Brunswick Corporation (BC) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to Brunswick Corporation 2015 First Quarter 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 Bruce Byots, Vice President, Investor Relations. Bruce J. Byots - Vice President-Corporate & Investor Relations: Good morning and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO; Mark Schwabero, President and Chief Operating Officer 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 these documents are available on our website at brunswick.com. During our presentation, we're 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 also like to remind you that the figures in this presentation reflect continuing operations only unless otherwise noted. I would now like to turn the call over to Dusty. Dustan E. McCoy - Chairman & Chief Executive Officer: Thanks, Bruce. Good morning, everyone. Our goal in 2015 is to continue to enhance and expand the growth we've been demonstrating now for several quarters. And as we finish the first quarter and are working our way through the second quarter, we're bullish about this goal. Our key end markets continue to be resilient and U.S. market provides us with a solid platform from which to continue the growth of our businesses. Our recently launched new engines, boats and fitness equipment are beginning to generate market share gains around the world. Mark and I'll provide insights into how our current product line outpace enabling us to generate above market growth rates. As the year is unfolding the challenges of the increasingly volatile global economic landscape, the intensifying headwinds of foreign currency present risk. But they also offer opportunities for Brunswick to leverage our fundamental advantages in the market. Great people, technology, innovations, leading brand positions, product quality and the unrivaled breadth and strength of our distribution networks. So while we manage these risks, we're focused on taking advantage of the opportunities we've created and are increasingly confident we will achieve the 2015 growth goals embedded in our guidance for the year, pre-tax earnings growth of 15% to 20%. Let's now talk about the first quarter results. To more accurately reflect the operating and market fundamentals of our operating segments, we will present net sales on a constant currency basis, excluding currency changes. Reported revenue in the quarter increased 10%. On a constant currency basis, revenue increased by 14%. This is in line with our first half sales growth guidance of high single to low double-digit percent. We experience growth in all the major product categories. The highest growth rates were reported by marine parts and accessories and fiberglass sterndrive/inboard boats. As expected, our gross margins decreased by 90 basis points compared to the prior year and operating expenses increased by 5%. Operating expenses were 17.3% of sales. Operating earnings increased by 8% versus prior year. Again, as expected, operating margins were down 20 basis points to 9%. Continuing down the P&L, pre-tax earnings increased by 13%. And finally, diluted EPS was $0.59, reflecting a $0.07 increase over the prior year. As we detailed on our January call, although our full year plan reflects improvements in operating margins, first half operating margins are expected to be flat to slightly down compared to the same period in 2014, but the key drivers being foreign exchange headwinds, the absence of 2014 favorable warranty adjustments and continued increases in investments to support our strategic objectives for the growth rate of these investments is heavily weighted to the first half of 2015. In addition to these items, our new product launch successes are introducing additional costs and inefficiencies in the first half, as we open and expand plant capacity to meet demand, continue to introduce a significant number of new products into production in each of our segments and ramp up production as our sales continue to experience significant growth. The strong sales performance represents the third consecutive quarter of double-digit growth rates, reflecting solid market demand and contributions from recent investments in new product launches throughout our organization. On a constant currency basis, sales in our Marine segment increased by 16%, while our Fitness segment increased by 6%. From a geographic perspective, consolidated U.S. sales increased by 17%. On a constant currency basis, sales to Europe increased by 16%, rest of world sales increased by 4%. So in summary, combined sales outside the United States increased by 9%. Operating earnings were $88.7 billion for the quarter, an increase of $6.8 million compared to 2014. Operating margins decreased by 20 basis points to 9%, due to the factors I described earlier. Pre-tax earnings increased by $9.8 million or 13%, as we also benefit from lower net interest expense and higher other income. Diluted EPS from continuing operations for the quarter equaled $0.59 per share, reflecting a $0.07 increase. Now, I want to take just a couple of minutes and provide our perspective on the global marine market. First, a quick update on how the U.S. market performed in 2014. The U.S. powerboat industry grew to approximately 167,000 units or about 5.5% in 2014. In the first quarter of 2015, the U.S. powerboat segment with preliminary numbers grew approximately 7%, as once again outboard boats led the way. March, which comprises about 9% to 10% of the year retail on average, demonstrated comparable growth rates. We need to keep in mind that in the first quarter of 2014 the U.S. experienced fairly widespread adverse weather conditions. Given our assumption of a continuation of sub-3% annual GDP growth rate, we anticipate the 2015 U.S. industry growth rates to be comparable with 2014 rates. Let's now look at marine markets outside the United States and we'll start with Europe. Overall, unit retail demand for boats and engines improved in the first quarter compared to a year ago. Scandinavia and Southern Europe were particularly strong, while Eastern Europe was weak. The retail market in Russia has dropped significantly, more than 50%, due to slowing economic conditions and the weakening of the ruble. ECB monetary actions, in our view, should continue to help retail market demand in Europe. And because most Brunswick marine product in Europe is priced at local currency, the strengthening of U.S. dollar hasn't affected retail demand. However, the negative effects of translation are lowering margins on product not manufactured in the region. For the full year, we're planning for overall demand in Europe to be flat to slightly up. In Canada, first quarter retail was down sharply, reflecting weakness in March. We anticipate the retail boat market in the second quarter and third quarter will likely remain difficult and down versus a year ago, as consumers react to the price impact of the strong dollar level, which is making product more expensive in Canadian dollars. Overall, we believe the Canadian market will be down for the full year. In South America, especially Brazil, retail boat demand is down over 20% over the last six months compared with same period a year earlier. The weakening real has severely limited demand for boats being imported into Brazil from the U.S. or Europe. As a result, our boats manufacturing in Brazil have picked up market share due to our local manufacturing presence. But we're still challenged for sales due to an overall weak retail boat market and declines in sales of boats that we imported in the region. For the full year, we're planning for the overall South American market to be down. Finally, as we look at the Asia Pacific, first quarter retail markets in the region were flat to slightly down with last year. Our plan reflects a flat to slightly down market for 2015. So if we summarize all that, for the regions I've just been describing, global market demand for the year is expected to increase in the 3% to 5% range, which is consistent with the assumption used in our multi-year plan. During the first quarter, markets performed more towards the higher end of that range. With that, I'll now turn the call over to Mark for a closer look at our segment results. Mark D. Schwabero - President, Chief Operating Officer & Director: Thanks, Dusty. I'll start with the Marine Engine segment. Our first quarter sales on a constant currency basis increased by 16%. Overall, acquisitions contributed 4% to the segment's year-over-year growth. From a geographic perspective, sales in the U.S. were up 19%, reflecting an increase in all major product categories. Excluding 2014 acquisitions, the U.S. sales increased approximately 14%. Sales to Mercury's European customers, excluding currency changes, increased by 21%, which included a 9% benefit from an acquisition completed in 2014. Excluding Russia, revenues were up in all categories. Rest of world sales on a constant currency basis increased by 5%, as these regions benefited from gains in outboard engines, as well as parts and accessories, and this growth was partially offset by lower sterndrive/inboard sales. On a product category basis, the outboard engine business reported solid overall sales growth in the quarter, which included benefits from Mercury's 75-horsepower, 90-horsepower and 115-horsepower four strokes, which were introduced in 2014, as well as the new 350-horsepower and 400-horsepower Verado engines launched in Q1 of 2015, which fortifies our position in targeted growth segments. These new engines have been well received by the OEMs and by consumers, particularly in larger offshore boats and have led to market share increases within these horsepower categories, including gains in the targeted saltwater and repower markets. Our outlook for the U.S. outboard engine business continues to reflect favorable retail demand. Europe and rest of world markets all demonstrated year-over-year growth with the exception of the high volume, small horsepower engine market in Russia, due to the weak retail demand mentioned earlier. 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 and consumers as well. Sterndrive engine sales continued to be affected by unfavorable global retail demand trends. However, the category did experience modest growth. Diesel engine unit sales were up modestly during the first quarter. Mercury's parts and accessory businesses, excluding the impact of currency and acquisitions, delivered strong sales growth during the quarter with gains in most major markets. Revenue benefited from new product launches and market share gains. This includes product successes such as Attwood's portable and integrated fuel systems, as well as their new LED and underwater lighting system products, Whale's new and award-winning range of intelligent pump control system, MotorGuide's new trolling motors, the Joystick Piloting System for outboard engines, a refreshed helm suite with new controls and features, the award-winning ECO Enertia Prop and Quicksilver, a leader in lubricants, for not only marine, but for motorcycles, ATVs and snowmobiles. In addition, the continued sales records achieved by our distribution business portfolio, which includes Land 'N' Sea, Kellogg Marine, Diversified Marine Products and the recently acquired Bell Recreational Product businesses demonstrate their ability to deliver on superior product availability, on-time delivery and the product category expansion. In addition, favorable weather conditions, combined with lower fuel costs, have provided some improved market conditions in the United States. Lastly, earlier this week, we announced the completion of our third P&A acquisition. We acquired BLA, Australia's largest provider of marine products, strengthening our presence in that region. Mercury's operating earnings increased by 20% compared to last year's first quarter. Operating margins were at 13.2%, 100 basis points higher than the prior year quarter. The improvement in operating earnings reflected the higher sales, including a favorable product mix benefit from parts and accessory growth and our recently launched outboard products. Partially offsetting these positive factors were the unfavorable effects of foreign exchange and increased investments for a long-term growth. Turning to our Boat segment, our first quarter revenues on a constant currency basis increased by 15%, with strong growth in the fiberglass sterndrive/inboard boats and solid gains in outboard boats. Our Boat brands made progress during the quarter in gaining share. This occurred not only in the U.S. market, but also in key regions including Europe, Brazil and Canada. Our share gains reflect the advancements made by our various product development teams, both in terms of shortening the average age of our boat models, as well as bringing fresh new concepts into the marketplace. This has been demonstrated across our brands and categories, including such things as Boston Whaler's Dauntless Family of boats and the 320 Vantage, Sea Ray's 19-foot SPX, MBL (17:22) Series Yachts, Lund 1750 Rebel XS and the Harris dual console Pontoon. In the U.S., which represents over two-thirds of the segment, sales increased 21%. In the quarter, European sales on a constant currency basis increased by 21% versus the prior year. This performance resulted from the introduction of new products including larger, higher priced products by our European manufactured outboard boat brands. Rest of world sales on a constant currency basis decreased by 3%, which reflected the weaker demand in Canada, which was down 12% on a constant currency basis, due to the conditions described by Dusty earlier in the call. In the first quarter, Brunswick's global retail unit sales increased by 12% compared to the prior year, reflecting more favorable U.S. weather conditions, as well as the market share gains. Global wholesale unit shipments increased by 4% and this compares to the Boat group dollar sales increase of 12%, as this segment also benefited from higher average selling prices due to a favorable shift in mix across most of our boat lines. For the remainder of the year and particularly in the second half, wholesale unit growth will be a bigger contributor to sales increases than the average sales price growth. Regarding our pipelines, dealers ended the quarter with 40 weeks of boats on hand measured on a trailing 12-month retail basis, which is comparable to the prior year level. Specifically, pipelines for aluminum products are up compared to last year, due to an expanded distribution network and new product introductions. Fiberglass sterndrive and inboard pipelines are flat versus the prior year, while fiberglass outboard pipelines are down slightly. Our plan assumes that the wholesale unit growth rate for the full year will be consistent with our retail unit growth rate. In addition, the current pipeline levels are appropriate, given our growth expectations in the various boat categories and we continue to be comfortable with these overall levels. The Boat segment's first quarter operating earnings declined by $700,000, when compared to the prior year. Operating performance in the quarter included planned cost increases associated with new product introductions, capacity expansions and production ramp up, partially offset by higher sales, including several new product introductions. In addition, foreign exchange had an unfavorable impact on our first quarter earnings. On a constant currency basis, sales at Life Fitness increased by 6% for the quarter. Growth resulted from higher sales to U.S. health clubs and hospitality customers, as well as sales gains in international markets, particularly certain developing regions. Partially offsetting this growth was lower sales to local and federal governments. The segment continued to benefit from new product introductions in all regions, with this quarter representing its 10th consecutive quarter of year-over-year revenue growth. Life Fitness continues to develop new products and services that drive market share growth in their commercial cardio and strength categories. Recent examples that have led to their share gains include the Explore Console for the Elevation Series, the PowerMill Fighter, Climber, the FlexStrider, the E-Series Cross-Trainers and the multi-purpose synergy family of training systems. Segment operating earnings in the quarter decreased 13%, as the impact from higher sales was more than offset by the absence of a favorable warranty adjustment in 2014 and an unfavorable impact from foreign exchange. In addition, Life Fitness incurred cost associated with the planned capacity expansion activities and new product introductions. And now, I'll turn the call over to Bill for some additional comments on the financials, starting with the consolidated perspective on how foreign exchange affected our results. William L. Metzger - Chief Financial Officer & Senior Vice President: Thanks, Mark. I would like to start with discussing the impact that foreign currency is having on our sales comparisons. As a reminder, approximately 20% of our sales are transacted in a currency other than the U.S. dollar. Our most material exposures include sales in euros, Canadian dollars, Brazilian real and Australian dollars. In the first quarter, consolidated sales comparisons were negatively affected by almost 4%, which was higher than our previous guidance due to further strengthening of the dollar. For the full year, we're estimating a similar impact on year-over-year comparisons. The impact on operating earnings in the first quarter was approximately $10 million, which was also higher than expected. For the full year, we are now estimating that operating earnings comparisons will be negatively affected by $30 million to $35 million or 8% to 9%. This estimate includes the impact of translation on all sales and costs transacting in the currency other than the U.S. dollar benefits from hedging activities of $11 million and offsetting price actions in certain international markets. Additionally, estimates for the full year assumed that rates remain consistent with current rates for the remainder of the year. Regarding our tax provision, our effective book tax rate as adjusted was 34% for the quarter. Our effective book tax rate for the full year 2015 guidance is also 34%, which excludes any benefit from the extension of the U.S. R&D tax credit, which would lower the rate by approximately 1.5% for the year. Our estimated effective cash tax rate for 2015 reflects a low double-digit percent level. Turning to a review of our cash flow statement. Cash used for operating activities was $125.9 million, a slight change of $1.8 million versus the prior year. As planned, pension contributions were approximately $61 million in the quarter, an increase versus the prior year due to the timing of our 2015 pension contributions. Normal seasonal changes in working capital balances resulted in a use of cash in our primary working capital accounts and totaled approximately $161 million, which is improved from the prior year. The biggest changes occurred in accounts and notes receivable, which increased by $88 million, accrued expenses, which decreased by $78 million, inventory which increased by $28 million and accounts payable increased by $33 million. Given the seasonality of sales in our Marine businesses, we anticipate the liquidation of working capital over the balance of the year. Total free cash flow amounted to a negative $168 million versus a negative $145 million in the prior year, a difference of about $23 million. Capital spending was approximately $34 million, which included investments in new products in our Marine and Fitness businesses, as well as capacity expansion projects. Our business units continue to remain focused on generating strong free cash flow, which will allow us to continue to fund future investments in growth and enhance shareholder returns. Cash and marketable securities totaled $426 million, a decline from year-end 2014 reflects a seasonal free cash flow usage of $168 million, as well as cash returned to shareholders through share repurchases and dividends of approximately $20 million and $12 million respectively. I'd like to conclude with some comments on certain items that will impact our P&L and cash flow for 2015. Our estimate for depreciation and amortization is approximately $90 million. We expect pension expense to be approximately $13 million. Any related charges associated with the second phase of the lump sum buyout plan in Q4 are excluded from our adjusted EPS guidance. Net interest expense is expected to be about $26 million and combined equity earnings and other income are anticipated to be comparable to the prior year. And finally, we expect our average diluted shares outstanding for the full year to be approximately 94.5 million. The anticipated reduction in average shares outstanding reflects the continued execution of our $200 million share repurchase program initiated in 2014, with purchases in line with the previous quarters, partially offset by compensation plan activity. Through the end of Q1, we've purchased $40 million under this program or 787,000 shares of stock. We expect to systematically complete the remainder of the current program by the end of 2016. On the cash flow side, our plan reflects $70 million to $75 million of cash contributions to our pension plan, which includes an amount that will be used to fund the lump sum benefit buyouts in the fourth quarter of 2015. The majority of those contributions have already been funded in Q1 to maximize returns and plan expense benefits. Our current plan anticipates working capital changes to result in modest usage of cash of $20 million to $40 million and capital expenditures of approximately 4% of sales, with a substantial portion directed at growth and profit enhancing projects including against capacity expansion plans in each of our segments. Despite higher investment spending levels and a modest usage of cash for working capital, we plan to generate strong free cash flow for the full year in the range of $170 million to $190 million. I would now like to turn the call back to Dusty to continue our outlook comments. Dustan E. McCoy - Chairman & Chief Executive Officer: Thank you, Bill. Pardon me. Our overall operating plans and assumptions for 2015 remain consistent with those we communicated on our last call. The first quarter produced results within the range of our initial guidance and expectations. 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 the benefits from the successes of our new products and the continuation of solid growth in the United States, partially offset by weaknesses in certain international marine markets. Our guidance does not include any additional acquisitions made in 2015. We've also incorporated our assessment of the impact from changes in foreign exchange reflecting current rates. For the full year, we anticipate a slight improvement in gross margin levels and solid gains in operating margins. As I mentioned in my opening remarks, our earnings growth will be more heavily weighted to the second half of the year, reflecting improved manufacturing efficiencies and cost reductions, as well as less severe FX comparison. Our earnings will benefit from managing costs through initiatives such as LEAN Six Sigma and by implementing programs to improve product cost through supply chain initiatives 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%. For the second half of 2015, we expect the increase in overall operating expenses to be more modest than planned in the first half. As a result, our pre-tax earnings should continue to demonstrate strong growth of 15% to 20%. Finally, with one quarter behind us, we've raised the bottom-end of our initial 2015 EPS guidance as adjusted, to now reflect a range of $2.75 to $2.85. An early look at the 2015 second quarter indicates continued strong top-line growth, forecasted in the 6% to 8% range and operating margins to be flat compared to the same period in 2014. If we now look at our segments, our 2015 plan reflects continued revenue and operating earnings growth in our Marine Engine segment. Specifically, we're planning for revenue growth in the mid single-digit range with a solid improvement in operating margins, despite currency headwinds and the continued negative impact on operating leverage from acquisitions. In addition, we will continue to make significant investments at Mercury. Our current plan reflects a stable pricing environment for our larger horsepower engine businesses. Looking at our Boat segment, our plan assumes that we continue to successfully execute our large fiberglass boat strategy, which is a key part of an increasing number of new products that will be shipped into the market. Our plan also reflects solid growth of outboard boats under 28 feet throughout the year, and therefore, influences our overall average sales price. As a result, increases in the average sales prices will be at lower rates of growth versus 2014. Our current plan reflects a stable pricing environment for our Boat businesses. We're targeting 2015 annual revenue growth in the low double-digit range and we expect margins to be up with year-over-year improvement in the segment's operating margins to be equal to or modestly less than what we achieved in 2014. In our Fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. In 2015, we're now targeting revenue growth in the low to mid single-digit range, reflecting the impact of the stronger U.S. dollar. We'll continue to make significant investments of Life Fitness, aggressively leveraging innovation to achieve competitive differentiation and its products and services, which should continue to enable market share growth and create business opportunities beyond its core business model. We're planning for margins to be flat to slightly up at Life Fitness for the full year. Our capital strategy for 2015 remains consistent with what we described to you on our last call. We plan to maintain strong cash flow and liquidity positions, deploy capital to strengthen our Marine and Fitness segments and to execute our pension derisking plan, as well as return cash to shareholders through a balanced approach that includes dividends and share repurchases. So to conclude today's call, though we face some challenges in 2015, we're well-positioned to continually execute our growth strategy and increase shareholder value. The management team and the 12,000-plus employees will remain focused on bringing to market a steady cadence of new product introductions aimed at attracting and capturing sales through consumer-friendly features and capabilities, expanding capacity throughout all of our businesses, Engine, Boat and Fitness, to meet increasing demand; increasing efficiencies and streamlining costs by continuing to operate our businesses as successfully as possible; and identifying and funding the best opportunities that we see for growth as well as managing and adjusting Brunswick's product portfolio as necessary. And with that, we'll quit talking and turn the call over to you for your questions.

Thank you. We will now begin the question-and-answer session. Our first question is from James Hardiman from Wedbush Securities. Your line is open.

Hi. Good morning. Thanks for taking my call, guys. Dustan E. McCoy - Chairman & Chief Executive Officer: Hi James.

How are you doing? Dustan E. McCoy - Chairman & Chief Executive Officer: Good.

So strong quarter given all the turbulent activity going on in the international markets. I guess a question on the guide. On an absolute basis, your sales guidance is unchanged, the midpoint of EPS is $0.025 higher. I guess when I sort of run through the math on what you've given us on the FX side, it sounds like an incremental 150 basis points of headwinds on the top-line and $0.04 to $0.07 roughly on the EPS line from FX. I guess the question there is, what's changed over the past three months, given those incremental headwinds that, in theories, some stuff must have gotten better given the constant currency increase in the guide? Dustan E. McCoy - Chairman & Chief Executive Officer: Well, the simple answer is, James, we've rolled up our sleeves and said, we're going to work our way through this currency impact. So we're working on costs; we're working on efficiencies. We're doing a little better in certain markets and with certain products than we thought we would. So when you roll all that up, as I began our comments with, we're bullish on our ability to handle the year that we predicted, 15% to 20% earnings before taxes growth, and we just see our way there. We're not very worried about it. We're just going to have to handle all this stuff.

Got it. And then sort of related question here. I guess first, is there any way you could split out the global boat unit growth number I think is 12%. What did that look like domestically versus Europe and rest of the world? And I guess, just bigger picture question, if you strip out all the translational impact of currency, sounds like the momentum in the U.S. is great, sounds like the momentum in Europe is pretty great. Rest of the world, which I guess for you guys is primarily a Canadian issue, is pretty bad. Can you just talk through some of the competitive issues going on in those different markets, some of which may have stemmed from currency and the impact that might have on European or Japanese manufacturers, but maybe walk us through some of the intricacies there so that we can better understand some of that? Dustan E. McCoy - Chairman & Chief Executive Officer: I'll first let Bill do the arithmetic for you. William L. Metzger - Chief Financial Officer & Senior Vice President: Yeah, the international unit demand was flattish for us with the U.S. markets making up the difference.

Got it. Dustan E. McCoy - Chairman & Chief Executive Officer: Let's look at competition, et cetera. We clearly, just because as we look at the NMMA numbers and we've told you what our increase in retail was, we took a lot of share here in the U.S. market. And frankly, we plan to with all the new product introductions we have. Brazil is a place where we're taking share, but as we've said that overall market is down. Our advantage that permits us to take share is local manufacturing. So we're taking share in a down market. It's sort of with a policy from a (39:11) sister – kissing your sister. We're glad to have it, but it's not that exciting. As we look at Europe, we did really well in Europe. And the big reason there is our European boat companies have been introducing lots of new products. They keep winning awards over there every year with their product introductions. They're moving to some bigger products and that business is developing a little momentum along with – I think we said Europe will be flat to slightly up – so with our ability to take share and the momentum there, we feel good about that market. So really, really tough place is Canada. In general, the Canadian market is heavily supplied by U.S. based manufacturers. And with the Canadian-U.S. dollar relationship, the price of boats for most Canadians has now gone up say 20% in round numbers. What happened is, we saw January and February start out actually quite nicely at retail and that was not a surprise to us, because our view was that at boat shows and other places and dealerships that dealers were selling products they had purchased at exchange rates that were very different than the current exchange rates. Once those boats generally begin to sell out, March experienced a significant decline at retail. And in our view, it's going to be a tough place to be for the remainder of this year. Eventually, what's there at retail that's going to get sold out, eventually dealers are going to need to replenish and the market will settle down. But for 2015, it's just going to be a difficult place to be and that's the toughest outside United States market where we're dealing with. Is that helpful as an explanation?

That's very helpful. And just a quick clarification here. So the Canadian market for the most part, boats are bought in U.S. dollars, is that correct versus the European market, where you have the translational risk, but much less of a competitive risk, is that how we should be thinking about this? Dustan E. McCoy - Chairman & Chief Executive Officer: Here's the way to think of it. The Canadian market is supplied by boats manufactured in the U.S. In general, the European market is supplied by us, by boats manufactured in Europe.

Got it. But as in terms of the boats that you sell to both of those markets, are they both in the local currencies or is Canada and U.S. dollars to your dealers at least, and then, they have to sort of make those adjustments, is there a difference in sort of how that currency works from your perspective? William L. Metzger - Chief Financial Officer & Senior Vice President: I think about two-thirds of the boats that we make or about 70% of the boats that we sell in Canada are actually made in the U.S., because we've got a Princecraft brand that sits in Canada that manufactures in Canadian dollars and sells in Canadian dollars. And most every other boat that's sold up, there is something that's imported in from the U.S. It is a sale that's transacted in Canadian dollars, but dealers are generally buying in the U.S. dollars.

Okay. And it doesn't sound like they are then lowering the prices to the consumer in any way that would allow some of that FX headwind not to hit the consumer? Dustan E. McCoy - Chairman & Chief Executive Officer: Yeah, actually protect themselves. William L. Metzger - Chief Financial Officer & Senior Vice President: Correct. Dustan E. McCoy - Chairman & Chief Executive Officer: They ought to be raising prices. William L. Metzger - Chief Financial Officer & Senior Vice President: Correct.

Right. Right. Okay. Good color. William L. Metzger - Chief Financial Officer & Senior Vice President: And just to clarify in Europe, about 70% of the boats that we sell in Europe are manufactured in Europe.

Got it. Very helpful. Thanks, guys. Dustan E. McCoy - Chairman & Chief Executive Officer: You're welcome.

Our next question comes from Joe Spak from RBC Capital Markets. Your line is open.

Good morning, everyone. Thanks for taking the question. The first one is the comment in your press release about FX being the competitive risk. And I realize you put that in last quarter as well, but I think many probably viewed it as sort of a boilerplate risk factor. And now, in light of some other events that I think investors have seen, it's probably getting a little bit more focused. So can you talk about what you're seeing I guess specifically on the engine side where we've seen Yamaha already act (43:55) in some other industries. Honda has a national TV campaign advertising deal on some marine engines. So maybe specifically how you're planning for that portion? Dustan E. McCoy - Chairman & Chief Executive Officer: In the U.S., we're not really seeing anything. And the only impact we're seeing in the difference between the relationship in the yen and other currencies is in some relatively small markets with smaller horsepower engines. And even there, the smaller horsepower engines we put into the market are produced in Japan in a joint venture we have with the Hudson. So when you roll that all up and above, we're not seeing any significant or material impact on the engine side from the engine producers.

Okay. That's helpful. And then, just if I ran some numbers, I just want to make sure in the ballpark here. If I back out the FX impact on boats that you guys talked about and we were to assume, let's just call, the 25% incremental margin, it would have suggested operating income maybe about $3 million higher. So is that roughly the order of magnitude that the plant expansion and the production ramps have caused in the quarter and how do we think about that sort of progressing down over the rest of the year? Dustan E. McCoy - Chairman & Chief Executive Officer: I think you're directionally correct, and the biggest improvement we will see in the Boat business will occur in the second half as these inefficiencies go away, efficiencies begin to take effect. So a way to think about our second half and while the second half is obviously going to be very strong from an operating margin standpoint and ordered in rank order, inefficiencies and operating issues will go away in the second half. Currency impact on it will be less in the second half, because we began to see currency changes in Q4 last year. And a lot of the one-items that were impacting second – first half will not reappear in second half. So when you add all that up, the half to half improvement is going to be quite significant.

Okay. And then, just one quick clarification on the guidance in follow-up to James' question, I mean is BLA in your guidance now, because that, by my numbers, would actually cover most of sort of the top-line – offset most of the top-line impact from the increase to FX headwind, and then, if you assume sort of a normal I guess P&A margin, most of the EPS impact as well, so is that in there? Dustan E. McCoy - Chairman & Chief Executive Officer: The sales are in there, there's no earnings in there.

There's no earnings. Okay. Thanks a lot, guys. William L. Metzger - Chief Financial Officer & Senior Vice President: But that's because for the year, we're not anticipating a bigger earnings contribution. You got to remember that this is a distribution business, distribution margins tend to be relatively low, but this is a business that we feel combined with our existing presence in Australia that we're going to do real well with over time. Dustan E. McCoy - Chairman & Chief Executive Officer: So I want to take just a minute and summarize with BLA where we are on our plan to grow our P&A business by $350 million top-line through acquisition, we said that could be up to a three-year process. So we're a little over a year into it. We're at about $110 million and are working on this – stay very relaxed everybody – to – we're working toward our goal of making them. And in fact, when we get to our November this year, meaning where we talk about our performance 2016, 2017 and 2018, it's highly likely that you'll see us increase the amount of sales growth we think we can get through from P&A acquisitions. We're incredibly happy with this process, with the results that we're going to get from it and what we think the long-term benefits will be.

Thanks a lot, guys. Dustan E. McCoy - Chairman & Chief Executive Officer: Thank you.

Our next question comes from Tim Conder from Wells Fargo Securities. Your line is open.

Thank you, and gentlemen, congrats again on the execution in a tough environment with a lot of crosswinds. Dustan E. McCoy - Chairman & Chief Executive Officer: Thank you, Tim. We appreciate that.

Just a clarification question on Canada, if I may. Any color you can give us by region? If the root of the question comes from any preliminary fallout from demand in Western Canada, in particular, from the oil related businesses or is this fairly well spread evenly across Canada or – just any color there? And then, we're hearing from some of our industry sources that the saltwater business actually in boats is extremely strong. In fact, in some cases, the industry including yourselves, is having some difficulty supplying a sufficient quantity of outboard engines for that. And clearly, if the Japanese were so inclined, they wouldn't want to be giving away margin in that circumstance. So any additional color you could give from that perspective? Dustan E. McCoy - Chairman & Chief Executive Officer: Let's first do the Canadian region. The big markets in Canada are Québec and Ontario, and we have – Princecraft is primarily Québec based, as far as the rest of the market with our West (49:42) based brands and yes, a lot stuff are out West oil spending – oil related spending has gone down. And as we measure the overall impact, I would say it's not significantly moving the needle across all of Canada.

So it's really Québec, is that what you're saying, Dusty? Dustan E. McCoy - Chairman & Chief Executive Officer: Well, more Ontario.

Okay. Dustan E. McCoy - Chairman & Chief Executive Officer: Ontario is the (50:09) for us, because we have – Québec is served by Princecraft very well.

Okay. Dustan E. McCoy - Chairman & Chief Executive Officer: ...compared to most of the rest of the (50:17). Yeah, Saltwater is strong. I'm not aware, and I'll let Mark speak to it, that we're not able to meet demand, except perhaps these 350-horsepower, 400-horsepower come out red hot and as we ramp-up production, we're sort of in that high-class problem sometimes. A few more people want them than we're able to get ramped-up for. Mark, do you have anything? Mark D. Schwabero - President, Chief Operating Officer & Director: Yeah, no, I would just add to that that we've put in metered capacity increases based upon our outlook of the market – been very pleased with the best of the 75-horsepower, 90-horsepower and 115-horsepower. The 150-horsepower we had launched, but capacity and anticipation of that demand – we have gotten a pretty strong response from our 350-horsepower and 400-horsepower we announced down in Miami. But our capabilities there and our supply lines and stuff are such that the folks up at Mercury are responding to the demands and I don't believe we would be part of that issue you're talking about, Tim.

Okay, okay. And then gentlemen, Bill or whoever wants to take this, as it relates to the capital allocation. Clearly, despite – you guys gave some caution at the Miami Boat Show regarding the Europeans potentially using the euro to be more competitive and the currency that's been out there. And then, also you gave some caution in early March at a conference saying that there wouldn't be a lot of upside. And yet, the fundamentals of the business excluding currency have done a little bit better, as you've already talked about and have increased your guidance here in the early part of the year, albeit minorly. But as things still look in capacity and borrowing rates, why would you maybe not look to forward buy that share repo? Is it related to maybe what you're alluding to on the opportunities on the P&A side? William L. Metzger - Chief Financial Officer & Senior Vice President: I just think, Tim, it's an approach where we want to dollar-cost average in and we think the right thing for us to do is to buy a set amount every quarter, flex it up and down based upon kind of where valuations are. And it leaves some flexibility that if we do get some investment opportunities, we haven't committed a significant amount of capital to share repurchase. We've got some dry powder to do some other things.

Okay, okay. Thank you, gentlemen. Dustan E. McCoy - Chairman & Chief Executive Officer: Thank you, Tim.

Our next question is from Mike Swartz from SunTrust. Your line is open.

Hey, good morning, guys. Dustan E. McCoy - Chairman & Chief Executive Officer: Good morning, Mike.

Just – and I know this is your favorite subject, but can we talk about the weather for a second. I know one of your largest dealers was talking about having some issues getting product into the New England region where there was a lot of weather issues earlier this year. Did you see any of that and did it impact wholesale shipments into some of those regions that we should start to see I guess in the second quarter? Dustan E. McCoy - Chairman & Chief Executive Officer: No. Yeah, we obviously saw some of it, but I don't think it's material enough that it's going to see any big swing in the first quarter or second quarter. Frankly, the biggest impact – I hate that word, frankly – I just said it. Actually, the biggest impact was in our P&A business up there, which is very strong and Kellogg is our distribution base business up there. And it was pretty miserable through the winter there; they're based in the Boston area. Pretty miserable was really an understatement; it's actually quite miserable. And that's starting to come back nicely, but that's the only – the biggest impact we would have seen, Mike.

Okay, thanks, Dusty. And then, just on the Fitness side, I know that you kind of laid out that the government part of the business was a little weak in the first quarter. Is that something that we should expect going forward or was this something just kind of tied to the first quarter? Dustan E. McCoy - Chairman & Chief Executive Officer: Boy, if I knew how the government was going to allocate money, I'd be a lot smarter than I am right now, Mike. Frankly or actually, as we're thinking about it, we don't see them doing a lot more in the second quarter than they did in the first quarter. And if there's going to be any opportunity, it will be in Q3. And we tried to make our best view as to what they would do for the remainder of the year in our guidance about how the Fitness business is going to perform.

Okay. That's great. I'll leave it at that. Thank you. Dustan E. McCoy - Chairman & Chief Executive Officer: Welcome. Thanks.

Our next question is from David MacGregor from Longbow Research. Your line is open.

Yes. Good morning, everyone. Thanks for taking the questions. Dustan E. McCoy - Chairman & Chief Executive Officer: Hi, David.

Hi. Just a quick question on the free cash flow; you bumped up the guidance by $20 million, is that just working capital or what else might be happening there? William L. Metzger - Chief Financial Officer & Senior Vice President: It's working capital and taxes paid. Taxes paid are going to be a little bit lower than what we thought three months ago. And we've got a little bit more visibility into working capital and we feel comfortable that we can decrease the amount of working capital usage for it, so.

Okay. Thanks. And then just on the parts and accessories business, you talked, Dusty, about the growth initiative, the three-year plan – you're one year into it; it sounds like it's going well. But what should we expect in terms of margin progression as you build that out over the next couple of years? Do international acquisitions, do they bring an accretive or a dilutive effect to the percentage margins in that business? Dustan E. McCoy - Chairman & Chief Executive Officer: Overall, these acquisitions will be dilutive to P&A margin, because in the pecking order, David – and we try to talk about this as often as we can. Mercury branded parts are highest margin. We then have all of the boat parts we kind of take through our Attwood business or other types of parts and accessories. And then the lowest margin are in the distribution business. So two of the three that we've acquired are actually in the distribution business. When we do parts manufacturers, that will fall in line with average Mercury margins, but will be a bit dilutive to overall P&A margins. But the rate of return on these investments is really, really good and the competitive position that puts us in, we love. So we're quite comfortable having a little margin dilution in order to continue this activity.

Okay, great. Thanks very much. Dustan E. McCoy - Chairman & Chief Executive Officer: You're welcome. Our next question is from Jimmy Baker from B. Riley & Company. Your line is open. Jimmy Baker - B. Riley & Co. LLC: Hi. Good morning. Thanks for my taking my questions. Dustan E. McCoy - Chairman & Chief Executive Officer: Welcome Jimmy. Jimmy Baker - B. Riley & Co. LLC: First, on the Boat side, great performance at retail up 12% versus wholesale up 4%. Can you just help us understand why that didn't translate to a decrease in weeks of channel inventory? I realize that's a trailing 12-month metric, but in each of the last three quarters of 2014, your retail performance was also in line or often quite stronger than your wholesale shipments. So can you just help us with the math there? Is there something that's distorting that or something else that we need to consider like dealer turnover? Dustan E. McCoy - Chairman & Chief Executive Officer: No. It's non-effective by dealer turnover. Here is – will be my simplistic explanation. In general, what I think is going on in the boat market, it would be financing, pipelines everything, so that is wholesale financing. We have been really increasing the rate of new products. And generally, everybody knows when the modeling year ends. And dealers are getting very good at wanting the model year to end with a very few birthday boats sitting in their lot. So what's happening is, as we go through the – moving into the selling season, wholesale does not match retail, as they really pull their pipelines down. So that's sort of first quarter and second quarter. Then, we finish the heart of the retail selling season through a model year change, and then with lots of new models coming out, dealers then begin in Q3 and Q4 to begin to get themselves ready for the next selling season, make decisions about new product, et cetera. So what's happening is and it's clearly setting up this year, it happened a bit last year, and I'll work at it at two levels. Strong second half versus first half even though the prime selling season in marine is first half. And then, secondly, as we watch pipelines, pipelines, in my view, are going to get really low here in our second quarter, because retail is quite strong, dealers will sell-through and then, everybody is going to need to take a breath and start replenishing to get ready for next year. So we were careful in our prepared remarks to say wholesale growth will equal retail growth over the year. It's just not going to look that way in first quarter and second quarter, and then, it will flip around in Q3 and Q4, Jimmy. Is that helpful? Jimmy Baker - B. Riley & Co. LLC: Yeah, that's actually very helpful. I appreciate it. So then, separately, you highlighted your sterndrive engine business was up in the quarter, and your sterndrive engine competitor posted fairly strong Q1 gains in all geographies, particularly strengthened in North America. Yet, we all see the SSI data, you noted that global retail trends in the sterndrive segment remain unfavorable. Can you just put those two for us why we're seeing these wholesale gains there when retail continues to deteriorate? Dustan E. McCoy - Chairman & Chief Executive Officer: Well, actually, where a lot of sterndrives go, I think if you look at the way you might have two sterndrives as an example. As you look at and I don't know, let me find the slide real quick, Jimmy, see if you're up on you screen, you can flip back to it. It's our slide nine, so we're seeing some of the bigger sterndrive models actually be up in Q2, Q3 and Q4 last year, Q1 this year, and those put a lot of sterndrives through. I think that's what you're generally seeing while we're all saying the sterndrive market getting a little better. And those are obviously higher dollar sterndrives than the smaller ones. William L. Metzger - Chief Financial Officer & Senior Vice President: I would also point out that Sea Ray's introduction of the new SPX models, which have a fairly high sterndrive component to them, there's been a fair amount of wholesale activity. Those things are just starting to flow through the retail results, Jimmy. So at least from our engine perspective, that's helpful. Certainly, not competitor, but for ours, it's helpful. Jimmy Baker - B. Riley & Co. LLC: Okay, great. And then just lastly, if I can slip one in on Fitness, the margins were down a bit in the quarter, but you actually took up your margin guidance language for that segment for the year. Can you just help us understand, I guess first how the first quarter compared with your prior expectations for that business, and then secondly, what you're seeing there that's giving you a little bit more confidence in the profitability of the Fitness segment despite the currency headwinds? Dustan E. McCoy - Chairman & Chief Executive Officer: Yeah, Jimmy, we can sum up. The first quarter margin impact is all driven by the year-to-year comparison, last year, we had big warranty improvements, which were significant dollars in the first quarter, not repeated first quarter this year. That is fundamentally the whole story. So as we go through the rest of the year, you kind of get a sense that we think margins will be generally improving with all the new products we have as we make up for this tough first quarter. But first quarter is all driven by lack of all the warranty gains we got in the first quarter 2014. Jimmy Baker - B. Riley & Co. LLC: Very helpful. Thanks very much for the time. Dustan E. McCoy - Chairman & Chief Executive Officer: You're welcome. Thank you, Jimmy.

At this time, I would like to turn the call back over to Dusty McCoy for some concluding remarks. Dustan E. McCoy - Chairman & Chief Executive Officer: So thanks everybody for joining us today. I know for me the analysts who cover, this is a very difficult scheduling. Next couple of days, we try to adjust the call timing to accommodate as many of you as possible. As always, thanks for the great questions. We're out on the road a lot for the next month and I'm sure we'll be seeing many of you in the coming days and weeks. So thanks very much.