Good morning, and welcome to Brunswick Corporation 2014 Fourth 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, 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. Also with us today is Mark Schwabero, President and Chief Operating Officer. Before we begin with our prepared remarks, I would like to remind you 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 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 supplemental information sections of the consolidated financial statements accompanying today's results. I would also like to remind you that the figures in this presentation reflect continuing operations only, unless otherwise noted. On July 17, 2014, the company announced the signing of an agreement to sell its Retail Bowling business and its intention to sell its Bowling Products business. On September 18, 2014, the sale of the Retail Bowling business was completed. As a result, the historical and future results of these businesses are reported as discontinued operations, and the historical and future results of the Billiards business, which remains with the company, are reflected in the company's Fitness segment. Therefore, for all periods in this presentation, all figures and outlook statements incorporate these changes and reflect continuing operations only, unless otherwise noted. I'd now like to turn the call over to Dusty.

Thanks, Bruce. Good morning, everyone. I'll start with an overview of our full year results. Revenue in 2014 increased 7%. We experienced growth in outboard boats and engines, marine parts and accessories, fitness equipment and fiberglass sterndrive/inboard boats, which was partially offset by a decline in sterndrive/inboard engines. Our gross margin increased by 60 basis points compared to the prior year, driven by volume leverage, favorable warranty comparisons in new products, partially offset by costs associated with production and new product ramp-ups. Operating expenses increased by 4% as we continue to invest in numerous strategic initiatives at increasing levels. 2014 operating expense was approximately 17.6% of sales, and that was in line with our guidance. Adjusted operating earnings increased by 21% versus last year. Our net interest expense was reduced by $11.8 million. Adjusted pretax earnings increased by 32%, which is slightly above our guidance range. Diluted EPS, as adjusted, of $2.42 reflected a $0.06 benefit from the recently extended U.S. R&D credit. Extending -- I'm sorry, excluding the benefit of the credit, EPS, as adjusted, was $2.36, $0.01 above the high end of our guidance. Our 2014 revenue performance benefited from recent investments in growth initiatives, with several new products being introduced into the marketplace, along with increases in production rates and capacity. Sales growth also reflects parts and accessories acquisitions made during the year. The Boat and Fitness segments reported top line improvements of 10% and 7%, respectively. Mercury sales were up 5%. From a geographic perspective, consolidated U.S. sales increased by 8%. Sales to Europe increased by 14%, due mostly to strong performance by our Marine segments as well as incremental revenues from acquisitions. Rest of World sales declined by 1% versus the prior year period, due to weakness in sales of both boats and engines, mostly…

Thanks, Dusty. I'll start with the Marine Engine segment, where sales were up 10% in the quarter. From a geographic perspective, sales in the U.S. were up 13%, reflecting an increase in outboard engines and parts and accessories, which was partially offset by the impact of lower sterndrive/inboard engine revenues. For the full year, U.S. sales were up 5%. Sales to Mercury's European customers increased by approximately 31% for the quarter as growth was experienced in all product categories. Growth in parts and accessories benefited from the recent Whale acquisition and growth initiatives, while stronger outboard performance included benefits from new products and improved conditions in certain countries. For the full year, sales to Europe were up 14%. Rest of the world sales decreased by 1% as these regions benefited from gains in parts and accessories, while engine revenues were down compared to the prior year. For the full year, sales to Rest of the world were also down 1%. On a product category basis, the outboard engine business reported solid overall sales growth in the fourth quarter of 2014, which included Mercury's new 75-, 90- and 115-horsepower FourStrokes. These new engines, which are built with the same architecture as the popular 150-horsepower FourStroke, have also been well received by OEMs and consumers. Our outlook for the outboard engine business continues to reflect favorable retail demand in most markets and boat categories. On the sterndrive side, Mercury's award-winning and recently launched 4.5-liter 250-horsepower purpose-built engine is receiving very positive feedback from OEMs. Sterndrive engine sales, however, continue to be affected by unfavorable global retail demand trends. Diesel engine sales were up modestly during 2014. Mercury's parts and accessories business delivered strong sales growth during the quarter with gains in most major markets. Revenue benefited from recent acquisitions, new product launches…

Thank you, Bill. Our operating plans and assumptions for 2015 remain fairly consistent with those we communicated at our 2013 Investor Day Meeting. We continue to target 2015 to be another year of strong earnings growth with outstanding cash flow generation. Our plan reflects approximately 6% to 8% sales growth, which includes benefit from the successes of our new products and the continuation of the growth demonstrated in the U.S. in 2014, partially offset by weaknesses in certain international markets as well as the unfavorable impact from foreign exchange. Our guidance does not include any additional acquisitions made in 2015. We anticipate a slight improvement in gross margins, which assumes an absence of favorable warranty adjustments achieved in 2014 and our ongoing focus on managing cost of goods through initiatives such as Lean Six Sigma and supply chain and manufacturing efficiencies. As a result of ongoing growth investments, full year operating expenses will increase, but as a percentage of sales are expected to be lower than 2014 levels, approximately 17% to 17.2%. As a result, our pretax earnings should continue to demonstrate strong growth of 15% to 20%. Our 2015 EPS as adjusted is projected to be in the range of $2.70 to $2.85. An early look at 2015 first half indicates continued strong top line growth, forecasted in the high single to low double digit range. While we're planning for improvements in operating margins for the full year, first half operating margins will be flat to down compared to the same period in 2014. This reflects foreign exchange headwinds, the absence of 2014 favorable warranty adjustments and continued increases in investments to support our strategic objectives, where the growth rate of these investments is heavily weighted to the first half of 2015. In addition to these items, our product…

[Operator Instructions] Our first question is from James Hardiman.

So Dusty, a few months back, as you gave preliminary thoughts on 2015, it seemed like you thought it was going to be more in the 5% to 7% range from a top line perspective. It's 6% to 8% now. And I guess as you layer on currency, you're looking at more like 8.5% to 10.5% sort of x currency revenue growth. I guess the question is -- well, I guess the statement is it sounds like you've gotten a little bit more bullish. I guess the question is, why? Obviously, we've seen some good industry numbers to finish the year. Is that what's driving sort of the better outlook? Or is it more internally some of the progress that some of your particular products have made over the last few months here?

James, it's more internally and the success of our products and our ability to take some share and continue in our view in certain of our segments to really be a market leader. Our view for the -- in 2015 for the U.S. market, which is the strongest market obviously around the world, is about the same as the growth we've seen in the market in 2014. So our -- if you will, more upbeat mood is around our ability to continue to put new product into the marketplace and be a success.

Got it. And along those lines, I mean, obviously, you've taken a little bit of time for supply to catch up with demand. It doesn't seem like we're there yet, certainly with the high-end Sea Ray offering. I guess, what gives you confidence -- or do you believe at all that the demand is actually waiting for that product to be available rather than going elsewhere to a competitor?

Well, we're sold out, as we keep saying, in certain of these new products, the larger products, 65, as an example, for about a year. So I can't honestly tell you that there aren't other buyers who would like the product who said, "I'm going to wait that long" and go somewhere else. But that's the part of our increasing capacity. We've announced, for instance, at Sea Ray that we're opening the Sykes Creek plant. This lets us really begin to do 2 things: increase the output of our L-Class models; but as importantly, from an earnings perspective, begin to remove inefficiencies and cost from the system that we're incurring through the enormous demand we have and trying to get it through the existing footprint. We're also doing this, and I think it's important for us to talk about, in all of our other businesses. We've announced, and you may have seen, I guess it's been 2, 3 weeks ago, we opened a significant capacity expansion at Boston Whaler. We need to do that for both big product, but also for demand for existing product. We're undertaking a significant expansion of our manufacturing location in -- at Life Fitness in Hungary. We've had to pick up line rates in all of our lines in Life Fitness for all the new product we've been bring to the market. And in fact, that's another place we're playing hard to the market. And that's a part of -- and I can keep going. It's true in all our businesses, including Mercury and our aluminum boat businesses, et cetera. So what we're doing is, as we're working hard to meet demand, we are going through inefficiencies and having additional cost as we expand capacity, bring new product in line and open new plants. And that's to be expected. So I laughingly say around here, we call this a problem, and it's a bit of a drain on first half margins. But it's a real high-class problem and one we're happy to have and one that will get taken care of in the first half. And we'll see a significant improvement in margins as we go through the second half.

Got it. And then last question for me on the ASP front. The number was 17% in the fourth quarter. I think it was 15% in 3Q. I guess, firstly, do you have a number for what that was for the full year? And then how do we think that trends? I mean, you basically said that it's going to be less of a benefit in '15 and than was in '14. I guess that's not a huge surprise. But how should we think about the magnitude of ASPs in '15 and the cadence of that? I'm assuming first half is much better than the second half.

For the -- we think that the cadence will be about half in 2015 versus 2014.

And what was the 2014 number?

It was in the range of 10%. Maybe -- we may not be quite half.

It's going to be slightly below half, James.

Yes, okay. Maybe -- it was 10% in '14, so we're thinking about 4% or 5% in '15. Is that what -- how we should think about that?

Yes, [indiscernible]. And it's a little bit more heavily weighted to the first quarter, but not significantly.

Our next question comes from David MacGregor.

I guess I want to by asking about the Engines business, and you put up a 14.1% margin for 2014, so you're kind of at the lower end of the target range you had established for 2016, which was the 14% to 15%. I realize you're making a lot of investments, and there's a lot of moving parts in there right now. But I guess I'm wondering if, beyond the 2015 -- so I guess I'm asking the question more on a longer-term basis. But do you foresee a point where the margins get substantially better than that based on the returns on all these investments? Or do you kind of hold it at that level and just accelerate the level of reinvestment back into the business?

It'll be the latter.

Okay. And let me ask you a second question just on the parts and accessories business. I guess you've got a strong dollar right now. Can you just talk about the extent to which that may accelerate acquisition opportunities for you or acquisition plans?

We don't -- let's talk about the dollar in general. The dollar is something that's outside our control. We've got our sleeves rolled up, trying to do everything that's within our control. We know the acquisitions we're working on, we know the people we're in discussions with, obviously. And if some great deal, what happened to pop in here, we might jump on it. But right now, we're just pursuing our strategy and working with the people that we've got in our queue.

So how should we think about longer-term organic growth in the parts and accessories business then, setting aside acquisitions?

Think of it -- it's sort of mid-single digits.

Okay. Last question is just with respect to the Fitness business. Let me ask you a question there. What's achievable in 2015 in terms of incremental revenue and profit from the products that you launched mid-'14?

On revenue?

Yes. Or -- and the margin line as well if you can address that.

Well, let's go ahead to margin. My judgment is the margins for Fitness could be a bit below in '15 what they were in '14 because we're continuing to make significant investments in that business, not only around product related to the Fitness category, where we play really well. We're having to make significant investments in capacity, in people in order to continue to grow the business at the rate we're growing it. We're continuing to invest in adjacencies, some of which we've talked about. And we're doing big plant expansions -- or a big plant expansion over in Hungary. So we've got -- this is a year of very heavy investment. And I just don't think we can expect that business to improve operating margins in light of all that.

Our next question is from Mike Swartz.

You gave a lot of color on your kind of expectations of the marine market by geography. And maybe I missed it, but could you maybe lay out your thoughts around sterndrive versus outboard for the year ahead?

There'll be more growth in outboard than sterndrive.

But do you expect sterndrive as an industry to grow in 2015?

No. I think -- don't think it will. I'd be happy if it was flat.

And then the -- just maybe on your input cost basket as well. I mean, that's something that's been a hot topic lately, particularly with the pullback in crude. How should we think about that playing out? I know that there's more to your cost basket than just resins and oil-related inputs. But from a very high level, when -- if or when should we start seeing benefits of that?

Complicated answer to what's a simple question. Crude, plastics, all that derived from that, are a little less than 3% of our input cost. So that's where we start. We have a very complicated, for a company our size, supply chain that's very global. And as we work our way through how -- the complexity of our supply chain, my judgment is we will have, without additional work that we're going to be undertaking, a net positive from commodity costs, but it will not be significant. It will be under, I don't know, pick a number, 10 basis points to 20 basis points, something like that. Another thing everybody has to understand that when you read a lot about it and it's one of those pains you've got to deal with when you run a business like ours, is all that's happening out on the West Coast is causing real inefficiency for those of us who source and build in Asia.

Our next question is from Tim Conder.

And a few things here, though. With Sykes Creek ramping and the investments you're making, especially, there in the larger boats, do you anticipate, at this point, getting close to approximating -- meeting demand on those types of products by year-end '15? Or will that really stretch more into '16 at this point?

Tim, the booger in that is, what is meeting demand? We're never going to be able to have somebody walk up and say, "I'd like to buy 65," and us hand him one. So from my perspective, we want a nice backlog on these L-Class and even sport yacht product. And our goal is to reduce the length of the backlog some, but we're always going to have a backlog as long as we have a hot product.

Well, let me rephrase that then. Do you anticipate getting to the desired level of wait time backlog by year-end '15? Or will that really stretch into '16 as you ramp that up?

I think, realistically, it's going to go into '16.

Okay, okay, okay. I apologize for not phrasing that correctly.

No, it's okay. That's okay. It's a fair question.

And then, Bill, regarding the FX, could you give us any color on your hedges and maybe your net exposure? And it sounds like, again, with the Hungary expansion, you're going to -- you're building a little bit more natural hedge there as you progress through '15. But your exposure on a net basis and the percent of that, that you're hedged and maybe at what levels?

Yes, Tim. I -- we have provided in the materials kind of our view of -- or what our exposure is on the sales side, which is about 20% of overall sales. Cut that in half is what our kind of net risk is after you layer in manufacturing costs and operating costs in those local markets. And then our hedges are about 50% of that number. And our hedge policy is very much 50% of a forward 12-month sort of activity. And every quarter, we layer in new hedges to keep 50% hedged of the next 12 months.

Okay. I guess maybe another way to ask the question is your main currency exposures. Any type of sensitivity that you can give with the hedges -- the hedging policy that you have? Or maybe...

I think the best way to look at it is to look at our mix of international sales, and the risks match up pretty well against the mix of international sales. So if Europe is 34% of the -- if Europe is 34% of our international sales, it ends up -- the risk ends up to European-based currencies right in that ballpark.

Okay, okay. And last question on your incremental margins here. As you had already indicated, you expect -- it appears that '15 is going to be a little bit lower due to the investments you're making and for good reasons, obviously. But then should we see that reaccelerate in '16, given that we should be past several of these investment humps here with Sykes Creek, with Life Fitness and so forth?

Probably not, Tim. We've got a bunch of more investments we're not talking about yet that we want to make '16 and beyond. And I think when we get to our Investor Day late this year, we'll need to lay out for the next 3-year period all the investments that we intend to make. We've got significant growth plans here in the company, and we know we need to continue to invest in order to drive it. We also have an obligation to our shareholders to keep growing EPS and cash flow. So it's a -- we got our sleeves rolled up, and we're really confident we're going to be able to get it done. But we'll need to start sharing more of that later this year.

So kind of keeping in that 20% to 25% would be a reasonable kind of thinking?

Yes, Tim. Yes, it would.

Our next question is from Greg Badishkanian.

Maybe just in terms of inventory levels overall for the industry and your competition, what you're seeing there, if there's any overhang. And just with the weaker other currencies relative to the U.S. dollar, just any changes in the competitive environment that you think you might see or maybe you're not seeing it right now.

Inventories, in my judgment, industry-wide are in excellent shape. And we get to see through our joint venture, at least through all of our dealer network, what the dealer inventories look like. They're really in great shape. And the industry continues to do a great job in managing that. In terms of competitive impact, hard to say right now. But I will say this, we're blessed with some really great competitors. They make us better. As we watch them, most of them are very focused on margin and earnings. And this would be a good time for them to continue to do that with the currencies in the state they're in.

We have a question from Jimmy Baker.

So just given the tailwind to boat usage, can you just talk about the sensitivity of Mercury's P&A business to lower fuel prices and how should we be thinking about that tailwind relative to, let say, other growth drivers like share gains and SKU expansion?

Well, we've always said that we've not been able to closely correlate lower fuel prices to Boat sales. We think that's more driven by the fuel prices having an impact on the overall economy. If that improves, then we get increased boat sales. On the other hand, we do see increased usage with low fuel prices, and that drives increases in our P&A business.

Okay. And then Dusty, you -- well, I don't want to say you, but your former Boat group president I think previously indicated you could handle a yacht market 2.5x 2012 levels out of that Palm Coast facility. But then fast forward to today, it's a little changed from those levels, and you're reactivating Sykes Creek. Can you just kind of explain if share gains drove the delta there? Or I guess if I could ask it more directly, how would you characterize the current throughput and cost performance of Palm Coast relative to your expectations when you decided to shutter Sykes Creek?

Throughput is generally on our expectations. Cost is a fair bit above our expectations. And I think what we didn't take into account well enough, Jimmy, was the model mix that we began to put through that facility and the complexity that it brought. And as a result, we have a real need for Sykes Creek. And I think if we're also honest with ourselves, we didn't quite anticipate the demand being at the level as it is. So it's a great problem to have, but it's something we've got to deal with here in the first half. And that's why we signaled -- going to have an impact on margins on the first half, but we'll see great margin improvement in the second half, business operating margins. I wanted to say something for our Palm Coast employees. They have been super men and women. The amount of overtime they're putting in for us in a really difficult time they're working through just because we've got great boats is incredibly appreciated by guys like me who get to sit in office every day. They're really working hard down there.

Our next question is from Rommel Dionisio.

Dusty, I noticed in your comments that you talk about potential acquisitions in -- with regards to Fitness and Engines. With the variety of different competitors in the Boat segment having been bought out by private equity years ago. I would think there might be some brands up for sale. Is there a particular reason why you didn't include that in the mix? Or do you maybe just find that internally developing new designs, whether it be the L-series for the Sea Ray or Boston Whaler 420, is the way to go here with your Boat business going forward?

We're really happy with our Boat portfolio and our ability to grow it and our ability to handle new products, new product introductions, et cetera. And we see, as we look at in the Engine segment and the Fitness segment as we talk about acquisitions, acquisitions that bring significantly more synergies and real ability to grow later. And that's why we're focused there. It's not that the Boat business is not a good place. We just think that synergistic opportunities and growth opportunities around acquisitions around Engines and Fitness is significantly higher.

We have a question from Joseph Spak.

This is Ritapa Ray filling in for Joseph Spak. Just a quick question on capacity and other segments. Can you just remind us of what it is and more pontoon aluminum segments and also progress there in Brunswick's more penetrated areas? And a follow-up question would be just a housekeeping one, which is can you remind us [indiscernible] warranty adjustments experienced in 2014?

Bill, do you want to do the last one?

Yes, I'll do the warranty adjustments. It's in the neighborhood of about 20 to 30 basis points of favorability year-over-year.

When we talk about capacity, we completed the significant expansion around pontoons a year before last. Last year, around our northern aluminum fish boats, which have been Crestliner and Lund product. We just opened a capacity expansion at Boston Whaler, and we're in the process of expanding capacity for large boats with Sea Ray. We are in the midst, at Mercury, of a 3-year capacity expansion plan. And we said we would be spending $20 million to $25 million thereabout a year in capacity expansion, and that process continues to go on and it will not be completed until next year. At Fitness, where we've said we're expanding capacity in our Hungary facility. And we're also trying to get the effect of capacity expansion through putting new better equipment in many of our Fitness facilities, changing layouts, et cetera, as a way to get more capacity. So as we look around the company, again, it's a great problem to have. And it's a problem we get paid to deal with. It's that we introduced so much great product, we just need to be making more of it, and we got our sleeves rolled up to do it.

If I can just add on the warranty question. The impact I gave was '14 versus '13. It's slightly more than that going into '15. So the $20 million to $30 million slightly higher than that, '15 versus '14.

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

Thanks, everybody, for joining us. We took a lot of your time today, and I know many of you who are on the sell side had a very, very busy day and we were just in line with others. So thanks for taking the time to be on the call with us. We'll be seeing many of you at boat shows and investor events that start coming at us hot and heavy following this. And as always, we appreciate your questions and interest. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.