay. But I mean, if you're -- okay, okay.
I'll -- and then the small boats, though, as that picks up -- I mean, your most probable boats are your midsize boats, and as that would pick up, you would think that the gross margins would get better when you start shipping some of that. So again, back to the gross margin, could the guidance at this point be conservative?
Dustan E. McCoy
I think, Tim, again, our planning assumption is that -- what you call midsize boats, let's kind of define it for the rest of our audience, it's sort of -- it would be midsized fiberglass boats which are, say, 28 feet up to 40 feet. And you're right, that's a very profitable segment for us.
But our plan, Tim, is to continue to take pipeline down in the second quarter for that product.
Operator
Next question comes from the line of Jimmy Baker from B. Riley and Company.
Jimmy Baker - B. Riley Caris, Research Division
The SSI data showed some significant strength in fiberglass inboard and sterndrive product over 30 feet in length in the month of March. It seems like that's continuing here in April.
So I guess, just in the context of your pipeline reduction initiatives, are you concerned at all that if we do have a big release of deferred demand later in the selling season that your dealers might actually be caught a little to lean?
Dustan E. McCoy
Not concerned, as we look at the levels of what we think we could produce, Jimmy, but you're right. It's something we need to keep an eye on.
And frankly, if it happens, we got a really high-class problem and we'll scramble and find a way to meet demand.
Jimmy Baker - B. Riley Caris, Research Division
Okay. And then maybe you could just characterize your fiberglass, sterndrive and inboard pipeline inventory relative to the industry, maybe both in terms of weeks on hand and then age?
Dustan E. McCoy
I don't know that we have a good industry weeks on hand or aging, frankly. We have views that, say, as we look at our BAC business, that we're comparable to slightly better than the rest of the industry, but, Jimmy, we don't have hard data.
I wouldn't be able to promise you with hard data that that was true.
Jimmy Baker - B. Riley Caris, Research Division
Okay. Last one from me, and then I'll pass it off.
A really strong quarter here for Mercury, as mentioned. I'm just hoping maybe you could speak to outboard engine market share trends here early in the season, and if you're seeing any increased competitive activity from the Japanese given that the yen and, I guess, the relative attractiveness of the North American market for them?
Dustan E. McCoy
Sure. Share, we're comfortable with where we are and that we'll maintain throughout this year the share growth that we've experienced that really began around the tsunami.
And what was the second part of that? I apologize.
Jimmy Baker - B. Riley Caris, Research Division
Just if you're seeing any increased continued activity...
Dustan E. McCoy
Oh, ok -- pricing. No, we haven't.
And our Japanese competitors are great and smart competitors, and this could be a time for them to take some margin. And I should always clarify, we buy a lot of engines out of Japan through our TMC joint venture, and that's for 30-horsepower and below.
And of course, we're seeing a benefit from that. But we're not really changing our pricing either.
Operator
Next question is from the line of Mike Swartz from SunTrust.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division
I just wanted to touch on some of the commentary around maybe investment spending. It sounds like versus your prior goalpost that some of the operational expenses aren't moving higher to the balance of the year, and it does sound like CapEx is closer to the top end of the range that you gave before.
So maybe you can provide some more commentary around maybe where the incremental spending is going, and if you're pulling any of that -- any of those investments forward from 2014.
Dustan E. McCoy
Let's see if this helps. First, is the increase in operating expenses because we've guided now, think of '13 as operating expenses being on a percentage basis same as '12.
And then if you do the arithmetic, pick a number, but that's -- I'm just going to pick a number, $40 million. As we look at then how we're spending that additional amount, well more than half of that, Mike, is all growth driven.
And it's in R&D. It's in sales and marketing, and it is in some IT infrastructure that we'll need in order to support all that growth.
As we go over to the CapEx spending that were beginning at that range, and I think we're saying it's around 4%; 75% of our CapEx spending is to support growth, and that's a significant number. So we're very happy with our ability to maintain all of our facilities, et cetera, but we're really spending a significant amount in order to promote growth in the future.
And none of that, Mike, is a pull-forward from '14. It's all consistent with our plan.
And as we've talked about now coming up on a couple of years about all of our growth initiatives, and we're just out executing against that everyday.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division
Okay, great. And then just to touch on the Fitness business.
I know that in the fourth quarter, the Fitness business was a little softer than expected, and your thoughts at the time where you said that some orders may have been delayed or deferred into the first quarter. Did you see any of that pick up in the quarter, or is that something that we should expect maybe later in the year?
Dustan E. McCoy
Here's what went on in the Fitness business. This business is now split almost equally between outside the United States and inside the United States.
And as the way that we account for sales, a lot of the sales that we've done in the past to government buyers has been on a unit basis down 50%. So then as we look -- and that happened in the fourth quarter.
Frankly, that's continuing unabated in the first quarter in light of all the restrictions on spending sequestered to government. So the way that, that quarter shaped up, and it's really unique versus all of our businesses, we got 1% growth in the U.S.
even after making up for loss of 50% of units to government sales. And we had 11% growth outside the U.S., which was just magnificent.
So that business -- our guys there are really in tune with the market. We got a lot of great products coming.
I've got to be with our team in Europe 2 weeks ago at the large European show. I really like the way the business is positioned.
I know what product's coming to the market, and I think it's going to do really well compared to the competition. So that's a place we're comfortable, push the guys to keep the new product coming.
We'll let them spend in operating expenses because a lot of what they do is not so much capital-intensive as it's R&D intensive. So we're encouraging the ramp up and get it done and keep the new products coming.
Operator
Next question comes from the line of Rommel Dionisio of Wedbush Securities.
Rommel T. Dionisio - Wedbush Securities Inc., Research Division
We certainly see the numbers in aggregate for the divisions. But I wonder, Dusty, if you could just comment on some of the new boat products introductions that you have here for 2013, especially Sea Ray and Bayliner.
I know Sea Ray had a new 5 -- 51 or 510 and Bayliner had some new designs as well. So I wonder if you can just comment on the initial reception at the dealer and consumer level there.
Dustan E. McCoy
Yes. And thank you for the question because it always gives me the opportunity to pontificate about what a great job our boat guys are doing.
As you know, you follow us closely, down in Miami, there were 4 boat categories for innovative products, and our products won 3 of them. And in one of the categories, we were both 1 and 2.
And the sales of those products continue to be very strong. The 510 which you mentioned is clearly our star right now, above 50 feet.
We've got a lot of product coming above that size range. And frankly, that's one of the reasons we're working hard to position our pipeline in order to receive all that at the appropriate time.
On some of the specifics, the Bayliner Element, all-new styling, a new ride, it feels different when you're on it, a very low price, is a real hit. And it reminds me almost back to 2002 when we took the first Bayliners to Mexico and came out with a very important price point of boat; we're getting the same sort of reception here.
Our Boston Whaler center consoles or side consoles -- I'm sorry, walk-throughs are doing well. They won an award in Miami.
So as I look at our whole product lineup, new products, our product folks are really hitting it. I think we probably had a low, as we went through the downturn, cut back on spending for our new product.
Our guys have done a great job of gearing up. Our design people are better now than they've ever been.
And we're really confident about what we've got coming. And we're spending a lot of money to get it there.
So it's got to hit, but our team knows that, and they're staying on the path.
Operator
Next question comes from the line of Craig Kennison of Robert W. Baird.
Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division
I wanted to follow up on an earlier question regarding market share for Mercury. I know one of your hopes was to begin to gain share in the saltwater market, where you're relatively underpenetrated.
Maybe just tell us how you've made progress against that goal, and what's driving it.
Dustan E. McCoy
First, Craig, thanks for the question. A little early to tell.
Boston Whaler's 100% Mercury, it's doing a nice job of gaining shares, so of course, we're getting that pull-through. That's a part of the market, even in this difficult weather-driven retail first quarter, that improved.
So my statement at this point in time is that we're getting slight market share gain, but now we need to let all the programs we've put in place evolve into the selling season, and I'll be able to give you a better view at the end of the third quarter, Craig.
Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division
And then, Dusty, I know you've -- you monitor the used boat market as an indicator for new demand. What are you seeing in that market, and how are prices in the used market trending?
Dustan E. McCoy
Really nothing different than we've been talking about now for several quarters. If there's a good used boat, it gets sold quickly or gets bought quickly.
The real problem that the whole network is having and continues to have is finding those great used boats. I think a lot of people are hanging on their boats and continuing the boat.
And we've seen no real change in used boat pricing, which -- to put us back on the same page says that used boat pricing has fallen back into the normal relationship between new and used, and that was something that, of course, got really out of line in 2008, '09 and a good part of '10.
Operator
Your next question comes from the line of James Hardiman of Longbow.
James Hardiman - Longbow Research LLC
Just real quick, Dusty. Did you say we were back to historical levels in terms of the new versus used?
I'm assuming there's still plenty of room to get there, or did I hear that wrong?
Dustan E. McCoy
We said -- I said on the relationship between new and used.
William L. Metzger
On price relationship.
Dustan E. McCoy
Thank you, Bill. Thank you.
James Hardiman - Longbow Research LLC
Oh, I'm sorry. But we're far from there in terms of the mix at this point.
Dustan E. McCoy
Oh, yes.
William L. Metzger
That's correct.
Dustan E. McCoy
I'm sorry, I was inarticulate.
James Hardiman - Longbow Research LLC
In terms of the inventories, you talked specifically with aluminum boats the retail was a little bit worse than what you thought. So wholesale was ahead of retail in the first quarter.
And if retail sales stayed consistent with your expectations, those 2, wholesale and retail, are basically going to be flat for the year. Is the point then that over the course of -- the remaining course of the year, a -- aluminum boats obviously have to accelerate, but is wholesale then going to be less than retail for aluminum?
And is that a safe assumption for the overall boat category?
Dustan E. McCoy
Well, first, unit sales in our plan, what I've said, they would be -- wholesale would equal retail by the end of the year. But even though retail is behind, it does not mean we will not continue to produce over wholesale at the levels of our plan because our view is that retail will catch up.
Secondly, this whole aluminum category presents a very interesting dichotomy for us. As hard as we go with the way the market has been improving, we never quite have the number of boats we want out there that we would like.
And in fact, even though we had great market share gain in our aluminum brands, we feel last year toward the end of the summer, we lost a little share because we just couldn't get enough boats out there. So we're just -- get them made, get them into the dealer network, let's stay on our plan.
And even if retail were not to be precisely where our plan was, we'll still make the boats and get them out there because we're going to need them. We just keep falling a little short.
Operator
Your next question comes from the line of Tim Conder of Wells Fargo.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Dusty, I wanted to circle back on the yen. Again, just to clarify, you said you have not seen any material pressures at this point from the Japanese using that as a competitive weapon.
Is that -- just to clarify that.
Dustan E. McCoy
That's correct.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay. And then secondly, at the Miami Boat Show, your being talked about, in some of the conversation on the side, about reminded us of the anti-dumping suit that Mercury brought back in the middle part of the last decade against the Japanese.
Can you kind of talk about should you see the competitive pressure step up what you feel you may have options of revisiting that or not?
Dustan E. McCoy
As long as I'm sitting in this chair, I can never imagine us doing that again. We just need to go win in the marketplace.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay, okay. Do you view that as a somewhat of a line in the sand, though, that the Japanese may see that as -- in the past as something they don't want to cross, though?
Dustan E. McCoy
I have no idea what's in their heads, and I certainly have no view that they're dumping right now. My view is very much -- currencies are going to move.
Over time, great competitors, and the Japanese are great competitors, do the right thing around price in their attempt to maintain margin over the long-term that they need in order to continue to reinvest in the business. My expectation is that will continue to happen with our Japanese competitors.
And the yen-dollar relationship still has not hit anything like we've had to live with at various times. It has been $1.20.
I haven't looked this morning, Tim, but it's around $0.99 or $1. Look, we can compete there.
We're prepared to do so. And we look forward to the competition.
Operator
The next question comes from the line of Joe Yurman of 1221 Capital Management.
Joseph J. Yurman - 1221 Partners, LLC
I want to address a comment, Dusty, that you made at a conference about a month ago, a sell side conference, it really took me back. And you were juxtaposing the difference in the Engine business and the Boat business kind of coming out of a downturn.
And in describing the Boat business, it's a very down and dirty and ugly world, and the thing that really kind of stuck out of me is that the number of brands kind of go into the downturn is the number of coming out. So the barriers to continue to operate are pretty low.
And you described them as zombies, and that they'll be stuck in the year, and it was just some really good color. But the thing I want to focus on is more -- our current composition in the Boat segment, 41% of our sales and a larger percent of our operating income is from the larger boats and the sterndrive and the inboard.
When I look at these zombies and given these barriers to compete are as low as they appear to be. I guess, just a couple of questions.
What's the probability that the way that these zombies are currently being financed kind of goes away if the environment just kind of more broadly speaking were to get worse? And I guess in a roundabout way, what I'm asking is, do you foresee the composition of the operating income of the Boat business ever moving away from the lion share coming from these larger boats?
Dustan E. McCoy
No. Well first, let me focus on [indiscernible] just a moment on the small boats.
We acquired those businesses in 2005 and right about the time the hurricane started and the aluminum market began to decline. Our aluminum business has completely restructured itself, completely changed its cost bases and right now, makes more money than our bigger sterndrive inboard boat brands do, and that's to be expected as we take down pipelines and reduce the production.
So that's -- that is a good business, and it's structured to remain good now for a very long time because that part of the market's not recovered. It's been recovering better than fiberglass, but our guys are doing a really good job in those businesses.
So that is a true structural change in our Boat business and a true long-term change in the profit producing activity of our Boat business. Now as we go to the larger fiberglass sterndrive inboard product, my view today is if we were producing wholesale equals retail, we'd be making money in that business.
But right now, we've been very open in that we're reducing pipelines. We're wholesaling fairly significantly under retail, and that is all designed to position this business for future success.
So yes, the industry dynamics are never going to change in my view. They're always going to be difficult, but our guys in the Boat business are making all of the adjustments they need in order to compete in the New World, whatever volumes have -- that potentially come to them.
So as you've looked at the progression of earnings in our Boat business, we've said we'll be breakeven to a little better this year. And that's pretty darn remarkable in the sort of market that we're in.
So it's not going to take a lot of volume for our guys to do really well. That part of the market will always be on a percentage basis more profitable, and with this sort of growth, it will always be on a dollar basis more profitable.
But we've done a complete review, restructuring, repositioning of our Boat business, and we feel pretty confident that we're going to do well almost in any market conditions over time.
Operator
At this time, we'd like to turn the call back to Dusty McCoy for some concluding remarks.
Dustan E. McCoy
I thank all who are on the call. We appreciate all the great questions we get and all the interest in our company.
As we've said, we're satisfied with our first quarter. We've got our sleeves rolled up.
We need now watch what's going to happen with the market in the second quarter, and we're prepared to do what we need to do in order to go forward. So thank you very much.
And I look forward to seeing you around on roadshows, conferences or whatever. Goodbye.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Have a good day.