Brunswick Corporation

Good morning and welcome to Brunswick Corporation's first quarter 2019 earnings conference call. All participants will be in a listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ryan Guilum, Vice President, Investor Relations.

Good morning. Thank you for joining us. On the call this morning are Dave Falks, Brunswick 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 filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will also be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results. I would now like to turn the call over to Dave.

Thank you, Ryan. Good morning, everyone. As anticipated, our marine business delivered strong results in the first quarter. as we grew top line by over 10% and expanded operating margins by 80 basis points. These results reflect the continued successful execution of our marine strategy, focusing on product and technology leadership, growth initiatives, and operational excellence. After a slower than expected start to the marine selling season, due in part to more challenging weather conditions in much of the U.S., We believe that the market demand for the remainder of the year will reflect modest growth in units, with dollars again growing at a greater rate. As a result, we will continue to execute against our plans and our overall marine strategy. And we believe that we can deliver operating performance and cost controls that will drive strong leverage and achieve our full-year earnings targets. Finally, we have made significant progress on the separation of the fitness business from the portfolio, which I will discuss in more detail on an upcoming slide. I'll now provide some commentary on our segments and the overall marine market. The marine engine segment continued its momentum from the second half of last year. Engine demand remains particularly strong for the 175 to 300 horsepower V6 and V8 outboard engines introduced in 2018, and the new mainline 400 horsepower outboard, which debuted in Miami in February. These platforms are the most recent evidence of the success of our strategic investments in industry-leading technology and product development capability, which has driven both market share gains and margin accretion. Note that the capacity investments discussed on our last call, which will further enhance our engine production capabilities, remain on target for completion in the fourth quarter. In addition, we plan to deliver exciting new engine products during the remainder of 2019. The parts and accessories business continued its steady performance led by power products. The delayed start to the boating season in the U.S. has slowed OEM and aftermarket parts sales, but we anticipate that improved conditions will lead to performance consistent with recent experience. Overall, revenue growth was 11.5% in the quarter, with outstanding operating leverage of 31%, leading to 180 basis point improvement in operating margin. The boat business remains focused on delivering our long-term strategic commitments, including investing in our market-leading premium boat categories, enabling and enhancing the boating experience, and maximizing operational efficiency across our manufacturing footprint. For the first quarter, top-line growth in the segment was slightly below expectations due mostly to weather and some market softness in the value categories. However, our aspirational brands with premium content continue to outperform, with growth in average sales prices outpacing unit results. Sales in international markets were down as expected. Operating margins declined 50 basis points due in part to factors that will help enable future margin expansion and growth, as Bill will discuss in a few minutes. Lastly, we announced two strategic moves to enhance our manufacturing and product development capabilities, which I will discuss at the end of the call. Looking at our combined marine segments, global revenue grew by more than 10%, with 6% growth achieved on a constant currency acquisitions basis. The engine segment reported strong growth in international markets, including benefits from improved outboard engine availability. U.S. market growth was influenced by a delayed start to the marine season and continued weakness in stern drive engine sales. The boat business also delivered solid growth, with U.S. outperforming international markets. Sales in Europe were down as anticipated, primarily due to slower market conditions and the supply constraints, caused by a transition from a contract manufacturer, as we discussed in January. Canadian sales were up in the quarter, after very weak wholesale demand in the second half of 2018, as dealers deferred orders to Q1 in response to the tariffs on boats imported from the U.S. The power products acquisition added 6% growth to marine business in the quarter, while currency was unfavorable by 2 percentage points. As I mentioned, the U.S. market is off to a slower start than anticipated in 2019, with reported industry demand metrics mixed. And MMA outboard registrations, which represents a more complete view of the market, were essentially flat with the prior year. As a reminder, currently over 90% of boats sold are powered by outboards. SSI, which provides a somewhat incomplete view of the market, is reporting a decline in demand of 7%. SSI reporting for the first quarter remains preliminary, as this reflects only 46% of the activity in March, with several key states, including Florida, not yet reporting. This is significant because March normally comprises half of the retail activity in the first quarter. Our view is that the unit market in the first quarter was most likely slightly down, primarily due to weather and softness of value categories. On a dollar basis, the market continues to grow due to strength in premium categories. Turning to the fitness segment, our attention remains firmly on completing the separation of this business from the portfolio. As I mentioned earlier, we've made significant progress on the separation and are very encouraged by the strong level of buyer interest in the sales process. Consequently, while we continue to maintain our preparedness for spinning the business, we have confidence that we will be in a position to announce a sale of the fitness business as expeditiously as possible in the second quarter. Fitness's first quarter performance was mostly consistent with our expectations, with revenue declines resulting from lower sales to Planet Fitness and softness in certain international markets. Gross margins remain relatively stable from the second half of 2018. Now I'll turn the call over to Bill for additional comments on our financial performance.

Thanks, Dave. Diluted EPS for the quarter was $0.99 per share on an as-adjusted basis. For the marine business, EPS was $0.94 per share, a 6% increase versus first quarter of 2018. including the impact of higher interest costs and tax rate. Marine revenue was up more than 10%. The combined marine businesses delivered operating earnings improvement of 18%, which translated into operating margin improvement of 80 basis points and leverage of 20%. In the marine engine segment, revenue grew 11%, led by power products, which added 8% to the growth rate and continued robust demand for higher horsepower outboard engines. The organic P&A business continues to grow at a steady pace, with weather negatively influencing U.S. sales in the quarter. Mercury's adjusted operating earnings increased 25% in the quarter due to increased sales, as well as favorable impacts from changes in sales mix. with which both contributed to 180 basis point increase in adjusted operating margins and operating leverage of 31%. In the boat segment, adjusted revenue grew 3%, outpacing changes in unit volumes, which were down 5% globally. Average selling prices expanded due to changes in mix and increased content on boats, along with inflationary price increases. Adjusted operating margins declined by 50 basis points as they were temporarily influenced by less favorable plant deficiencies at certain of our boat facilities due in part to new product integrations and related complexities. In addition, the boat business had elevated spending on profit improvement initiatives in the quarter, which we believe will enable future growth. These factors offset benefits from positive changes in mix. Dealer pipelines ended the quarter with 40 weeks of boats on hand, measured on a trailing 12-month basis, which is up slightly from last year. Year-over-year pipeline variability is very common at this early point in the season, particularly given the delayed start in the boating season. We believe that our pipeline levels are appropriate, given the anticipated level of retail demand. Over the remainder of the year, our disciplined management of pipeline inventories will continue, as we plan to make necessary adjustments to match wholesale shipments with retail activity. Our plan anticipates that year-end pipelines will be consistent with 2018 levels on a weeks-on-hand basis. Our first quarter gap results also reflect the impact of three items which have been excluded from our as-adjusted results. We recorded restructuring, exit, integration, and impairment charges in the quarter, totaling $141.5 million. mostly related to an impairment of goodwill resulting from a reevaluation of the fair value of the fitness reporting unit which was informed by significant progress made on the sale process this pre-tax impairment of a hundred and thirty seven point two million dollars resulted in an after-tax charge of a hundred and three million dollars an adjusted net book value of the fitness business of approximately five hundred million dollars other items related to the fitness separation, and purchase accounting amortization in connection with a power products acquisition. Our full-year guidance for the combined marine business remains relatively unchanged. Absent significant changes in the macroeconomic climate and assuming our expectations for marine industry trends remain intact, we anticipate overall revenue growth rates in the range of 8 to 10%. Although slightly lower than previous estimates, this expectation still represents strong top-line growth for the year. Operating expenses are estimated to be lower than 2018 on a percentage of sales basis as we continue to fund investments in growth while driving improved cost efficiencies. We believe that these factors, together with ongoing benefits from new products and acquisitions, will enable strong leverage and margin growth, especially in the engine segment. and allows us to achieve our initial operating earnings growth guidance of high teens percent for the year. Our guidance for the full year adjusted diluted EPS, excluding the fitness business, remains in the range of $4.50 to $4.70 per share. Key changes from our previous guidance include benefits from lower tariffs and spending reductions, offsetting slightly lower growth in projected marine sales. For the second quarter, we anticipate revenue growth within the full-year range and marine business adjusted EPS in the range of $1.43 to $1.50 per share. In addition, we expect that the profitability of the fitness business in the second quarter will look similar to the first quarter results, with a significant majority of 2019 earnings coming in the back half of the year. In our marine businesses, we now anticipate an impact to 2019 pre-tax earnings of $10 to $15 million related to tariffs, which has improved from our previous estimate. This updated estimate now assumes that the previously announced Wave 3 of China tariffs stays at 10%, as opposed to increasing to 25% on March 1st, which was previously anticipated. and assumes that we moderate a portion of the price increases that were aimed at covering certain components of the net tariff impact. The impact of retaliatory tariffs on boat exports to Canada and the EU continue to be incorporated into our plan with early season sales into these locations consistent with our expectations. Next, I would like to provide an update on certain items that will impact our P&L and cash flow for 2019. Most of our initial expectations for the year remain unchanged. We anticipate strong free cash flow in 2019 in excess of $300 million, excluding any fitness segment results or separation costs, an estimated depreciation in amortization between $100 and $110 million, which excludes the intangible amortization associated with a power products acquisition. This very strong projected free cash flow generation will allow us to continue to fund future investments and growth, including acquisitions, and successfully implement our capital strategy. We estimate that the effective book tax rate for the combined marine business in 2019 will be approximately 23%, which is slightly lower than our initial assumption for the year. Our capital strategy assumptions remain mainly unchanged as well. Our capital expenditure plan continues to be focused on investments related to product development and capacity, with a healthy portion of payments made in the first quarter related to Q4 2018 activity associated with engine manufacturing capacity projects. The pension exit is also proceeding as planned, with completion anticipated in the third quarter. Our plans continue to include debt reductions of at least $150 to $200 million in 2019, with actions primarily occurring towards the end of the year. Our long-term objective for debt retirement is now approximately $400 million as a result of recently completed refinancing activity. During the first quarter, we completed our third retail bond offering, bringing our total refinancing since October to $540 million. These offerings have allowed us to further extend the maturities of some of our acquisition debt obligations at an attractive cost of capital. Incorporating these actions, our estimated net interest expense for the year is expected at between $73 and $75 million, which is slightly higher than initially anticipated. Importantly, we have several opportunities to deploy capital from the impending fitness separation to further enhance shareholder value, that are not currently reflected in our 2019 capital plan or guidance. These include accelerating debt retirement, reengaging in share repurchases, and deploying additional capital for M&A. In the normal course, we will also continue to look for opportunities to enhance our dividend payout consistent with our historical objectives. I will now turn the call back to Dave to continue our outlook comments.

Thanks, Bill. As I mentioned in the opening of this call, we continue to execute against our plans for the year and our overall marine strategy, with several key factors driving our future performance. In the marine engine segment, this entails growing market share in outboard engines, especially in the greater than 175 horsepower categories, and completing additional capacity initiatives necessary to meet the extremely strong market demand for these products. The outboard product lineup expanded further in the quarter with the release of the 400 horsepower four-stroke. And you can be certain there'll be more exciting propulsion and P&A products to come this year. The integration of the power products business remains on track with strong demand for its OEM and aftermarket electrical products, leading to top line and earnings growth as planned. As a result, we anticipate net sales growth for this segment in the low double-digit percent range, with a strong improvement in operating margin. Similarly, the boat group is executing against its operating and strategic priorities. In January, we announced plans for the formation of the Brunswick Fiberglass Boat Technology Center, which will enable a centralized expert development team to efficiently design, engineer, and launch innovative, industry-leading products for Boston Whaler and Sea Ray. Just last week, we announced the establishment of the Brunswick Integrated Manufacturing Center, which will be located at our manufacturing facility in Merritt Island, Florida. This facility is targeted to be fully functional by the fourth quarter of 2019 and will enable us to centralize certain operations to take advantage of economies of scale, enhance vertical integration, and support the development and ongoing production of high-demand boat models, such as the SeaRay 400 SLX, which is sold out through 2019. In addition, in the second quarter, our SeaRay and Large Boston Whaler boats will begin shipping standard fit with our industry-leading connectivity solutions. These are just some of the many examples where we're combining technology and shared knowledge to improve operational efficiency, and create products that improve the boating experience. We will continue to monitor retail market conditions and have the ability to gauge and modify production and pipelines as we progress through the prime selling season. We expect net sales growth for the year to be in the low single-digit percent range with softness in international markets. In addition to taking steps to improve operational efficiency, we will focus on cost control in order to strengthen the margin profile of the segment. In closing, we continue to be confident in our ability to deliver against our 2019 plan and our long-term targets. We expect continued strong performance at Mercury and steady boat group results with top-line growth and strong operating leverage leading to consistent earnings growth across our marine portfolio. We will execute against our capital strategy and continue to look for M&A opportunities that advance our overall strategic objectives. The relative health of the marine market will determine the full extent of our ability to improve margins in the boat segment, but we remain steadfast in our commitment to margin accretion. We are engaging in enterprise-wide cost reduction programs that will enable us to better align our cost structure with our new marine-focused operations, while ensuring ample investment for growth. We also understand the urgency and desired finality for the fitness separation. We are focused on delivering an outcome as soon as possible that will maximize shareholder value and allow our marine portfolio to receive the attention and valuation it deserves. Finally, Bill, Ryan, and I look forward to seeing many of you on the road over the next two months as we embark on a busy marketing schedule. I will now open the line for questions.

Ladies and gentlemen, at this time, if you have a question, please press the star and the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And our first question is from Craig Kennison from Baird. Your line is now open.

Good morning. Thanks for taking my question. Bill, I wanted to go back to your discussion of an impairment charge related to fitness. Did I hear that right, that it places a book value of approximately $500 million and that it's based on progress you've made in terms of negotiating a value for that business?

Yeah, it's based on factors other than just what we've seen there. There's still some traditional valuation techniques that we employ from an accounting perspective, but you understood that correctly.

Okay, that's very helpful. And then just on the inventory front, it looks like inventory weeks on hand is a week heavy for How quickly do you think you can resolve that and get back to maybe par versus last year?

Yeah, Craig, it's Dave here. You know, I think given the somewhat late start to the season, that's kind of to be expected. I don't think it will be an issue for us to work through it. We are very committed to pipeline management, as you know, and expect our year ending to be consistent with our prior forecast.

And Craig, in the materials, we provided some perspective back to 2015, which was kind of the last time we've seen this sort of weather dynamic play out, and pipeline inventories are very consistent with where we saw them back in that time frame. So we're pretty relaxed where pipelines are today and feel that we're going to be able to handle whatever we need to do to manage them appropriately. Thank you.

And as a final question, as it relates to retail, if you look geographically where weather may have not been an issue, does it appear that trends are better in those markets? And then on a related note, you know, has tax policy or the refund season had any impact on demand? Thanks.

I think, Craig, the main – factors that we obviously we are seeing some weather-related slowness. I would say the other thing that we're seeing, we mentioned this earlier, is premium categories at pretty healthy demand and some softness in the value categories. That plays very well for us. We have a very healthy portfolio of aspirational brands, so we're very encouraged about their performance. And I particularly call out CRA, which is doing extremely well with its new portfolio right now. So I think those are the two main dynamics that are playing out. Thank you.

Thank you. Our next question is from Jarek Johnson from BMO Capital Markets. Your line is now open.

Hi, good morning. What is noticeably absent from the slide deck is the page about boat unit retail. Can you talk about that?

Yeah, and it's noticeably absent, if you like, because as I mentioned on the prior call and in some other discussions, that's not really how we're managing the business, and it tends to be a bit distracting when we put that – We're managing the boat business for accretive margin and particularly to support and grow our aspirational brands. If you just want something directional, I think we're performing pretty much in line with what you've seen across the marketplace. But I'm... I'm trying to refocus the conversation around the boat group more on profitability and the performance of the premium brands.

Understood. Great. Thank you. And then on operating margin improvement of 80 basis points, how much of a headwind are you seeing in operating margin from your capital projects and your capital investments, and what kind of drag from those investments do you have built into your guidance?

I would say we're seeing a bit of a tick up in depreciation, which we've given guidance to, and that doesn't end up changing the equation meaningfully. I'd say the other thing that I'd point out, Garrix, when we bring in capacity online, it typically ends up being more modern and more efficient overall than kind of what I would call our overall capacity in engines. So we end up seeing some fairly nice cost benefits there and efficiency benefits. Once we get the capacity brought online, we operate fairly well. And the other thing I'd point out is that as we look at the capacity plans, what we're doing now, we're adding more to what we've already integrated into our facilities and have experience with. A year ago, we were really bringing online a completely new assembly line and capability along with a new product. This next phase of capacity is really just expanding on what we did in 2018. So the same sort of headwinds we faced in 2018, we don't necessarily foresee the same sort of issues in 2019.

Great. Thank you, Bill.

Thank you. Our next question is from James Hardiman from Woodbush. Your line is now open.

Good morning. Thanks for taking my call. So, David, I guess your answer to that last question, it sort of begs the question when you say that your performance is in line with what we've seen across the marketplace. And I guess why I say that is because you've got the engine number, which was pretty flattish, and then you've got a,

ssi number which was down more like seven percent i guess maybe just a clarification is it consistent which one of those is it more consistent with um yeah i think the um we tend to provide give more credence at least at the moment probably to the uh to the outboard um data until ssi is at least complete uh but you know we're we're somewhere in that range and uh We can push around on this here and there, but our performance is basically consistent with what's going on in the marketplace. And, James, I appreciate the question and the request for clarification here. Maybe we'll find a better way of doing this in the future. I just want to clear that margin accretion and supporting our premium brands is my primary direction on how we're going to manage the boat business. And... And, of course, we will continue to monitor the performance of our brands on a unit sales basis. But that is, if you look at what's happening, particularly in the value segments, a lot of value OEMs use Mercury product. So I think the area where I want to push around in terms of market share gain and margin improvement is really in the premium brands. So, you know... a unit of 420 Boston Whaler Outrage is not the same as a unit of 18-foot aluminum boat. And I just want to make sure that we pay sufficient attention to that as we go forward with these discussions.

Yeah, I completely agree. And that's a helpful explanation. I guess my sort of bigger question here, it sounds like weather was a factor. That shouldn't be a surprise to anybody that's been paying attention here. But it seems like just based on the lower sales guide that maybe you think it's a little bit more than that. So I just wanted to hone in on maybe what's changed. I thought the comment on the tariffs was an interesting one in that the benefit to tariffs is actually a little bit of a negative to the top line given some of those price increases were tied to the tariffs. Maybe let us know how significant that was, but sort of more broadly. What specifically is driving the top-line reduction?

Well, I think what you see is a couple of factors that we mentioned. There is certainly weather is playing out, and certainly premium is performing somewhat ahead of value in general, but the overall The weather effect means a somewhat later start to the overall season, which drives us to be somewhat more conservative in our projections. And as we get into April, it's an important inflection point in the selling season, and we don't exactly know yet where that is. I would tell you that the last couple of weeks seem encouraging, which is very good news. But I think we were just being prudent around the ways in which the balance of the year could play out. But this is really small stuff we're talking about at the moment.

Thank you. Our next question is from Greg Bandishkanian from Citi. Your line is now open.

Hey, guys. Good morning. It's actually Fred Whiteman on for Greg. I think last quarter you had talked about some value softness in the market, but then when you gave the update down in Miami, it sounded like that lower end product had improved a bit. Can you just sort of walk through where that value category stands, just given the softening that we've seen in SSI and some of your prior commentary?

Yeah, I think the way that things have developed through the year is we saw, as you know, the unit volumes are basically increasing kind of month to month as we go through the year. We saw quite a bit of choppiness in January as we went through the early parts of the boat show season, which were reflected in the comments that we made in the four-year earnings call in January. As the First quarter progressed, we saw stabilization and more of a normative trend from value. I just think we're not quite back there yet, and we still see premium somewhat ahead. So I think as we get into Q2, we'll know, particularly the early part of Q2, we'll know somewhat more about how that's developing. I would say, though, that the trend is just becoming more predictable as we go month by month through the year.

That's helpful. And then one of your larger dealers had talked about getting a bit more aggressive with promotional activity. When you guys look across the category, is that sort of consistent with what you're seeing, or is it sort of isolated on a dealer-to-dealer basis?

I think as we have a slightly later start to the season, it's probably pretty natural that people will want to get the season off to a good start and make sure that we pick up the demand as it comes through. I don't think that I've seen uniform application of specific promotional tools, but we're certainly seeing it beyond the large channel partner of ours that I think you're referring to. Perfect. Thank you.

Thank you. Our next question is from Scott Stember from CL King. Your line is now open.

Good morning.

Good morning.

Just a follow-up question about the boat business and current trends. A couple days ago, one of your competitors in the pontoon boat side, they talked about it sounded as if your business was, again, a little more encouraging later in the quarter heading into April. Can you maybe just talk about that and flesh it out a little bit more? Just trying to get a sense, now that the weather, and again, on the RV side, we're hearing the same thing, that now that the weather is finally starting to clear up in the Midwest, that you're starting to see people coming back to dealer lots. Could you maybe just dig into that a little bit more, where we stand right now? I know it's a little early, but maybe just give us a little more granular detail.

Thank you. Yeah, so I would say that order rates have picked up in the past year. couple of weeks, which does, uh, indicate a more, um, certainly a more, uh, encouraging, uh, trend. I think, uh, relatively consistent with, uh, other people in the marketplace. I, I, um, I don't, I, I won't comment on, you know, individual other companies in the marketplace that might have slightly different dynamics to us, but I would say that's a pretty consistent, um, thought that, um, last couple of weeks have been somewhat encouraging.

Okay, and to the breaking out fitness from the marine business in the quarter, I don't know if I saw it or not, but did you give what the earnings of the EPS for fitness versus the marine business in this quarter so we can, you know, gauge where the second quarter can turn out?

Yeah, the difference between the two was about five cents a share, Scott. And embedded in that are really three pieces. There's a piece that's just pure fitness operating earnings, which is about a million dollars. There's a piece that relates to tax rate differences between the way we look with and without fitness. And given the differences between the two and the difference in timing of earnings between the two, that contributes to that five cents. And then there's some cost allocations that, under a discontinued operations basis, that we're not able to attribute to the fitness. So it ends up hurting the marine business a little bit. And that's kind of the three factors that contribute to that $0.05. I think that's a reasonable way to look at Q2.

Got it. That's all I have. Thank you. Yep.

Thank you. Our next question is from Joe Altobello from Raymond James. Your line is now open.

Great, thanks. Good morning. I guess first quick housekeeping question, going back to fitness real quick. The EBITDA outlook for this year, correct me if I'm wrong, I think was about $50 to $60 million. It seems like given the guide you gave this morning, which is unchanged, that's unchanged as well.

That's correct.

Okay, great. And then on weather, again, we've heard this from other companies, so Not a surprise. Is there a chance that some of the sales that you may have missed in the first quarter because of weather get recouped in Q2? And I'm curious if you could remind us what your experience was back in 2015 when you saw the same pattern.

Yeah, I think there is a good chance that some of the sales that we missed early season will be recouped in Q2. Certainly... You know, the delay in getting boats in the water particularly just delays the point at which a lot of P&A sails occurs, and most of those P&A sails happen when the boat goes in the water as opposed to a particular point in time. So we're confident in that, and also I'm pretty confident in recovering boat sails as well. I think we still have plenty of the season left. It's a little bit of a later start, but... Providing we have a good season, I don't see why we don't recover a significant portion of those sales.

Okay, but the downward guidance revision this morning, I guess, is some conservatism.

Yeah, I think we're just being a bit prudent. I think the good news in the guidance that I think we've provided now is, yeah, we see a later start to the season. So we've taken the revenue guidance down. We just took it down a point centrally. But I think what you see is that we have plenty of levers in the business and are very committed to earnings. So I think the good news from what we did is to say that counts on us for earnings. And we will try and be as straightforward as we possibly can about where we see possible different revenue conditions than we saw previously. But I would not overweight that. I think it's just us being prudent as we normally are, I think. Okay, great. Thank you.

Thank you. Our next question is from Tim Condor from Wells Fargo Securities. Your line is now open.

Thank you. Gentlemen, could you just give us your expectations for the U.S. market in units and dollars, and then maybe your thoughts on a global basis here for 2019, your updated expectations? Sure.

Yeah, Tim, I'll take that one. So we've got, I'd say, implied in our guidance on a unit basis for the U.S. low single-digit unit growth. And, again, remember, based on the comments that we made on the call and some of the Q&A here, that is all focused on what we would consider more of the value end of the market. I would say our expectations for dollars in the U.S. is still kind of a mid-single-digit dollar growth rate. Globally, I'd say based on some of the weakness that we've seen in Canada and Europe as a result of the tariff impact and other factors, we'd expect our global units to be down low single digits. And again, I would expect dollar growth on a global basis to outperform units to a similar degree that we're seeing in the U.S.?

Okay. Okay. Okay. That's helpful. And then the low-end boats here, clearly weather impacts and its units and that impacts things, especially in the Midwest. But are you seeing or hearing any pricing resistance as part of the equation?

It's possible that that's part of the equation. Sometimes it's difficult to deconstruct exactly what's going on there. I wouldn't say that it's a dominant theme. I think the theme at the moment is much more of a weather effect. Okay, okay.

And then, gentlemen, on the Canadian side, the wholesale dynamics seem to where You shipped a little more to the U.S. in Q4 and maybe very early Q1, and then as you moved into the latter part of January and so forth, the Canadian dealers started taking it, but maybe with some assistance from all OEMs. Any quantification as to the level of tariff assistance there that you provided? I think, Bill, you may have built that into some of the tariff part, but just maybe specifically, and then from the perspective of, If the tariffs are repealed, could that be recoverable?

The pricing assistance is not necessarily a recovery mechanism built in for that. I would say it's a fairly small impact on our profitability in Q1, given the assistance that we provided to Canadian dealers. And I point out, remember in the back half of last year, Canadian dealers really curtailed Stocking activity in the second half and re-engaged in stocking activity was actually higher than it was a year ago. But if you measure that over the last nine months, it's down reflective of what the market expectation is. So this Canadian dynamic is a bit of a timing issue, and you're correct in saying that some of the stocking that we would have done Canadian dealers was shifted to U.S. dealers in the back half of last year.

Okay, okay. So the Canadian market end expectations have maybe gotten a little bit weaker, and then it's just the timing of when they took the export.

I'd say our market expectations are unchanged. I would just say the timing is influencing how it's rolling through the wholesale activity and the international sales numbers that we've posted.

Okay. Last question, gentlemen. Dave, given your strong engine demand, you're ramping up more capacity, obviously, as you've talked about. Is that limited? It appears it has, but I just want to make sure my perception is right. Your ability to pursue international engine share opportunities, and then when do you expect to be able to do that? Would that be a more 2020 opportunity?

I think The background here is clear. We have extremely high demand, particularly for the new family of engines, the 175 through 300 horsepower engine that we just introduced, or introduced in 2018. That very high demand continues both domestically and internationally. We're really only just picking up as well some of the excitement around the 400 horsepower mainline engine that we introduced just a few months ago. So the high horsepower engine range is very exciting in terms of domestic and international demand. And once we get more capacity online at the end of this year in Q4, I'm very excited about what's going to happen. I would say that internationally, below kind of 150 horsepower and below, I think we're in a good balance of supply and demand, and we can certainly satisfy and begin to use some of that to gain international market share. I think I mentioned earlier in the statements that overall engine availability is particularly in those 150 and below categories, is now beginning to come online and help us with market share in Europe and other international areas. Okay. Thank you, gentlemen.

Thank you. Our next question is from Michael Schwartz from SunTrust. Your line is now open.

Hey, good morning, guys.

Good morning. Good morning.

I just wanted to touch on the new integrated boat facility project that you're undertaking down at Merritt Island. Just trying to understand a little bit more around maybe the timing of when we should see some of the benefits from that. Is that more of a capacity play, or is that more of a support product development innovation type project? And then the other question I would have on that is, When you gave guidance in January, were the costs of that project embedded in that guidance?

So the purpose really, there are a couple of purposes for that new integrated manufacturing center. It isn't really a development facility, although there may be a small amount of development there. Essentially, what we're facing is, particularly as we introduce new models from C-Ray and to some extent from Whaler, we need quite a bit of flex capacity as we begin to fill the pipeline with a new model. As later in the life of the model, the demand and pattern becomes more normalized. But right now, we are producing essentially all of the 400 SLX C-ray outboard models in that new facility because we have huge demand and backlog through the whole year. We could even satisfy higher demand, so we're going to be upping the number of units of the 400 SLX coming out of that facility. But there are other boats, particularly larger boats, where that happens as well, where we need flex capacity as we introduce the model and potentially through some of its life. And this facility is an extremely good facility for accommodating that. A couple of other things that are going on in there that I think are really interesting, and especially as you look at what's made Mercury really successful... around vertical integration, and that is we have an opportunity to produce a number of parts and subsystems that are currently produced outside Brunswick, inside Brunswick, more efficiently and more cost-effectively. And those can be systems and small parts, if you like. So we're beginning that process. For example, we're insourcing right now some of the upholstery for Boston Whaler that we would previously have outsourced. So what you'll see really in that facility is an ability for us to bring in-house at lower costs some of the things that we were previously purchasing, and an ability to ramp up or flex up capacity for high-demand models. It's really important that we bring this online. It's worked really well with the 400SLX. We anticipate... similar need for incremental flex capacity as we bring on other new models from C-Ray, particularly the bigger models and also from Boston Whaler. So that is kind of the rationale for the facility. I'm very excited about it because we end up, and you may have heard this from some of our channel partners, well, we get these great new models out and then we can't quite hit the demand. And we probably missed some units in the early part of the cycle, which I don't want to happen. So that's really the purpose of the new facility. The facility is now kind of essentially transferred, I think, almost completely onto the books of C-ray right now, so it is a bit of a negative in the first quarter until we get the facility more utilized. By the time we get to the fourth quarter of this year, it will be much more fully utilized, and we'll begin to enhance margins.

Okay, and it was embedded in your guidance back in January, correct? I think it was, isn't it?

YEAH, WE ENVISIONED SOME OF THIS. I'D SAY WE PROBABLY HAVE A BIT MORE REVENUE OPPORTUNITY THAN WE WOULD HAVE ENVISIONED, BUT THERE MAY BE A BIT MORE COST AS WELL THAT'S ENVISIONED IN THAT. I think I'd point out this is an existing facility with an existing workforce. When you think about the capital implications, it's extremely efficient for us to utilize this asset, and it's extremely efficient for us to utilize the workforce that we have available to start incorporating new activities.

Maybe one last point on it. I forgot to address your point about development. So I would say the major... development asset that already existed in that facility and that we'll be retaining is we have two very large and contemporary milling machines that essentially mill the original hull molds and deck molds for boats. Having those internally helps us speed up product development a lot, and we're actually also now beginning to take on board some outside work for other OEMs, which is obviously helpful in defraying the cost of the facility.

Thank you. Our next question is from David McGregor from Longbow Research. Your line is now open. Yes. Good morning, everyone.

David, you mentioned in response to a previous question that you wanted to shift the conversation around boats away from retail and more towards the profitability of the portfolio and so on. I'm just wondering, are you prepared at this point to start talking about, you know, how much of the portfolio is not profitable today and how much could be profitable a year from now and what's needed to drive that flip?

Yeah, at the moment, the whole portfolio is profitable. Obviously, the profitability varies from brand to brand. But I think... I'm getting a little background noise. Yes, I'm sorry. So the whole portfolio is profitable... And I think that's a significant change from where we were in the past. So we have made huge strides with a number of our boat brands to balance the earnings that we get for the boat group much more evenly across our various brands. Obviously very high contributors like Boston Whaler and now Sea Ray is coming up very nicely. But I think that what we're seeing is the benefits of operational excellence across the group are probably higher than anybody thought they could be. We have facilities that are operating at incredibly high productivity and efficiency levels, and facilities that have been maybe the subject of consolidation sometime in the past and where the productivity wasn't fully worked out. So that is a huge effort right now to make sure that we have everything in the bulk group operating at equivalent levels of productivity and efficiency. And we're using common resources to make that happen. I want to elevate the margin of that whole group. I think there's tremendous potential in there. We have great brands, so we do have pricing power across a lot of our brands, but I never want to use that without making sure that we have corresponding improvements in cost control and operational efficiency more uniformly across that group.

David, I would just add to your comments, to Dave's comments, that if you think about the profitability of the businesses, some of the businesses that we have that have lower margin profiles are also ones that have very low investment requirements and are, I would say, some of the less, you know, don't carry the same levels of variability that we might see in other parts of the portfolio. So as I think about the ROIC implications of the portfolio, I think we've got things pretty well balanced. across the profile. There are obviously places where we believe we can do better and are striving to do better, but there's really just no glaring elements of the portfolio that don't match the investment return equation, either currently or on a what a future opportunity basis would be.

Thank you. Our next question is from Joseph Spack from RBC Capital Markets. Your line is now open.

Thank you. I guess just to be a little bit more explicit about this, with the tariff lowered but EPS maintained, is the delta just a result of sort of lower flow-through on volume, or is there something else that's offsetting that as well? Yes.

Yeah, Joe, it's a little bit. So the adjustments that we've made, we've gotten a little bit more aggressive on the cost side of the equation. We've taken a little bit out due to volume, and that was covered by some of the cost actions that I talked about as well as the tariff benefits. I think if you think about the implications of the point that we took out, and you start to think about what the leverage on that might be in the earnings implications. We made just a slight tweak to cost, and the tariff number is very visible at $7 million. So that kind of gives you a feel for what the moving pieces were.

Yeah, okay. That's helpful. I just wanted to make sure there was sort of nothing on the absorption.

You know, I think the net of interest and taxes, which both changed, is probably a bit of a net negative as well. We didn't necessarily call it out in the script, but those are two factors that changed a bit that, you know, created a bit more headwinds for us on a net basis.

Okay. And then secondly... Now, the commentary in the slides and the remarks about confidence of a sale of fitness as expeditiously as the second quarter. So are we all in the sale camp now? And then also, if that's true, do you have any idea about how this impairment impacts any potential tax bill?

Well, there's no impact on tax, whatever the net tax implications we pay relative to a sale. I think when I think about potential tax leakage and stuff, obviously there's elements of structure that get involved, but we're not anticipating a meaningful amount of tax leakage associated with a sale. And I would point out, too, that the proceeds, you know, we made the point on the call, but I just want to emphasize we have not embedded any sort of upside opportunity related to the completion of the sale in our April guidance here. The 450 to 470 does not include anything. any implications of applying those proceeds to either accelerate debt, re-engage in share repurchases, or any incremental M&A that we might get done between now and the end of the year. So none of those factors are in our guidance.

Okay, that's fair. But the spin is a clear option, too, at this point, if something falls through.

You know, we're maintaining everything we need to maintain that as – to maintain preparedness for that option. Clearly, as we've mentioned, the vast majority of our focus right now is on the sale process, and we're very confident that we can proceed with that. Okay, thank you.

Thank you. At this time, we would like to turn the call back over to Dave for some concluding remarks.

Yeah, well, thank you, everybody, for participating. We always appreciate it. It's a great discussion. I would tell you that we're very confident in our business. We're putting some of the pieces in place here that might not seem so important right now, but will be important for our growth in the future. Certainly, you know, the market is a little bit softer as we start the year, but there are some really encouraging trends. And as you saw, we believe the market will be very constructive for the balance of the year. So I'm excited about the way that the business will progress. I'm excited about some of the initiatives. I think you will see some nice things as soon as Q2 in terms of product and other actions that we're taking. That will be very exciting for us, and I think will be very exciting for our investors as well. And we look forward to going on the road and discussing all this in a little more detail in a few weeks' time. And thank you, and have a good rest of the day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.