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.

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.

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…

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…

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…

[Operator Instructions] Your first question comes from James Hardiman from Longbow Research.

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?

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…

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?

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…

Your next question comes from Mike Swartz from SunTrust.

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?

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…

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?

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.

And your next question comes from the line of Tim Conder from Wells Fargo Securities.

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.

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.

Okay, okay. I know again you don't like to talk about weather that much, but you pointed out what you...

I've been talking it a lot, haven't I? For somebody who doesn't like to talk about it.

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.

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.

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.

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...

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.

Okay. So operating expenses, Bill, up absolute dollars, but maybe lever a little bit as a percent of sales?

Correct.

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.

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…

And your next question comes from the line of Jimmy Baker from B. Riley & Co.

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?

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?

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?

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.

And your next question comes from Joe Yurman from 1221 Capital Management.

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?

Yes.

Okay. So now how asset-intensive is the business? Do we own these facilities? Are they leased?

We own them.

Yes, we own them.

Okay, we own them all.

60% -- 60%, 65% are owned.

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?

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.

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?

From a target perspective, it's 50%.

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?

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.

And at this time, we would like to turn the call back to Dusty McCoy for some concluding remarks.

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.

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.