Earnings Labs

Brunswick Corporation (BC)

Q2 2014 Earnings Call· Thu, Jul 24, 2014

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Transcript

Operator

Operator

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

Bruce J. Byots

Analyst

Good morning and thank you for joining us. On the call this morning is Dustan McCoy, Brunswick's Chairman and CEO; and Bill Metzger, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filing and today's press release. All these documents are available on our website at brunswick.com. During our presentation, we are using certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation, as well as in the supplemental information sections of the consolidated financial statements accompanying today's results. I would like to remind you that these figures in the presentation reflect continuing operations only unless otherwise noted. On July 17, the company announced the signing of an agreement to sell its retail Bowling business and its intention to sell its Bowling Products business. Beginning with the third quarter of 2014, Brunswick will report the results of this Bowling Retail and Products business which was previously reported in the Bowling and Billiards segment as discontinued operations. The historical and future results of the Billiards business will be reflected in the company's fitness segment. The company's second quarter and year-to-date financial statements include the Bowling business results as continuing operations. The 2014 second half and full-year outlook statement reflect the bowling businesses as discontinued operations. I would like to turn the call over to Dustan.

Dustan E. McCoy

Analyst

Thank you, Bruce, and good morning, everyone. I'll start with an overview of our second quarter results. Revenue in the quarter increased 4%. We experienced growth in outboard boats and engines, parts and accessories, fitness equipment and bowling products, which was partially offset by revenue declines in fiberglass sterndrive boats and engines, as well as retail boating -- bowling, I'm sorry. Bill will provide more color on the segments' performance in his remarks. Our gross margin increased by 30 basis points compared to the prior year. Operating expenses increased by 7% as we continue to invest in numerous strategic initiatives. Adjusted operating earnings increased by 3% versus the prior year. Net interest expense was reduced by $4.1 million, reflecting our prior-year debt reduction activities which were enabled by our strong free cash flow performance. Adjusted pretax earnings increased by 8% while diluted EPS, as adjusted, decreased by $0.28 to $0.95, reflecting a higher 2014 effective tax rate. Our Fitness segment reported strong top line growth of 6% in the quarter. This is the sixth consecutive quarter of solid revenue growth for this business. Sales on our combined marine segments increased by 4%. From a geographic perspective, consolidated U.S. sales increased by 5%. Sales to Europe also increased by 5% with a favorable impact from foreign currency accounting for a portion of that growth. Rest of world sales declined by 2% versus the prior year period. Due to weakness in marine markets and changes in foreign currency offset by gains in Fitness. In summary, sales outside the U.S. increased by 1%. In the first half, the Fitness segment reported strong top line improvement of 6%, while sales on our combined marine segments were flat due to, as you will recall, the difficult first quarter for the engine and bowl businesses. From…

William L. Metzger

Analyst

Thanks, Dusty. I'll start with the Marine Engine segment where sales were up 3% in the quarter. From a geographic perspective, sales to the U.S. were up 3%, reflecting increases in outboard engines and parts and accessories, which were partially offset by the impact of lower sterndrive inboard engine revenues. Sales to Mercury's European customers increased 5%, as growth in parts and accessories was partially offset by lower outboard and sterndrive inboard engine revenues. Rest of the World sales increased slightly as gains in outboard engines has exceeded reductions in parts and accessories and in sterndrive inboard engine revenues. On a product category basis, the outboard engine business reported solid overall sales growth in the second quarter of 2014. Our outlook for the outboard engine business continues to reflect favorable retail demand in most markets in both categories. Sterndrive engine sales continue to be affected by unfavorable global retail demand trends. Diesel engine sales were down modestly in the quarter but are still up year-to-date. Mercury's parts and accessories businesses delivered solid growth sales growth during the quarter with gains in both the U.S. and Europe, partially offset by declines in Rest of the World. Revenue benefited from new product launches and market share gains. We again reported record sales in the second quarter at Land 'N' Sea and Attwood. Mercury's operating earnings increased by 3% compared to last year's second quarter. Operating margins were at 18.8%, 10 basis points lower than the prior year quarter. Improvement in operating earnings included a benefit from higher sales, as well as the impact of the absence of favorable insurance settlements in the second quarter of 2013 and investments in growth initiatives. In our Boat segment, second quarter revenues increased by 4%. In the U.S., which comprises about 2/3 of this segment, sales…

Dustan E. McCoy

Analyst

Thanks, Bill. Our operating plans and assumptions for the full year remain fairly consistent with those we communicated on our first quarter call, after we adjust for the bowling divestitures. We continue to target 2014 to be another year of strong earnings growth with outstanding cash flow generation. Our plan reflects 5% to 6% sales growth, which is supported by our increased investment in new products and by the continuation of the growth demonstrated in the U.S. in the second quarter of 2014, and growth in certain international markets. We continue to anticipate a solid improvement in gross margin levels. As a result of ongoing growth investments, full year operating expenses, adjusted for the divestitures, will increase but, as a percentage of sales, are expected to be lower than 2013 levels, approximately in the range of 17.6% to 17.7%. As a result, our pretax earnings should continue to demonstrate strong growth of 24% to 30%. On our last earnings call, we established our 2014 EPS as adjusted guidance of $2.40 to $2.55. With the announced divestitures of our bowling business and the corresponding discontinued operations accounting, our guidance was affected -- effectively reduced by $0.20 to $2.20 to $2.35. Today, we'll change our guidance to a range of $2.25 to $2.35. Regarding our outlook for the second half, we're anticipating strong top line growth in our Marine segments, as well as our in Fitness segment. On a consolidated basis, we're planning for approximately 10% to 12% sales growth in the second half. Some of the key drivers of the second half growth include new products being introduced at Mercury, which I will elaborate more on the next slide. The Boat group has several new products mainly introduced or better reaching full production rates, including Sea Ray 650, 470, 510 and…

Operator

Operator

[Operator Instructions] Your first question comes from the line of James Hardiman with Longbow Research.

James Hardiman - Longbow Research LLC

Analyst

Maybe to start, let me try to bridge the gap between sort of the minus 2% retail for boats worldwide in the quarter and the -- I think it was plus 4% reported wholesale. I guess first question, it sounds like international is a real problem child here, do you have the numbers that you could share in terms of what domestic versus international look like at retail? And then I think in your prepared comments, you made the point that the bigger piece of that delta is pricing as opposed to inventory fill. Can you just sort of confirm that? And I guess, how do we think about that delta as we move forward in the back half of the year?

Dustan E. McCoy

Analyst

Well, what has been the problem in the first half is fundamentally, Canada and South America. We've gone nicely in the U.S., we did nicely in Europe. And the big issue there, the big help there in our Boat business has been some great new models which tend to be larger and have a higher average selling price. Canada is -- retail has been down fairly dramatically. Again, it was driven by a very bad weather and what we tend to notice in Canada, if there's any variation in exchange rate, it sort of freezes the market a bit, and then things begin to get back to normal, but we're getting late in the year. And I anticipate that Canada may have a hard time getting back to what we had hoped it would. In South America, it appears to be all driven by economics in that region. And frankly, did we know that? And when we do businesses with South America, that's a part of doing business down there and you just got to be flexible roll with the economy, and I think our guys are all doing a great job there. And I would point out that we're up fairly significantly in Fitness business down there. And I just need to give a shout out to our business team there. As we look to the second half, we will have improvement in units and even higher improvement in dollars. And again, this is driven generally across our fiberglass businesses with bigger models, with higher average selling prices, which will then pull up the average selling price for all of the boats and helps [ph] revenue. We're -- the biggest issue we have, frankly, around our boat business as we look at the second half, in my judgment, is not demand, it's our ability to get over new products into the field. We have significant ramp-up to do in all of our plans of that produce fiberglass products, and that includes Sea Ray, it includes Bayliner and it includes Boston Whaler. So this has now gone from, in my judgment, a market-facing issue to an internal operational production issue and we got a lot of confidence in our operating teams in these businesses, and that's why we feel so strongly about the big second half growth. Is that -- it's a bit rambling. Does that get you there?

James Hardiman - Longbow Research LLC

Analyst

Well, it helps quite a bit. I guess to the last point, the ability to get all the new products into the field, I think MarineMax, again, you guys are in the enviable position to follow-up your biggest customer. But they talk about maybe some of the Sea Ray products getting out a little bit slowly. Was that just maybe a lack of communication? Or versus how you were thinking about things of some of these new products take a little bit longer to get out there?

Dustan E. McCoy

Analyst

Probably both and probably more of the former than the latter. And we're going to be careful getting this new product into the marketplace, especially with the big Sea Ray product which I think sounds like it was referenced on the MarineMax call. I think you listened to it, James. We waited a while to get the great, big, new product in Sea Ray into the marketplace. We knew that we were going to be losing share in these bigger boats as we went to a very careful planning process, development process. Now that we've got the product, we need to make sure when we build it and get it into the field that it's really good product of high-quality with no issues so that it's a part of the really strong, as we look in future years of this brand, that this is one of the big foundations for future growth for the brand. So if we ever error, it will be on slower making sure it's right rather than pushing out trying to get revenue.

James Hardiman - Longbow Research LLC

Analyst

Great. And then just last clarification question here. I think you said in the prepared remarks that your tax rate did not include the extension of the R&D tax credit. How should we think about what the tax expense is going to be if that does get reinstated? I think POLARIS, for example, a couple of days ago, basically assuming we don't get anything until the fourth quarter, and then it's retroactive then and it's meaningfully helpful to their numbers as a result. Any way to quantify what it means to your business if that does get reinstated?

Bruce J. Byots

Analyst

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

Operator

Operator

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

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst · Citigroup.

In terms of the promotional environment on the boat side, how's that been progressing since the beginning of the year with maybe boats sales not being as robust as maybe we would or basically in line just kind of in line with your expectations, but it's not extremely robust. So how have they been responding?

Dustan E. McCoy

Analyst · Citigroup.

Our discounting has been right in line with our forecast and budget. I would say that as we've been helping our dealers get ready for all the new product, we have been helping them get some product off the showroom floors so that they'll be ready for the new products we're introducing. But the market is, in general, behaving very well. And as I say, we did a discounting a bit for some older product to make sure that the pipeline was clean. As we look at our pipeline in the field and we look at boats 0 to 100 -- 360 days, 18 months, over 2 years, et cetera, all of our statistics are down. That is favorable to what we've been in the past. So we're really getting our pipeline very clean.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst · Citigroup.

Good. And then just to clarify again, the guidance you revised the lower end down $0.15, but there's a $0.20 impact, the difference, the upside in the $0.05 is the lower end of the range. Would it -- can you give us a little more color on that?

Dustan E. McCoy

Analyst · Citigroup.

Why we raised the bottom end of the guidance?

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst · Citigroup.

Yes. Yes.

Dustan E. McCoy

Analyst · Citigroup.

Bruce made me. No, as we progress through the year and we're getting a better look at the marketplace, our margin performance, how the market's going to accept our new product, we're quite comfortable we ought to narrow the range.

Operator

Operator

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

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Analyst · SunTrust.

Just wanted to touch on some of your commentary and MarineMax had echoed this with regards to the over 30-foot fiberglass inboard market and some of the, I guess, some of the strength you're seeing there versus the, I guess, the dichotomy with the lower or under 30-foot product. I mean, taking a step back, what's really driving the difference there? Is it new product or is it something about the way the market or the consumer is coming back?

Dustan E. McCoy

Analyst · SunTrust.

Well, it's quite interesting. The under 30 feet with an outboard on it, is all doing well. Under 30 feet with sterndrive on it continues to be a tough place to be. And that's what I think all the statistics show, Mike. The over 30 feet is driven by, in my judgment, first, a lot of great new product in our 350 SLX, especially sort of the 30 to 40 feet. But we've been gaining lots of share there and the market is up there, in our view, over 5%. And that includes ourselves. And in fact, there's some other builders doing some great job of putting these large sterndrive runabouts into the market. And saltwater fish, with outboard, which is of course fiberglass, continues to do very well and a lot of folks are putting a lot of great product in the market in that category. Then when we move above 40 feet, as you look at the numbers, bigger stuff is doing pretty good in the 40 range, can still be a bit of a tough place for everybody to play. We've had to view for a long time that above 40 was going to be a good place to be, and that's why we spent so much time getting product ready going to that market, and my judgment is we'll be rewarded for that.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Analyst · SunTrust.

Great and then just shifting over to, I guess, some of your commentary around timing of investments. How should we look at that? Were there just some things that you couldn't fit into the quarter? Or I guess, just general commentary?

Dustan E. McCoy

Analyst · SunTrust.

Yes. As our folks out who run our businesses, gauge what they can get done within a particular quarter, our goal always is to really get it done right, don't just go spend the money because we put it in the budget, et cetera. And what you see with our operating unit heads, many times, is that they're working their way through a quarter. The sun don't shine 365 days a year as they're working on our project. I won't say they'll hit a snag, but they'll hit a point in which they want to think more about it and decide what they do next, and they don't just continue to throw money at it. So we're always encouraged when our operating units come in and say, I'm still going to spend the money, I still believe in the project, I believe the investment needs to be made, I believe it will fuel future growth. But I just wasn't quite ready to pull the trigger in this quarter. I'm going to do it next quarter. We stay very relaxed about those things. And in fact, congratulate our operating guys for coming in and having that discussion.

Operator

Operator

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

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst · Wells Fargo Securities.

Dusty, a couple of pieces here. I guess one is more near-term, one is a little bit more long-term. You talked about pipelines and you talked about specifically, Canada and Latin America. Can you talk about July trends, what you’re seeing in just in general in retail in the U.S.? And please correct me if I'm wrong here, it would seem that even though your pipeline inventories are up a little bit in aluminum, the outboard fiberglass, that could be a little bit of the weather we caught in the early part of the second quarter now you're expecting that to improve. So I guess that's all one collective question. And the second question would be 2016 goals. And part of the domestic your announcement you basically reiterated the base case and it appear also the optimistic case goals despite the $0.21 to $0.23 headwind. Can you give us a little bit more detail as to why you feel confident in that? Because you're effectively raising the guidance here on the 2016 goal.

William L. Metzger

Analyst · Wells Fargo Securities.

First, pipeline and retail trend, June was a good month. July is feeling like June at this particular point in time. In terms of the pipeline and in aluminum are -- the only place we felt a little heavy on pipeline was in Canada, which is completely understandable in light of what has been happening to retail there. We are probably going to need to add the pipeline in pontoon. As we went into our new plant in the third quarter last year and introduced a bunch of new models and model year. We and our supply base we're unable to get in sync and keep up, and I think we got a little bit behind what the market wanted and what our dealers wanted, so we need to use this third and fourth quarter to get ourselves right with our dealer network and consumers. So that's a real goal as we go forward. So again, in pipeline, we're quite pleased and happy with what our guys have been doing out there. Why we stayed on the base case and taking $0.20 out is we think there are lots of levers, Tim, that we can pull as we go between now and 2016. So if we step back and -- this starts to bring us into the question of, as a management team, what are we going to do with the significant amount of cash that we'll get from the bowling transaction, and with a significant amount of cash, free cash flow we're going to be generating both this year and in coming years. And we sort of think of this in 3 buckets, and I'll come back to the guidance, Tim. Investing in the business, taking care of the pension plan, returning capital to shareholders. And we need to…

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst · Wells Fargo Securities.

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

Dustan E. McCoy

Analyst · Wells Fargo Securities.

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

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst · Wells Fargo Securities.

Okay. And then one of the clarification back to, you mentioned about the pontoon pipeline, you probably need to bulk that up a little bit. So the 19- to 30-foot portion of the sterndrive market, you continue to see a shift in the pontoons and maybe the ski-wakeboard segment as we've seen the last couple of years, is that ongoing in your view? And again, if you're picking up on the pontoon, I mean, not to say you'll care but I mean is on is are getting more of the engine feel pretty comfortable with that still?

Dustan E. McCoy

Analyst · Wells Fargo Securities.

Yes. The one thing, the comment I would make, yes , clearly the sterndrive 130-foot product, buyers had a migration to both pontoons and [indiscernible] product. There's a big cut in here. We're beginning to see real movement now in outboard-based fiberglass product under 30 feet. It is not ski product and obviously not a pontoon. And there's really nice growth there, all driven by different propulsion, difficult with the product. These outboard engines are becoming just magnificent pieces of machinery. So it's not all just pontoon and ski. We're now beginning to see an increase in outboard use product there.

Operator

Operator

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

Jimmy Baker - B. Riley Caris, Research Division

Analyst · B. Riley.

So looking at your updated guidance, the 10% to 12% top line growth in the back half of the year, as we kind of bring that down to the segment level, looks like you'll have perhaps the strongest growth on the boat side and that obviously pulls your Mercury with it. But if you're looking at Mercury, let's say, excluding intercompany sales, are you expecting an organic acceleration in the back half? And if so, what's driving that?

Dustan E. McCoy

Analyst · B. Riley.

Yes, we do expect an acceleration from second quarter rates, let's say, we don't count first quarter. And it's driven heavily by new product. We continue to do a very good job of taking care of fill rates for P&A around the world, and we think we're going to be taking some market share with a lot of the new product that we have coming out and this business in addition to this white space, Jimmy [ph].

Jimmy Baker - B. Riley Caris, Research Division

Analyst · B. Riley.

Okay, great. And just a follow-up on the impact of this wave of new models that you have on your existing sitting pipeline inventory. Your comments seem relatively in line with Marine Max earlier today. You talked about becoming a little bit more promotional to help clear the deck ahead of the arrival of your new product. And realizing that a lot of moving parts of the margin side of your business given the production ramp you're undertaking. But can you just help us tease out how long this period will last or you need to support sell-through of the legacy pipeline inventory before the true margin profile of your new product portfolio would be seen?

Dustan E. McCoy

Analyst · B. Riley.

I think we're getting to the end.

Operator

Operator

Your next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: In the past, you've talked about incremental margin in the low 20 range, including some investments spending. And I know bowling was fairly small, but I would wonder how that -- how you would look at incremental margin now that bowling is no longer part of the portfolio?

Bruce J. Byots

Analyst

Yes, Craig, This is Bill. I would say that the 20 to 25 on a long-term basis still holds true. But clearly, in the short term, we've been and are projecting that we're going to do better than that. And I would say some of it's just the benefit to the new product lift, some of it's the fact that our product quality has been a little bit better than we thought it had been in the plan and a little front-end loaded there. And our operations are just performing pretty well. So I think long-term, that range is still in play, but clearly, in the short term here, we're doing a little bit better than what we thought.

Dustan E. McCoy

Analyst

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

Operator

Operator

Your next question comes from the line of Joe Hovorka with Raymond James. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: A couple of quick questions, and feel free to cut me off whenever you want.

Dustan E. McCoy

Analyst

That's just not our style. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: The boat revenues, I think you used to give, [indiscernible] but can you update that between fiberglass outboard, fiberglass sterndrive inboard and then your aluminum business?

Dustan E. McCoy

Analyst

In terms of -- I'm sorry, you sort of broke up there. The first piece in terms of growth rate? Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: The revenue split. It used to be like 40/40/20, and then it's been shifting. Did you have an update on where that's at now given all the changes we've been making?

Dustan E. McCoy

Analyst

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

William L. Metzger

Analyst

I would agree. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Okay. Okay. And then...

Dustan E. McCoy

Analyst

[indiscernible] the growth we're going to experience, we're certainly getting a little bit more out of the rec fiberglass businesses, but we're going to get growth out of all of the businesses in the back half of the year. So there's not a dramatic shift that's occurring in '14. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: And it sounds like, I mean, we all know about the product at the 35 to 65 feet that's been coming up, but it sounds like you've got some stuff coming in the kind of sub-30-foot range in the Sea Ray brand, including some more outboard boats, is that correct?

Dustan E. McCoy

Analyst

Yes, we've been introducing some outboard runabouts, outboard deck boats. And as we look at second quarter, we add some nice market share gains with this product. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: So is that product in the market already? I was under the impression it's coming this fall.

Dustan E. McCoy

Analyst

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

Operator

Operator

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

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst · BMO Capital Markets.

On Fitness it seems like the U.S. health club landscape is growing, but consolidating we've got a few bigger players out there. Is their scale and buying power, is that something that could put pressure on your margins?

Dustan E. McCoy

Analyst · BMO Capital Markets.

Yes.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst · BMO Capital Markets.

Okay. And then on capacity utilization. Maybe you could update us where you are in the Marine businesses. What kind of capacity you have available. And then how long we are until we max out. And maybe an update on what's in mothballs and that can be a quickly brought up to speed.

Dustan E. McCoy

Analyst · BMO Capital Markets.

Sure. We talked about this before sort of to remind us all, we size ourselves for around 220,000 unit market in terms of production capacity in Marine. Pontoon has exceeded that on an equivalent basis. Aluminum is there and going above, and we think fiberglass outboard, which would -- especially in saltwater which would be our Whaler brand is going there very quickly. So we've made last year big investments in pontoon capacity. That will let us run for a long time. We're completing a big investment in our largest aluminum fishbowl plant up in New York Mills, Minnesota. That's coming online as we speak. And that gives us a pretty good runway. And we're in the, let's say, 20% through plant expansion at Boston Whaler, which will give that business plenty of runway. In our bigger boats, we've got lots of room and the way to think of that is that market is still down fairly significantly from prerecession levels and we got room for that market to go back to the equivalent of 200,000 units, and it's got a good bit of runway ahead of it in order to get there. At Mercury, the outboard market has grown faster than the sterndrive market. And on equivalent basis, it's exceeded where we thought the market would be at this point in time. So we said we've been investing pick a numbers, say, 25 million a year, last year, this year and next year an increasing capacity at Mercury, it's not only in assembly, but it's in the casting, machining tooling and assembly. And that will all be done next year, and we all have a long runway ahead of us there also. So some places we've been tight. We've been making investment. Other places we've got room and I think we'll be fine.

Operator

Operator

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

Joseph Spak - RBC Capital Markets, LLC, Research Division

Analyst · RBC Capital Markets.

I guess my first question is just specifically in the quarter on the engine business. You had a little bit of over 3%. Sales growth and then operating income of more like 2.5. So the incremental margin was just like a little bit maybe below what you guys have talked about historically. Is that mostly mix-related or was there something else that popped up in there in the quarter in terms of efficiencies or anything?

Bruce J. Byots

Analyst · RBC Capital Markets.

We referenced a couple of insurance settlements that occurred in 2013 that generated some income in the second quarter of last year. That was a headwind and that it's just incremental investment spending. If you strip those 2 out there, their incremental leverage is just fine.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Analyst · RBC Capital Markets.

Okay. And then the -- you talked about being sold out on some of the new product and just being a little bit capacity-constrained again. So I mean if we think about maybe the industry overall, getting a little bit better here as we exit the season and maybe last a little bit longer. I mean, how much are you really able to participate in that? Or are you just viewing that as sort of a better sign that sets you up a little bit better as we think about 2015 and beyond?

Dustan E. McCoy

Analyst · RBC Capital Markets.

If the industry increases -- with all the investments we've made in aluminum, fish, pontoon and investment we're making in saltwater, we can participate enormously. In the bigger boat -- let's do smaller fiberglass, sterndrive boats, we're fine. In the bigger stuff, it feels like we're capacity-constrained right now because we're in ramp-up mode with all these new product. And what we try to convey, and I don't think I do a very good job in explaining this, is we introduce a new model, we know how many weeks, months, et cetera, it will take us to get to full run rate, and it's fairly complex actually. So let's take our new 650 Sea Ray. You think of everything that goes into that boat, we've got to coordinate the supply chain to have it all there and we've got to train ourselves as we move that product from product development over to the plant floor on actually how to build it. And that's a fairly complicated dance with hundreds of people involved. So as we start to ramp up we say, I'm going to make this up because I don't want to give anything away competitively. It'll take us 6 boats over 7 months. And again I'm making these numbers up to go from a standing start to normal run rate. Once we're at run rate, then we can increase run rate very easily because it's just then a matter of turning it over, if you will. But as we go through the learning process, we can't do much faster than the ramp up process we designed, and we're in ramp-up mode, for instance, with the 650. We're sort of coming out in ramp-up mode for the 51. I think we're at a ramp up mode for the 35, the 350 SLX. But we've got 2 58s coming. And when we throw those in, it'll feel slow as we get started. So our dealer network and a couple of people of reference, perhaps, the Marine Max call, and I'll need to go read the transcript, but I can understand where the dealer networks has said man [ph] I got to ramp up [ph] off-boat, I can sell, you can maybe give me more. And our answer always is we'll get there but we've got to get this model integrated and ramped up before we can begin to increase production rates.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Analyst · RBC Capital Markets.

Okay. And maybe just one housekeeping. So for modeling purposes as we sort of change things over, was -- and I'm sorry if I missed this somewhere. But was bowling about $0.02 in the quarter? So maybe on an adjusted basis, $0.02 lower versus what you guys actually printed?

Bruce J. Byots

Analyst · RBC Capital Markets.

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

Operator

Operator

At this time, I would like to turn the call back to Dusty McCoy for some concluding remarks. Please proceed.

Dustan E. McCoy

Analyst

Operator, first, thank you for your help today. As always, thanks everyone for being on the call. We love your questions. They're always good. As you can see, we're predicting and forecasting and planning for a very strong second half. So you'll see the whole organization with our sleeves rolled up now because we've got a lot of work to get done over the coming weeks and months. Thank everybody for your interest and I'm sure we'll be seeing you as the weeks progress as we go through the second half.

Operator

Operator

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