Jul 25, 2013
Executives
Bruce J. Byots - Vice President of Corporate & Investor Relations Dustan E.
McCoy - Chairman, Chief Executive Officer and Member of Executive Committee William L. Metzger - Chief Financial Officer and Senior Vice President
Analysts
James Hardiman - Longbow Research LLC Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division Timothy A.
Conder - Wells Fargo Securities, LLC, Research Division Craig R. Kennison - Robert W.
Baird & Co. Incorporated, Research Division Jimmy Baker - B.
Riley Caris, Research Division Joseph J. Yurman - 1221 Partners, LLC
Operator
Good morning, and welcome to the Brunswick Corporation's 2013 Second Quarter Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded.
If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President of 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 about future results. Please keep in mind that our actual results could differ materially from these expectations.
For the details of the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website 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. The figures in this presentation reflect continuing operations only, unless otherwise noted.
I'd now like to turn the call over to Dustan McCoy.
Dustan E. McCoy
Thanks, Bruce. Good morning, everyone.
I'm going to start with an overview of our strong second quarter results. We reported continued gains in sales, margins and earnings, reflecting our ability to execute against our growth and debt reduction plans in spite of challenging market conditions in certain of our businesses.
Revenue in the quarter increased 4% and was led by growth in outboard marine products, marine parts and accessories, fitness equipment and U.S. retail bowling, partially offset by declines in fiberglass sterndrive/inboard boats and in our bowling products business.
Gross margin increased by 60 basis points, mainly due to improved operating efficiencies and cost reductions in all 4 segments. Operating expenses increased by 2%, including a 13% increase in research and development expenses, as we continue to invest in programs that support our numerous growth initiatives Adjusted operating earnings increased by 12% versus prior year with our Marine Engine segment being the primary contributor.
Continuing down the P&L, net interest expense, excluding debt extinguishment losses, was reduced by $4.9 million, reflecting the benefit from our substantially completed debt reduction plan. Diluted EPS from continuing operations, as adjusted, increased by 18% to $1.23.
For the year, we're increasing our estimate of 2013 diluted EPS, as adjusted, to a range of $2.55 to $2.65 per share. This is the result of our solid first half performance in uneven market conditions, a favorable outcome on our debt refinancing transaction and a lower-than-anticipated tax rate.
As I mentioned, sales in the quarter grew by 4%. Solid top line improvements were experienced in our Marine Engine and Fitness segments.
In our Boat segment, the aluminum and fiberglass outboard boat businesses continued to deliver strong sales growth in the quarter, while the fiberglass sterndrive business remained weak. From a geographic perspective, consolidated United States sales increased by 5%, sales to Europe increased by 6% and Rest-of-World sales were up 1% versus the prior year.
In the first half of the year, our sales also increased by 4%. Consolidated U.S.
sales increased by 6%, sales to Europe were up 1% and Rest-of-the-World sales were flat versus the prior year. Our first half growth rates in Europe were mixed, both by country and business segment.
We'll provide some specific commentary on this region during our segment discussions. Adjusted operating earnings were $140 million -- $140.7 million for the quarter, an increase of $14.8 million, or 12%, compared to 2012.
Operating margins, x charges, increased by 90 basis points to 12.8%. The increase in operating earnings reflects solid sales growth and continued gross margin improvements, partially offset by a modest increase in operating expenses, resulting from the increased investments in growth.
Operating earnings, excluding restructuring, exit and impairment charges, were $236.2 million for the first half, an increase of 17% compared to 2012. Operating margins, x charges, increased 130 basis points to 11.3%.
Net earnings for the quarter were $0.85 per share, including $0.04 of charges for restructuring, $0.32 of losses from debt retirements and a $0.02 charge from special tax items. Excluding these items, our diluted earnings per share, as adjusted, equaled $1.23 per share.
This compares to net earnings of $1.02 in the prior year, which included a net of losses from debt retirement and a $0.03 benefit from special tax items. Again, excluding these items, 2012 second quarter EPS equaled $1.04.
In summary, our EPS, as adjusted, increased by $0.19 or 18%. Net earnings for the first half were $1.43 per share, including $0.10 of restructuring charges, $0.32 of losses from debt retirement and a $0.14 loss from special tax items.
Excluding these items, our diluted earnings per share would've been $1.99 per share. This compares to net earnings of $1.53 per share in the prior year, which included $0.05 of losses from debt retirements and a $0.02 benefit from special tax items.
Excluding these items, 2012's earnings per share would've been $1.56. As adjusted, our first half EPS increased by $0.43 or 28%.
Now let's look at our operating segments, and we'll start with the Marine Engine segment. From a geographic perspective, second quarter sales to U.S.
markets were up 9%, with the growth in all major product categories. Sales to Mercury's European customers increased 4%, led by a more favorable mix of higher horsepower engine sales.
Rest-of-World sales were up 2% year-over-year as a result of higher sales in most of major markets. In the aggregate, Mercury sales increased 7% for the quarter.
From a product category perspective, our U.S. outboard engine business delivered strong sales growth, reflecting solid performance in the aluminum and fiberglass outboard in both categories.
Strong demand continued for our 150-horsepower FourStroke, as well as for the Verado engine family and engines in the 75, 90 and 115 horsepower range. Unfavorable global retail demand trends, along with reductions in boat dealer inventories, continued to affect revenues in sterndrive engines.
As you may recall, in the first half of 2012, demand for outboard engines increased double digits, which outpaced Mercury's production capabilities, leading to a high level of back orders at the close of that period. As Mercury entered the back half of 2012, they had successfully taken several actions to increase capacity and production flexibility, and made excellent progress over the second half of 2012, lowering the level of back orders and increasing sales.
This dynamic contributed to the sales growth for the outboard business in the first half of 2013, as Mercury successfully met demand of products in the period. This relationship has somewhat reversed in the second half of 2013, as the benefit from shipments to decrease high outboard product back orders in the second half of 2012 will not be repeated in 2013.
Mercury's parts and accessories businesses reported solid sales increases in the United States and Rest-of-World markets, reflecting stable boating participation, new product launches and market share gains. European sales for our P&A business experienced a slight increase in the quarter.
Record sales were achieved by Attwood and Land 'N' Sea in the quarter and year-to-date. Attwood's award-winning portable and integrated fuel systems continue to be an important contributor to Mercury's P&A business, and Land 'N' Sea continues to grow through product line and distribution expansion.
Mercury's adjusted operating earnings increased by approximately $14 million during the second quarter, with operating margins at 18.9%, which is 100 basis points higher than the prior year on an adjusted basis. Positive factors include higher sales, particularly in the 75- to 150-horsepower outboard range, as well as in the parts and accessories business.
Also contributing to the higher operating earnings were favorable product mix of higher horsepower engines, as well as improved cost and operating efficiencies. These positive factors were partially offset by spending on growth initiatives and higher warranty expense, as continued improvements in claims experience were more than offset by a more favorable warranty adjustment in the prior-year second quarter.
Now turn to our Boat segment. Their second quarter revenues were up 1%, compared to the prior period.
In the U.S., which represents about 2/3 of the segment, sales were flat, reflecting continued growth in U.S. aluminum and fiberglass outboard boat categories, which was offset by continued weakness in retail demand for fiberglass sterndrive boats and the impact of our related strategy to reduce large boat pipelines.
In the quarter, our sales to Europe increased by approximately $4 million. For the 6 months, sales are down 10%, which we believe is more consistent with the marine retail demand trends in Europe.
Rest-of-World sales decreased by 3%, as higher sales into the South American market were more than offset by declines in other markets. Now let's take a look at the United States powerboat industry statistics, provided by Statistical Surveys Inc., to get a view of how demand is unfolding by boat category in the United States.
As we stated in our first quarter conference call in April, it appeared weather was influencing both 2012 and 2013 demand metrics, which continued into the second quarter. Specifically, a warmer-than-normal spring in 2012, combined with the colder and wetter-than-normal conditions experienced in 2013, are believed to have had a significant influence over market demand in both category -- in certain categories.
Based on the preliminary second quarter data, aluminum and fiberglass outboard boat markets demonstrated solid growth and have improved compared to the first quarter 2013, with the pontoon category, as reported in Soundings Trade Only, leading the outboard market with a 5% year-to-date growth rate. The fiberglass sterndrive/inboard boat market experienced double-digit declines in the quarter.
And for the year-to-date period, again, as reported in Soundings Trade Only, fiberglass sterndrive boats, less than 30 feet in length, were down approximately 40% year-to-date. While we believe weather continued to be a factor in the second quarter in this category, consumer shifts from this category to other boat types, such as pontoons, as well as continued economic downdrafts on the typical buyer in this category, are also contributors to the lower industry sales.
Overall, the entire U.S. retail powerboat market grew 3% in the quarter and remained modestly down through the first half of 2013.
Global retail unit sales of Brunswick Boats in the second quarter were flat, and global wholesale shipments decreased by 2%. Also during the second quarter, most fiberglass and aluminum categories benefited from higher average sales prices, and as a result, overall segment revenues increased slightly in the period.
Regarding our pipelines, dealers ended the quarter at 32 weeks of boats on hand on a trailing 12-month retail basis, which compares to 31 weeks on hand a year earlier. Pipelines for aluminum product 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 by approximately 3.5 weeks.
Retail activity in the first half trailed our expectations, which contributed to the pipeline increase. However, we believe the pipeline levels in this category are at appropriate levels, and we do not expect second half wholesale shipments to be significantly affected as prior year pipelines were below desired levels for our dealers.
Assuming retail sales are consistent with our full year expectations, we expect aluminum wholesale unit shipments to grow slightly greater than retail demand in 2013. Pipelines for fiberglass sterndrive/inboard product continued to decline to record low levels.
As we previously stated, we planned in the first half of this year for the continuation of declines in pipeline inventories, as we and our dealers responded to weak market conditions in this segment. As this market continues to be very weak, we now expect pipeline reductions to continue in the third quarter.
In addition, our product plan contemplates a significant volume of new introductions in the fourth quarter and healthy pipelines facilitate the flow of this new product to the market. The boat segment's second quarter adjusted operating earnings declined by $1.7 million when compared to the prior year.
This decline resulted from the previously discussed declines in lower sales of fiberglass sterndrive/inboard boats, as well as growth initiative investment spending and the absence of second quarter 2012 legal and insurance settlements. Partially offsetting these negative factors were the benefits from higher aluminum and fiberglass outboard sales, as well as the fiberglass boat cost reduction activities initiated in the fourth quarter of 2012.
As a result of the incremental pipeline reductions, we plan on taking in our fiberglass sterndrive categories in the third quarter. It's unlikely that we will achieve positive operating earnings in our Boat segment in 2013.
Now let's turn our attention to our 2 recreational segments. Sales and Life Fitness increased by 5% when compared to last year's second quarter.
The increase reflected strong gains in international markets, including solid growth in the United Kingdom and Germany. Sales growth to U.S.
health clubs and hospitality customers were partially offset by lower sales to local and federal government customers. Second quarter operating earnings increased by 5% as the benefit from higher sales was partially offset by growth initiative investments.
Sales in Bowling & Billiards decreased by approximately $2 million, or 2%, in the quarter. Lower sales in bowling products and the impact of a reduced retail center count were partially offset by an increase in U.S.
equivalent retail center and billiards sales. We believe that weather and improved pricing were the main positive factors affecting our retail bowling center results.
Second quarter adjusted operating earnings increased by about $1 million as improved retail bowling operating margins were partially offset by lower sales in bowling products. During the quarter, our bowling organization entered into agreements to divest its European center bowling portfolio consisting of 7 locations.
The elimination of these centers will be modestly beneficial to the segment's operating earnings going forward. This action is a reflection of the ongoing efforts the bowling retail team is pursuing to enhance our bowling center portfolio.
Now I'll turn the call over to Bill who will give us a closer look at our financials.
William L. Metzger
Thank you, Dusty. Let me start with a discussion on our debt outstanding, which at the end of the second quarter was $472 million, representing a $359 million reduction over the last 2.5 years.
In early May, we issued $150 million of 4.625% debt. The proceeds from this issuance, along with cash and marketable securities, we used to retire the remaining 2016 notes in June, thereby eliminating the 11.25% coupon from our debt portfolio.
These transactions substantially completed our planned debt reductions. Net interest expense, which includes interest expense and interest income was $12.3 million in the quarter, a decrease of $4.9 million versus the same period in 2012.
The reduction was a result of lower debt balances. Beginning in the third quarter, our new quarterly run rate of net interest expense is about $8.25 million.
Therefore, for the full year, we expect net interest expense to be approximately $43 million, excluding extinguishment losses associated with debt retirement. Foreign currency had a minimal impact on sales and a favorable impact on operating earnings comparisons for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements and includes the impact of hedging activity.
For the full year 2013 versus 2012 comparisons, we currently estimate that exchange rates will have a slight unfavorable effect on sales and a positive impact on operating earnings. This assumed that rates remain in line with current levels for the remainder of the year.
On an adjusted basis, our tax provision was $12.5 million, compared to $13.1 million in the second quarter of 2012. These amounts exclude the tax impact of one-time charges, such as restructuring charges, debt extinguishment losses and any nonrecurring special tax adjustments.
The effective tax rate on an as-adjusted basis was 9.8% for the second quarter of 2013, versus 12% a year ago. Our current estimated effective tax rate for 2013 on an as-adjusted basis is in the range of 11% to 13%, which is lower than the prior year and our previous estimate for 2013.
These variances are largely the result of a more favorable mix of domestic versus foreign earnings. I would also like to remind you about the possible reversal of a significant portion of our tax valuation allowance reserves later this year.
This noncash earnings benefit is excluded from our estimated 2013 tax rate as adjusted. And as we have previously discussed, this possible change in treatment will raise our tax rate in 2014 versus 2013.
Turning to a review of our cash flow statement. Cash provided by operating activities of continuing operations in the first half was $107 million, a solid improvement of $41 million versus the prior year.
Seasonal changes in our primary working capital accounts resulted in a use of cash in the first half and totaled approximately $105 million. By category, accounts and notes receivable increased by $74 million, inventories decreased by $27 million and accrued expenses decreased by $55 million.
Given the seasonality of sales in our marine businesses, we anticipate the liquidation of working capital over the balance of the year with a corresponding benefit to free cash flow. Capital expending in the first half increased $25 million versus the prior year to approximately $61 million, which included investments in cash capacity expansion, which Dusty will discuss later, and in new products in all businesses.
Free cash flow also included approximately $7 million in proceeds from the sale of property, plant and equipment in our marine segments. Total free cash flow from continuing operations totaled $53.6 million versus $50.7 million in the prior year.
Our business units continue to remain focused on generating solid free cash flow, which has allowed us to reach our debt reduction targets and will also allow us to continue to fund future investments and growth. In summary, cash and marketable securities declined to $303 million at the end of the first half, with the net impact of debt reduction activities partially offset by free cash flow.
Supplementing our cash and marketable securities balance is the net available borrowing capacity from our revolver of approximately $279 million, which when combined with our cash and marketable securities balances, provides us with total available liquidity of $609 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 that restructuring charges will be in the range of $13 million to $15 million in '13. Charges reflect activities pertaining to Boat segment planned consolidations initiated during the fourth quarter of 2012 and in the first quarter of 2013, as well as the previously mentioned divestiture of our European bowling centers.
Our estimate for depreciation and amortization is approximately $95 million. We expect our 2013 pension expense to be approximately $19 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 prior years as we fund our growth initiatives.
Our plan continues to reflect an amount that approximates 4% of projected sales, with a substantial portion directed at profit-enhancing projects. Our working capital performance will primarily be a function of revenue assumptions.
Our current estimate reflects a use of cash for the full year in the range of $25 million to $50 million. Despite higher spending levels and the usage of cash for working capital, we plan to generate positive free cash flow for the full year, generally consistent with prior year levels and maintain healthy levels of liquidity.
I'll now turn the call back to Dusty for some concluding comments.
Dustan E. McCoy
Thanks, Bill. So we'll conclude by me providing you with our outlook for the full year of 2013.
Our operating plans for the remainder of the year continue to reflect an uneven recovery in the U.S. powerboat market, with our outboard boat and engine products and global parts and accessories businesses generating growth.
Our assumptions continue to reflect weak market conditions for fiberglass sterndrive/inboard boats, as well as further pipeline reductions in those categories. And we continue to plan for weakness in Europe for some of our businesses, albeit at a reduced level compared to the declines we experienced in 2012.
And our recreation businesses, positive health and wellness trends, combined with some really exciting new products, have positioned our Fitness business to continue its strong top line performance and deliver excellent results again in 2013. And our Bowling business should further benefit from operating enhancements and capitalizing on its competitive advantages.
We're now targeting a 4% growth rate in overall revenue in 2013, which is consistent with first half performance. Growth rates in the third quarter will be affected by fiberglass pipeline reductions, unfavorable comparisons in our engine businesses due to the factors I described earlier and lower retail bowling sales due to the center divestitures.
Our current full year plan reflects a solid improvement in gross margin levels. As a result of the factors affecting the top line in our marine businesses, third quarter consolidated gross margins are expected to be in line with the prior year.
Our organic growth platform will benefit from increased investments in capital projects and research and development programs, along with SG&A to support them. As a result of these initiatives, full year operating expenses, as a percentage of sales, are expected to be comparable to 2012 levels.
Our planned increase in spending to support growth and innovation is heaviest in the third quarter, and we're currently planning that our operating expenses in the third quarter of 2013 will be up approximately 10% versus the same quarter in 2012. Examples of these investments and our commitment to innovation and growth include the following: If we start on this chart at top left and go clockwise, the investment continues at Mercury's Fond du Lac campus in Wisconsin, where a $20 million expansion project is underway to enhance Mercury's manufacturing capacity.
Earlier this month, Mercury broke ground for an additional 38,000 square feet of manufacturing space for our horizontal machining and high-pressure die-cast machines. Separately, Mercury's also investing in a 17,000 square foot facility, housing 2 new 18,000-gallon testing tanks to enhance and augment our product development and testing.
In the Boat segment, we recently acquired a new pontoon manufacturing location in Fort Wayne, Indiana, which is home to 2 of our popular pontoon brands, Harris Flotebote and Cypress Cay. The challenge for our pontoon brands has been to keep up with the strong demand, particularly in light of its current facilities.
The new 360,000 square foot replacement location offers about double the area of the current plant, allowing room for expansion. This new location, which is expected to be up and running in August, provides much needed space and allows for improved operating efficiencies.
Moving on, by the end of July, we will have 2 pilot locations for our new Brunswick's concept in retail bowling in the Atlanta area. Brunswick Bowling has been hard at work developing this upscale bowling and entertainment center concept over the past 18 months.
In addition to Marietta and Norcross, Georgia, a third location is planned for Buffalo Grove, Illinois, in the fall. Our bowling retail organization has really honed in on delivering exceptional guest service, including innovative cuisine from Tavern '45, a new name inspired by the founding of Brunswick in 1845.
Meanwhile, Life Fitness has been quite busy in an effort to advance its edge in technology and innovation, while also anticipating fitness trends and customer needs. The new Discover SE and Discover SI tablet consoles are the first to sync with Android and mobile devices in addition to Apple operating systems.
This tablet console features an ultra-responsive touch screen with swipe technology for superior navigation and a more personalized experience. Global Trends Reports predicts health-focused mobile app downloads will reach 1 billion annually by 2016.
With the launch of its cloud-based Life Fitness connect website and app, Life Fitness provides customizable tools to fitness facilities and exercisers looking to tap into this trend. Product development has always been a key focus here at Brunswick, especially during recent difficult times.
We do so not only to change, to meet a changing market, but to stay in front. It's imperative that we step up our already brisk pace of innovation to improve our products and the customer experience we offer throughout Brunswick.
Lastly, and to complete our outlook comments for the full year, we'll also benefit from lower net interest expense and pension cost, as well as a lower effective tax rate on adjusted basis. Partially offsetting these positive factors is the effect of higher diluted shares outstanding.
As a result of our solid performance in the first half, the favorable outcome of the recent debt refinancing and the lower-than-anticipated tax rate, we're increasing our expectation of 2013 diluted earnings per share from continuing operations, as adjusted, to a range of $2.55 to $2.65 per diluted share. The midpoint of this range would represent a 24% growth rate over the $2.09 we earned in 2012.
Thanks, and now I'll take your calls.
Operator
[Operator Instructions] Your first question comes from James Hardiman from Longbow Research.
James Hardiman - Longbow Research LLC
We appear to be headed towards another year where sales are a little bit worse than expected, certainly than what the Street was anticipating, but margins are materially better than expected. I think the general perception on the Street this year was that you'd only go so far as the industry and maybe some share gains would take you.
And yet, here we are, with guidance dramatically up from where it was just 6 months ago. I guess, my 2 questions are: How has margins and cost trended versus your own internal expectations this year?
And as we move forward into the back half of this year and into next year, what's left to do on the cost side of your business with the most obvious cost reductions already in the rearview mirror? Is there a meaningful improvement over and above just leverage from here on out?
Dustan E. McCoy
First, James, thanks for the question. Secondly, when we talk about the top line, it's quite interesting.
We have lots of pundits, and even some industry people, who like to talk about what they think the industry's going to do, but I would submit to you that the industry is performing just about like we said it would, overall. It's different from here to there, but if you add up the overall numbers, it's -- we're right in the range we said it would be, and we have guided top line growth of 3% to 5%, and we're settling now in -- at 4%.
So I'll start out with -- that the market and the industries look about like we thought they would, and our top line growth is right about where we thought it would be. In terms of whether we've been surprised by the margins that our businesses have been able to produce in general, no.
I will say, though, that our folks are doing an absolutely outstanding job in the difficult economic climate in which we're working to deliver both top line and then leverage it to the bottom line, while making significant investments because we're very focused on continuing to grow. Our margin expectations for the remainder of the year is that we'll finish the year with our margins up solidly.
And I hope everybody heard us, I think the third quarter is going to be a difficult gross margin quarter for us. And my judgment is it'll be flattish to last year, and then we'll finish out the year with a nice solid improvement in gross margins.
And that, from where I sit, is just absolutely outstanding in the sense that we had a very strong second quarter -- second half last year in a market that was growing better than it is growing this year. And therefore, the ability of our team to come in and hold results in a more difficult market in the second half of this year is a really, really great work.
So I'm tickled to deal with what everybody's doing. And what's left to do on the cost and margin improvement?
I will start out by giving what I suspect is a lot of the CEOs' answers all around the world, there's always more to do. And we've got really great operating people who are very much after every single thing that we can wring out of the business through the supply chain, through the manufacturing floor, through design for manufacturing, through the way we transport and deliver product, and ultimately, what the product experience feels like when our customers get it.
So my judgment is, and I've talked about '13, we've still got more room in '14 and beyond in a lot of the investments we're making. For instance in -- I just spoke today in the product development facilities at Mercury, in capacity expansion at Mercury, all bring efficiencies.
The new products that we're introducing, which we haven't talked about today, but we talked about in prior calls, for instance, at Mercury, in our judgment, are all going to be margin enhancers and that, generally, is the case across all of our businesses. Our goal is, as we move forward, and we've been pretty open about it, is anything we bring to the market needs to have a cost position equal to or less than the product it's replacing.
And our folks have been doing a really good job of hitting those targets. So my judgment is, we're going to continue to grow margins.
It will not yet. 200 basis point margin improvement in a relatively short time, but we've got more room and we'll continue to do it.
James Hardiman - Longbow Research LLC
Very helpful. And then, just secondly, I was hoping you could talk a little bit about some of your new products and what their availability currently is.
I guess from the engine side of the business, you spent a lot of last year trying to catch up with demand on the 150-horsepower outboard. Have you caught up with demand there?
And then I guess, similarly on the boat side, you came into this year with some really compelling new products, certainly as we get towards the larger boats. Everything that we're hearing is that they're extremely popular, but maybe you're not keeping up with demand.
Is that ultimately, potentially, similar to engines this year, more of a benefit for next year once you hopefully catch up with some of that demand?
Dustan E. McCoy
Well, let's do engines first. We described on the call, and I don't know that my words were particularly artful.
I hope everybody understood them, and I may confuse this even more by this discussion, but in the first half of 2012, for a whole bunch of reasons, we really couldn't meet demand. And one of the reasons were just unbelievable demand in the first half in light of the very warm and dry spring we were having.
And so we went into the second half with a significant backlog. And we worked really hard to improve our efficiencies, productivity and units we could push through our system in the second half in order to lower that backlog to manageable levels, and of course, in doing so, we pushed the sales line nicely in the second half.
I'm still on engines. In the first half of this year, we didn't have the same dynamic.
And in the second half of '13, we're not going to have the same dynamic where we were chasing the backlog. Our backlog now is at very nice and manageable levels.
I think our team at Mercury has done a great job of forecasting and running an S&OP process and delivering product off the floor that's consistent with demand and our outlook for demand. So we've generally solved all of that.
Now over time, and that's why we're making all the capacity expansion expenditures that we keep talking about, is we're going to need more capacity at Mercury because we're nearing in the 4-stroke outboard categories, driven by demand there, but also our great new product. We're going to need more capacity in order to take care of never having to have the sort of backlog that we had in 2012, and that's what we're investing to do.
On the Boat side, a fair bit more complicated. If we first start with our aluminum products, both fish boats and pontoons, a growing segment.
We're taking share very nicely there, but I'm -- I think our guys are beginning to feel like they could be hitting a capacity wall at some point. And that's why you heard us in the call today say that we're fine with having more boats and weeks on hand in the pipeline ending 2013 than we did in 2012, because we're always playing behind in that part of the business.
And this little bit of slowness in the first half, particularly in the first quarter, picked up nicely in the second quarter, primarily weather-driven, I don't want to be The Weather Channel, and I'm trying not to talk about weather too much here, has permitted us to get a little ahead and we're going to work hard in 2013 to stay ahead in the aluminum business, so we can get a few more boats in the pipeline. But ultimately, we may have to invest in some more facilities for fish boats.
Now we have in pontoons, the part of the commentary on the call, we've made a big investment in a new facility. We have not been able to meet demand, probably disappointed both consumers and dealers.
So we're making an investment to take care of that. If we look at our Fiberglass Outboard product, which I particularly think of as one brand, Boston Whaler.
Again, we've got a heck of a lot of demand, growing share. And as we look at the product portfolio going forward, it's likely going to be necessary that we're going to have to make some facility investments there in order to keep up demand.
And again, just like in the aluminum business, that's great. We're happy to do it and it says a lot for the brands and the new products we're bringing to the marketplace.
When we go to our fiberglass sterndrive/inboard businesses, we have a bit different situation. Those markets are not recovering, and if you look at the one chart that we showed with the smaller, under 30, down 14%, we said 31 to 40 is up 2.3%, that's 15 boats, just – and it's still an incredibly small marketplace.
And then for the larger category, that is a 41 to 62, we said down 1.2%, that's 4 boats in the market. So we've continued to play in relatively small markets here in the U.S.
So what we've done is, firstly, taken out a lot of capacity, so our system is adjusting to meeting demand in a smaller footprint. And then when we add to that, we've got a lot of new product coming, and again, our system has to incorporate that new product into a smaller footprint.
And I think there have been times we probably, again, disappointed some dealers and customers, but we've positioned ourselves for, especially in boats over 50 feet, for a lot of new product coming to the marketplace, that's why it's so important we manage the pipeline through the remainder of 2013. And we're confident that our system now is prepared to incorporate these new boats into its production planning and get the boats out as we bring them to the market.
So, James, that's a very long answer to a short question, but we think of it in several layers here.
Operator
Your next question comes from Mike Swartz from SunTrust.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division
A question for you, Dustan. And I think, previous call, your outlook for the global marine market was kind of low single-digit growth.
I guess the first piece of this is, is that still just your thought process for 2013? And then are you seeing a level of maybe pent-up demand in the market that gives you a little more confidence going into maybe the back half of the year as well as 2014?
Dustan E. McCoy
First, Mike, not prepared to really talk about 2014 to any great extent right now. And my judgment is 2013 will play on out within the range that we said at the beginning of the year.
Slight -- I think I've said, generally, we thought the market could be up slightly, but if it went any way different than that, it would be down, not up, and that continues to be our view. And if we step back, the ultimate question for our investors and for those of you who follow us, is ultimately, where is this marine market going?
And we – I'd probably warn everyone out talking about the factors that we think need to occur in order to really drive the improvement in this market. And we've always said, everybody needs to make their own judgment about whether those factors are, in fact, coming to fruition.
And our judgment had been, we didn't think it was going to happen in 2012, and we were pretty open about that. We think it's playing out that way.
Having said that, we remain very confident about the ultimate growth in this market because we wouldn't be making all of the investments we're making if we were worried about this market. We're spending a ton of money in investments, in capacity, in new product throughout all of our marine segments, and in fact, all of our businesses.
I think in the -- and that is how we think of this industry and business, medium to long term. Here in the shorter term, which, again, we don't worry much quarter-to-quarter or rarely do we worry much year-on-year about where the overall market is going, because we have a pretty good short-term view of what things are.
But it's clear that consumers are continuing to want product, and if you look at the transactions that happened in used boats, they are up in the market today versus before the recession. So boats are trading hands at significant numbers in the used market, and that is an indication that consumers want different product.
But right now, they're going to use the market to get it. That begins to inform us, and we're doing a lot of consumer work, several thousand people have been -- have helped us have a real look at where we think the market is going on a shorter-term basis.
And fundamentally, consumers are of the view that the investment they need to make in new product, in dollars, time and effort, is at a level they'd prefer to go to used. We're very comfortable with that.
We're operating this company in that environment, and we're continuing to view that this is all playing out generally as we thought it would, Michael. So we're relaxed.
And we again believe, medium to long term, everything's going to play out the way we had hoped. And we have the flexibility, the operating efficiency and a bunch of great people on the ground to deal with all the near-term fluctuation.
Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division
And then if we can just maybe shift gears to the -- some of the new model year '14 product, that's coming out, and I know it's early, but can you maybe give us some more color on the feedback that you're hearing from dealers and others in the market?
Dustan E. McCoy
Well, let's first deal with engines. My judgment is the market is eagerly anticipating all that we have coming to the marketplace in engines.
When we think of and let's think of this in a couple of buckets, the over 50 product, and we have one -- in the boat market, we have 1 new product out in that range, and that's our 51 Sea Ray. And I think the market acceptance has been outstanding.
And as we look at what the production requirements are at Sea Ray, there's a heck of a lot of those getting built, and it gives us great comfort that the rest of that product line above those lengths or that length is going to be just fine. We've got a lot of product coming here in the second half below 50 feet.
And again, through the work we do with our dealer network and through voice of the customer, we're told that's going to sell well, and we've just now got to get it out there and get going.
Operator
And your next question comes from the line of Tim Conder from Wells Fargo Securities.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Dusty, just a little clarification there. Your comment on the global market of being up slightly.
Are you talking global marine, including engines? Or you are just commenting on the Boat market?
And then, if you could just also, just your view on the U.S. boat market from -- for 2013.
Dustan E. McCoy
Tim, my view on the global boat market is what we've seen through the first half is likely to be played on out through the rest of the year. Global engine market, we will do fine globally in the engine market because of our strong brand presence and our really strong P&A business, because people continue to boat all around the world and use our product and we're going to be there to help dealers keep them on the water.
So the growth rates we see in the engine business in the first half aren't generally going to push on through the second half. Again, on a comparative basis, I think third quarter is going to be difficult for comparison's sake, because we pushed a lot of product out in the third quarter of last year.
And as I've been talking about, we don't have the need to do that in the third quarter this year. For the boat market, this year, in the United States, again, I don't see anything that's going to change the dynamics that we've seen through the first half, Tim.
It's a pretty tough market. Some parts are really doing great, other parts are having trouble recovering, and where it's doing great, we want to be there taking share and making more money.
And where the market is weak, we got to get our new product out and we got to get our pipeline healthy in order to get the dealers through all that. Our judgment is that P&A will continue to be a real driver of top line and earnings growth throughout the remainder of the year, because our P&A business is just so well positioned and with the share we have the fact that people continue to boat, that'll fuel that.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay, okay. I know again you don't like to talk about weather that much, but you pointed out what you...
Dustan E. McCoy
I've been talking it a lot, haven't I? For somebody who doesn't like to talk about it.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Do you think, Dusty, again, the strength in the market continues to be, now, for the third year in a row, in the aluminum and in the outboard fiberglass. Do you think that, that market growth that we've seen year-to-date was restrained by weather?
That it could have been more, and then therefore, obviously, you're not that worried and given the lower dollar price points and so forth, just any additional color on that.
Dustan E. McCoy
Tim, I do believe weather restrained the market. It's difficult for me to give you an accurate statistical look at how much, but in my judgment, and I'm a boater, I'm out all the time.
I know where I boat, people are having to swim to their boats because -- even when it's docked because the lakes are so high. I boat on the Ohio River.
I haven't been able to get my boat out, but once, in the past 3 weeks because the Ohio has been flooding and so much debris coming down the river. There's no other recreational boaters out.
Everywhere we go and talk to people and work with dealers, this weather has had an impact. Now, what we have to do as a business, and we talk about this a lot, is to be honest, we have to ignore it, because there's always going to be weather.
And if all we do is talk about weather then that's all we're going to -- if we talk about the weather, all we're going to do is talk about the weather, because there's always weather. So we just have to keep to working our way through this.
But again, I think there's no question, boat sales, not only in the aluminum and fiberglass outboard sales, Tim, but across all whole industry, have been temped down by the weather in the first half.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay. And then a clarification point, if I may.
You said that the operating profits on boats will likely be negative this year. Again, on -- any -- are you excluding anything or is that just a straight reported basis?
And then finally, looking at 2014, I know you haven't given a lot of guidance, but 2 things: Number one, the investment spend, would you anticipate that coming down as a percent of sales or being flattish in absolute terms? And the same question with CapEx, as a percent of sales, you're running 4% in '13, what -- should that come down a little bit in '14?
Either Dusty or Bill.
Dustan E. McCoy
I'll do the boats. There won't be any adjustments on boats.
That's just the way we'd be reporting it. Bill, you want to say...
William L. Metzger
It's on an the x-items basis, Tim, so there's – it would include the typical adjustments. On the investments spend side, CapEx, I think it's reasonable to assume that we continue to spend at the same levels on a percentage of sales basis that we're spending here in 2013, some of the capacity investments and new product investments that we're investing in this year continue into '14, and it'll keep them at that levels.
On the investment spending side, R&D, operating expense, sort of thing, R&D will continue to be strong. I would expect operating expenses to maybe a level off a little bit, but still go up because we'll continue to invest in growth initiatives.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay. So operating expenses, Bill, up absolute dollars, but maybe lever a little bit as a percent of sales?
William L. Metzger
Correct.
Operator
And your next question comes from the line of Craig Kennison from Robert W. Baird.
Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division
Could you talk about your market share trends within boat categories? Clearly, you guys have a disproportionate number of fiberglass boats, but I'm interested in how your share trends are working within category.
Dustan E. McCoy
Sure, Craig, thanks for the question. Let me do it in 3 chunks, if I may.
The first would be aluminum, both fish boats and pontoons. We are growing faster than the market in both those categories, and we're taking share.
In the fiberglass outboard category, we are growing faster than the market and taking share. In the sterndrive/inboard range, we are – to give an overall answer, we are losing share, but then let me chunk it up into 3 pieces and see -- so you'll see we're never happy we're losing share, but it's also understandable to us, and we think we have a good feel for what's happening.
If we think of smaller sterndrive boats, there are 3 dynamics that are in play there: First, there are several really great brands, great brand leaders, innovative people in the industry, whose brands have not typically worked a lot above, let's say, 30 feet. And therefore, in a reduced market, they have really keenly focused down below 30 feet and are doing a great job at it.
At the same time, we made the decision, for margin purposes primarily, that we would reduce our model count down in this low range. And then -- well, and then with those 2, we just -- we've lost share.
We understood before we did this work that, generally, how it would play out. And again, there are some really, really great competitors down there who are doing a great job.
So that's all settling out about like what we thought it would. Let's say, sort of 30 to 50 feet, in the smaller size -- end of that range, we've lost some share.
In the larger end of that range, we've gained some share. Net-net, again, we have a new dynamic in play for parts of this 30 to 50 segment, and that is the U.S.
boat market has -- even though it's not growing a lot, is still the best boat market in the world for a lot of competitors to come to. And there are some great brands throughout the world, for instance, in Europe, that are having great difficulty in their markets, and they focused very much on coming to United States.
Now when all those brands come, and we're talking about such very low unit counts, remember I said this, 2.3% growth in boats, 31 to 40 is 15 boats across the whole industry. So when you have a few of these really great brand names coming to the U.S., trying to find a place to get some capacity in these very low counts, 5 or 6 boats start to move share.
And that's what's been happening to us in that category. We've been losing some share, and we've got some new product coming.
Above 50 feet, Craig, we've been pretty open. Our product line was stale.
We've got a lot of new product coming. The first one was the 51, and we think it's doing -- I know it's doing great.
So as we bring this new product to market, I think we're going to continue to have share difficulty until all the new product gets out. And then our anticipation is once it gets out, our share will be fine.
I hope -- that's a very long answer to your very short question.
Operator
And your next question comes from the line of Jimmy Baker from B. Riley & Co.
Jimmy Baker - B. Riley Caris, Research Division
Although I'm -- Dusty, you did just confuse me a little bit, which is easy to do, but I think you mentioned that the market is trending like you thought and your top line is trending like you thought, but then you also mentioned you no longer expect the boat group to have positive operating earnings this year. So can you just kind of reconcile that for me?
And I guess as a follow-up, if global retail demand was better than your slightly positive or up slightly assumption for second half, do you think you could get above breakeven in the boat group?
Dustan E. McCoy
First, sorry for the confusion, and it's not from your ability to understand, it's from my ability to articulate it. Overall, the market is performing just about like we thought it would.
But within segment, there are differences. So we did not anticipate, as we thought as fiberglass sterndrive/inboard, Jimmy, where our view was it would be flat to down with an orientation toward down.
But we hadn't planned on, as an example, in under 30 feet being down 14% on a year-to-date basis. So as that has begun to evolve, we felt it's important that we make adjustments in our production in order to help manage the pipeline for the second half.
And as you know, those are pretty high-dollar, high-margin boats. And as we do that, that's what's causing our boat group, in our view, to have a high likelihood it won't be profitable in '13.
Now if the fiberglass sterndrive/inboard market were to really take off, but I would tell you, Jimmy, it's our judgment, it's not through the remainder of this year. Yes, of course, we could be profitable very quickly.
It's just strictly taking units out. Yes, we're managing cost, but we also want to be prepared for all the new product we have coming.
Does that make sense?
Jimmy Baker - B. Riley Caris, Research Division
That does. And if I could just sneak a quick one in on the Fitness segment.
I'd just be interested in your outlook there for the balance of the year, operating margins dipped just slightly year-to-date. Just interested in what's driving that?
And if you see an opportunity to show operating margin improvement in that segment during the back half of the year?
Dustan E. McCoy
Sure. We said as early as the spring of 2012 that we anticipated our Fitness business would be under some operating margin pressure, driven by the fact that many of the -- our Fitness business competitors, through a whole range of reasons, many times, having not to do with their ability to operate and the product they had, had been going through difficulty.
And our view was the beginning in '12 through '13, '14, '15, they were going to make a big effort to come back in the marketplace, and we anticipated significant pricing pressures at the customer level. And that's all beginning to unfold just like we thought it would.
I think we had, in our 2012 big analyst meeting, where we ranged our ability to produce earnings and margins through '14, we had, I think lowered -- we'd said 12% to 14% would be their operating margins. I think as we're watching that, it's not going to be on the low side of that.
And I think we ought to finish out the year, in general, with the sort of margins that you see us having produced in the first half. But I don't think there's a lot of opportunity for great margin improvement because as we're watching this marketplace, it is really getting, from a pricing standpoint, to be a tough place to be.
And we're holding up very well, and we got -- and that's why we're so focused, Jimmy, on a lot of new product, so that we begin to take the margin pressure off our business there.
Operator
And your next question comes from Joe Yurman from 1221 Capital Management.
Joseph J. Yurman - 1221 Partners, LLC
My question is about bowling retail. I've only really just started to take a look at this, and so my first question is about -- so we had 95 centers, and now we've divested 7, so we have 88, is my math right?
Dustan E. McCoy
Yes.
Joseph J. Yurman - 1221 Partners, LLC
Okay. So now how asset-intensive is the business?
Do we own these facilities? Are they leased?
Dustan E. McCoy
We own them.
William L. Metzger
Yes, we own them.
Joseph J. Yurman - 1221 Partners, LLC
Okay, we own them all.
William L. Metzger
60% -- 60%, 65% are owned.
Joseph J. Yurman - 1221 Partners, LLC
Got you, okay. And now, with respect to Tavern '45, and I understand for competitive reasons, you may not want to get into this, and I'm hoping you'll get into more of this at the Analyst Day, but is this an in-house initiative?
Have you been working with some third parties, particularly in culinary and things like that, how should I think about that?
Dustan E. McCoy
We have been working with a third party to design the menus, to train the chefs, to help us understand how to change the service experience. And I feel you heading towards the -- exactly the right way about how to think about this.
The typical bowling center has been experiencing movement from folks who come in and do league play to open play. And generally, across the industry, although we have been bucking that on the same-store sales basis but within centers.
But across the industry, the top lines have been under a lot of pressure when the league players aren't showing up, because they're a great source of revenue. They're there every week.
They spend a certain amount. You know how to staff in order to take care of the leagues, and all that is different with open play.
But what our bowling retail folks have begun to notice, is there was a form of hybrid bowling activity that was experiencing double-digit growth fairly consistently, and that activity is one where bowling is the primary recreational activity. But there are also great food, great customer service, great lounge areas, et cetera, and if you begin to think about those sort of activities, the restaurant, the food and beverage part of the business, begins to approach half the revenue of those sorts of centers and in our present centers it's nothing like that high.
So then, our bowling retail folks began to really think their way through how they needed to change internally. And the internal change is to become a business that's very, very customer, consumer-centered, bowling centric if you will.
And they've made the decision that they were going to pilot 3 places, 2 in Georgia, as I said, 1 here in Chicago. That one opened, getting ready to open the second one, we'll open the third one in the fall.
And we knew, as fit as our people are, we needed help to understand things we just didn't know. So yes, we have had outside help around the food and beverage activity, and we've made great additions internally with food and beverage expertise.
And within all that, we're just quite confident that this is going to work out well for us.
Joseph J. Yurman - 1221 Partners, LLC
And with respect to that, and it may be too early to quantify, but can you kind of maybe, qualitatively, just talk about the sales lift as you've kind of retrofitted these 2 facilities in the Atlanta area?
Dustan E. McCoy
From a target perspective, it's 50%.
Joseph J. Yurman - 1221 Partners, LLC
Okay. And then my last question is I picked up during your prepared remarks about there are certain competitive advantages that you enjoy in your bowling business.
All else equal, let's say that I was competing against Brunswick and operating one of these centers, to what extent are these competitive advantages ROI enhancing versus just maybe the one-off who is going to do this in the area?
Dustan E. McCoy
Well, because of the number of centers we operate compared to only one other big operator, who's coming out of their second or third bankruptcy, I kind of forget, we demonstrated an ability to bring both nice ROI, not particularly high, but it's steady. It's more bond like, if you will.
We make the investments in these centers and we know how it's going to churn out returns over a very long period of time. And our competitive advantage here is we have great folks who've been at this a long time, we're extremely disciplined in the way we do it.
We don't leverage these things way up, and we just continue to churn through. So that's been our advantage.
Operator
And at this time, we would like to turn the call back to Dusty McCoy for some concluding remarks.
Dustan E. McCoy
As always, we appreciate the questions that we get. They're always very insightful.
And actually, we always look forward to this day. We're confident where we're going.
We're relaxed. We wish we were getting more help from the marketplace, but we don't need it.
And we're prepared to live in a world in which we've been handed cards. We're going to play these cards and do well.
So thanks, everybody, for being with us on this call. And we look forward to seeing you individually and in other group events as we get through the next quarter.
And most importantly, we look forward to seeing you all in our November investor conference. Thanks very much.
Operator
Thank you. And thank you for your participation in today's conference.
That concludes the presentation, you may now disconnect, and have a great day.