Good morning and welcome to Brunswick Corporation's 2016 Fourth 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 Phillip Haan, Vice President, Investor Relations.

Good morning and thank you for joining us. On the call this morning are Mark Schwabero, Brunswick's Chairman and CEO and Bill Metzger, CFO. Before we begin 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 will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation, as well as in the reconciliation 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 Mark.

Thank you, Phil, and good morning, everyone. Our 2016 results reflect the continued successful execution of our growth strategy. Our emphasis on product leadership was evidenced as we saw the benefits from share gains in our businesses. 2016 was the final year of the three-year plan we laid out in November of 2013. And despite several challenges over that three-year period, including the unplanned Bowling divestiture, currency headwinds, and minimal contributions from international marine markets, we grew EPS as adjusted to an all-time record of $3.48, which exceeded the range of $3 to $3.40 that we outlined in that 2013 plan. We believe an important element of this success is our approach to developing our long-term plans, which are balanced from the risks and opportunity perspective. 2016 also represents the first year of our 2018 plan, which we shared with you in November of 2015. Our performance in 2016 puts us in a strong position to achieve the 2018 targets, while continuing to deliver strong free cash flow and invest in our business. Our annual revenue in 2016 increased 9%; on a constant currency basis, revenue increased by 10% with acquisitions contributing approximately 5% of the growth. The strongest growth rates were reported by our Fitness segment, our fiberglass outboard boats and our marine parts and accessories. Our aluminum boats, our outboard engine, and our fiberglass sterndrive/inboard boat businesses also contributed solid growth. Our overall revenue growth was strong, but was slightly lower than our expectations. This was mostly attributable to lower marine sales due to timing of wholesale shipping activity and a weaker retail environment caused in part by greater uncertainty stemming from the U.S. elections. Our gross margin of 27.3% was 20 basis points higher than last year. Our operating expenses increased by 8% and were 16.6% of…

Thanks, Mark. I would like to start with an overview of our revenue performance in 2016. For the year, on a constant currency basis, sales in our combined marine segments increased by 6% while our Fitness segment increased by 24%. From a geographic perspective, consolidated U.S. sales increased by 11%. Sales outside the U.S. increased by 7% on a constant currency basis, including growth in Europe of 15% and growth in other international regions of 3%. In 2016, adjusted operating earnings were $479.7 million, an increase of $53.3 million compared to 2015. Our adjusted operating margin of 10.7% is 30 basis points above the prior year. For the fourth quarter, on a constant currency basis, sales in our combined marine segments and Fitness segment increased by 5% and 25%, respectively. From a geographic perspective, consolidated U.S. sales increased by 11%. Sales outside the U.S. on a constant currency basis, increased by 7%. By region, sales on a constant currency basis increased by 13% in Europe, while rest of the world sales were up 4%. In the fourth quarter of 2016, adjusted operating earnings were $90.5 million, an increase of $22.8 million or 34% versus the prior year. Our adjusted operating margin of 8.4% was 150 basis points higher than the prior year. Turning to our Marine Engine segment where fourth quarter sales on a constant currency basis increased by 4%. From a geographic perspective, sales in the U.S. were up 5%, reflecting strong growth in parts and accessories and modest sterndrive engine growth, while outboard engine demand was stable. European sales were up 7% excluding currency changes with gains in all major products categories. This performance reflects benefits from recently introduced new engine models and our strategy to expand the parts and accessories business in this region. Rest of the…

Thanks, Phil. Our overall operating plans and the assumptions for 2017 remain relatively consistent with longer term assumptions, included in the 2018 plan we communicated at our Investor Day in November of 2015. We target 2017 to be another year of outstanding earnings growth, with excellent free cash flow generation. Our plan reflects approximately 6% to 8% sales growth which includes the continuation of solid market growth in the U.S. and Europe and improving market conditions in certain international markets. Our plan also reflects benefits from the success of our new products and our market share gains. As a reminder, we only include completed acquisitions in our guidance. And in total, they are expected to account for about 1% of 2017’s projected growth. We anticipate continued improvement in gross margin levels and in operational margins. Our operating expenses are estimated to increase in 2017, as we continue to fund incremental investments to support our growth. However, on a percentage of sales basis, they’re actually expected to be a little lower than 2016 levels. These investments will be directed toward new products, initiatives that help us advance our productivity, such as Lean Six Sigma and investments to support our growth plans, including information technology. We will continue to see the benefits of these and prior investments as we move through 2017 and into 2018. The increases in gross margin and reduction in operating expenses as a percentage of sales are anticipated to result in operating leverage in the high-teen percentage range. Our guidance for the 2017 EPS as adjusted is the range of $3.90 to $4.05. Our EPS outlook for the first quarter reflects a low-teen growth rate with sales in the range full year guidance. Turning to our segments, the 2017 forecast reflects continued revenue and operating earnings growth in…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Randy Konik from Jefferies. Please go ahead.

Hi. This is John, John Madisizki [ph] on the line for Randy. Thanks for taking our questions. I guess first off, can you just share some more color on trends in the Cybex business in past quarter? I think third quarter was characterized by some international distribution challenges and some decreasing demand for certain product categories. Did you see those factors lessen this quarter?

I think that the things that have gone on there a combination of the distribution channels have -- I'm going to say then cleaned up, contracted, literally the transitioning that's been going very nicely with those changes, we still have a little bit of mix there. And Cybex was a little heavier into some retail channels that have been a little less growth than what we've seen in the global commercial aspects. But, again, fundamentally, we’re very pleased with where Cybex is at. And as I mentioned, we slightly exceeded the earnings target for that acquisition for the first year. So, the integration is going very nicely.

Great. And then, just a follow-up for Fitness more broadly. In the outlook, you alluded to some new products eating growth, particularly in the second half of 2017. Any more color you can give there? Are these new products related to Cybex or just more broadly across the Fitness segment in general?

One of the things we've said as part of the acquisition strategy is we would probably be doing more platforming work by having the various brands going across the segment. So, the new products we're talking about aren't unique to Cybex, but they do cross various categories of our fitness products. And we won't be giving a lot more color to those today. Actually, we're -- those will be front and center and get to the industry, and the consumers space is literally at IHRSA process, which happens in March of this year out in Los Angeles.

Our next question comes James Hardiman from Wedbush Securities. Please go ahead.

Hi. Good morning. Thanks for taking my call. So, let's talk about guidance here for a bit. You grew earnings or EPS 19% in 2016. The guide, at least at the midpoint for 2017 is about 14%. And then, to get to your guidance or your targets, midpoint of your 2018 is closer to 20% growth. So, I guess the question is why the deceleration here in 2017 and what gives you confidence that assuming that a midpoint of that number is still reasonable that we would be able to reaccelerate in 2018? And I guess maybe, Mark, you had made a comment in the prepared remarks that the 2017 numbers do not include any uncompleted acquisitions, and I am thinking that maybe there is some apples and oranges here because -- correct me if I am wrong, but I do think the 2018 number would include acquisitions that haven't been completed. So, how should we square all of that?

Let me take the last part of your question. When we were at Investor Day in November 2015, you'll remember we said we’d get 3 to 5 from the market, we’d get 2% due to share price, ASPs and 2% from acquisitions. So that's where we were at the seven to ninth number, again that's talking 2016, 2017, and 2018. So, when we actually do the guidance for the next year, we only put in there what we've completed. So, we're right on plan relative to five to seven essentially coming from the core business and one point for completed acquisitions. We fully expect to do some more acquisitions during the year, and obviously, as we do those acquisitions, the revenue number will go -- the adjustments go up accordingly. So, there's a little bit of apples and oranges there, James. And then, I'll let Bill comment about kind of the mid-point, your early part of the question.

So, James, one thing to put into your calculus there is just tax rate impact. We saw a fairly nice whip in EPS growth this year from tax rate improvements. I think when you look at our three-year plan, those benefits were contemplated to be a little bit of front-end loaded. So, going into 2017, we don't see that same sort of lift from the tax rate. The other thing, I'd point out is that when you look at product development activities as well as integration activities, the impact of those on 2018 versus 2017 should provide us a nice little tailwind, as we look forward to 2018, and are a little bit more meaningful as we get to 2018 and then into 2019. So, I would say that your guide there or your view of it is correct. I think there is a couple of factors to keep in mind. I think the other thing as we look forward to kind of the environment we’re in now, we are certainly I think long-term think very positively about some of the changes being talked about by the administration change, the federal government, but probably view there to be maybe some risks or things unintended -- not unintended consequences, but things that may impact the business in the short-term like FX markets and things like that where maybe we are being a little bit on the conservative side and a little bit prudent as we set our plan for 2017.

That's really helpful. And then maybe to follow up on the point you made about product development activities, maybe this is a good opportunity to talk about what’s been announced so far. Well, actually, let's take a step back; you had a bunch of new smaller SLX products that you announced a year ago. I don't know how quickly you were able to get that out into the channel. Maybe walk us through how much of that -- the relative benefit to 2017 versus 2016; is maybe 2017 even a bigger year for those products than 2016? And then for the New York Boat Show, obviously, you just announced this 400 SLX, which seems like as the successor to the 350 SLX, which was really a big deal. It would seem like that would have -- could be a really nice sales driver for you guys. But, given your comments that 2018 is probably going to be a bigger new product year than 2017, how should I think about all that; is that product going to be capacity constrained? And as we think about this upgraded engine product that you’ve been teasing for a while, should I take away that that’s going to more likely be 2018 than 2017?

Yes. So, let me start at a very higher level. First of all, the question about boats, we a year ago announced the SLX, the 250, 280, 310s, all the way -- and some product there. We talked about the fact that they would probably pull our ASP growth rate down a little bit because we were moving from white space bigger boats to a more average type of boat. But that stuff’s gone extremely well. There is products out in the pipeline; they are pulling through very nicely. If you did feedback calls to, for instance, Sea-Ray dealers, you would get very positive feedback about the market acceptance and that stuff is coming through. So you are seeing that and that’s happening. But, James, what I really want to take you back to is what we are talking about really the increased investment. And if you look at the capital and PD&E investments and things we’re doing, most of that stuff is all over in the engine and fitness area. And so, we’ve talked about fitness from the standpoint of second half of 2017, we’ve talked about the fact, some of that will get showcased during the year. But the other big piece of the investment is in our engine business. And you won’t see the benefit of that yet in 2017. But, it’s why we remain optimistic and think we’re right on plan relative to our three-year plan and 2018 targets, because of full year benefits we’ll get from both fitness and engine in 2018.

Yes. just to add that, I would kind of characterize the boat introductions as very much of the same pace as we've seen over the last couple of years that obviously with a couple white space products but we've also had white space products that have been sprinkled in the mix over the last two or three years as well. So, we’re certainly pretty bullish on our outlook for the boat business relative to new products but I think where the big changes are in fitness and engine.

And James, to your specific example of the 400 at the New York Show, that's -- it's going to be a -- that’s really an extension of our -- you used the term replacement of the 350; it's really in a extension of that product line moving that up. You know what probably if you've been at the show or go to the show what the average price point of that will be? I just keep in context with the relative size of those markets are relative to how much to extrapolate it into. But it's going to be an absolute home run product.

Our next question comes from Scott Stember from C.L. King. Please go ahead.

Could you maybe talk about -- you referred to timing from the election and just maybe some general softness in the market as the year finished out; granted, the last quarter’s only 10% of the boating world. But, maybe just talk about some of the comments that you made about your optimism for reacceleration and growth in 2017. You said some products that you’ve seen, dealers are liking or is it just something else that’s going on? Maybe just expand on that a little bit.

Well, let's go to the higher level even, and then, I'll get specific to your question. First of all, when you just look at the fundamentals of marine, the stable boating participation, favorable replacement cycle, our comments as well around innovation, so the fundamentals of things going on. I think the things to give a little more color about the -- I'll say the second half is really around -- I think the elections had our dealers maybe getting a little conservative of how this is all going to go or where it's going to happen, although we were getting some good order rates. And I think now as we're very early into the boat season but as we look at dealer sentiments, the consumers sentiments, the attendance of some of the shows, the activity that's going on, I just think there is some renewed energy in the market that goes even beyond the fundamentals of the marine industry.

Okay. And as far as the new products, I know it's a little early, but what’s some of the feedback that you’re getting; anything that's gone out so far?

The feedback’s been good; we brought out the kinds of things that we don’t talk about that size much but one pontoon, Crestliner pontoons, and the new 400, and we've got some new Sea-Ray products, larger boats there as well. So, on the boat side, the products have been good. We continue on the engine side to see the acceleration of things around the joystick piloting. And really the big show in all that activity for fitness really starts with IHRSA in the month of March. But, whether it's been Houston, Dusseldorf, Toronto is going on, now Chicago, Atlanta and Nashville, all those shows, the feedback although fairly limited three weeks into the kind of kind of boat season, all those places have had the some real energy about the products we're launching.

Just a last quick question on ASPs, I think you said up 6% I think in the fourth quarter; and you said probably not to the same extent in 2017. Maybe just expand on that a little bit.

Yes. I would kind of characterize that there's probably a little bit better balance in growth between our three businesses in the Boat segment in 2017 than it would have been in 2016. And we're just kind of what I would deem to be getting back to a more normal increase in ASPs as we get little bit more balanced between the three lines of businesses, and large and small products.

Our next question comes from Joe Spak from RBC Capital Markets. Please go ahead.

Thanks very much. Bill, I was wondering now that we’ve had some time, if you’ve -- I am assuming you’ve done some scenario planning on at least what we know from the better way plan. Do you have any indication as to sort of at least where your book tax rate would go, based on border adjustability, CapEx reduction, et cetera?

Joe, maybe -- A, we have done quite a bit of work to understand what the impact of some of the proposals would be. I think, maybe a couple of things just to share with you to help understand what the impacts could be. When you look at our overall tax position, between 80% to 85% of our taxable income is the result of our U.S. operations. So, as you start to think -- and if you think about some of the other things that are play in tax reform like deductibility of interest expense et cetera, we're not a highly leveraged entity at all. When you start thinking about the benefits of a reduction in the statutory tax rate, our presence in the U.S. naturally I think will give us a really nice reduction in our tax rate, just as a result of the decline in the statutory rates especially given the fact that our foreign tax rate is only slightly higher than about 20%. So, when we look at tax reform, net reduction in a statutory rate would be beneficial to us. And then when you just take a look at border tax adjustments and things like that, we are a net exporter, given the base of our operations; a lot of the products we sell internationally come from our U.S. operations. I think we're not necessarily in a position today to share kind of size what that could be. But net-net, we're positively affected by that element of tax reform as well, and really I think maybe differently situated than some of our other participants in the industry would be when you think about the outboard business, large fiberglass boats, things like that where our base of operations is a little bit differently structured than some of the competition would be.

That’s helpful. I mean, I guess, would -- just thinking through off the cuff, given some of the potential deductibility, would it actually even potentially increase your deferred tax assets and maybe even lower your cash taxes further?

Well, I think there is -- the cash tax reduction from tax reform, there will be a reduction in cash taxes.

Okay.

Well, from the 8%, that’s what you are basing it on…

No, from the -- I guess you said, what, 10% to 15%, right, or mid teens I think you said, yes.

Joe, I think it’s a bit premature to talk about what the absolute impacts of these things are. I think if you just start to base it on a 20% statutory rate and you start to factor in, we are probably higher than that just based on that, and border tax adjustment would give us favorability below the 20%.

Okay. And then, real quick on pension. Sorry, if I missed this, the contribution this year, is it in line with that 70 per annum over the planning period?

Yes.

Okay. And then, have you -- just given where rates look like they are finally moving higher, but they are still advantageous, have you given any thought to maybe advantageously raising some debt now and maybe even using that to help fund further offloading of the pension liability?

Yes. I would tell you, we look at all of that stuff on a pretty regular basis, Joe. And as we sit here and think about where things have changed, it’s all things that we considered; haven’t necessarily adjusted our plans at all in that regard, but certainly something that we’ve looked at.

Our next question comes from Mike Swartz from SunTrust. Please go ahead.

Mark, I just wanted to ask you a question regarding sterndrive. Is there a drive market in general? And specifically, I think in the presentation, you talked about sterndrive engine growth this quarter. And I think that’s the first time I’ve heard that in quite some time. So, could you just give us a little perspective in what you are seeing in the sterndrive market; is it starting to flatten out or is this simply share gains?

Well, I think, first of all, you just got to start with the fact that the volume in the industry is some stuff that dropped to levels that it doesn’t take a lot today to move a number from being flat to up a little bit. So, first, I just want to temper that a little bit. I think to us specifically now as -- there is finally the place where all the banks and transitions and all that stuff we’re going through, we’re feeling very good about other markets accepting our purpose-built engines . And that becomes the current production being more of the norm. We just think we are greatly -- in a great position on a go-forward basis there. But, some of the increased stuff -- again, it’s relatively, fourth quarter is relatively a low quarter, and then when you take the relatively low numbers, I wouldn’t -- I am still very positive that there is a real place for sterndrive engines, but I wouldn’t over read the comments.

Okay, fair enough. And then, just sticking with the boat side of the business, looking at margins in that business up I think about 110 basis points, 130 basis points in 2017, and I think it was up 90 basis points in 2016. So, maybe you could bridge the gap for us and what’s really kind of driving that acceleration as we go in 2017, is it favorable boat mix; is it lower production costs?

I think it's kind of all of the above. We're going to get some volume benefit; we're going to get productivity enhancement. To Bill’s earlier comment, there’s probably a little more normal level of some of the integration work that's going on, the mix, a little bit -- I mean there is a whole bunch of factors that come through there. But, the biggest ones are just our ability now is, if we’re a little more stable environment and giving the industry increase in the volume, increase to really have more of that drop to the bottom line.

Okay, great. Thanks a lot.

Goes into the margin.

And I would say mix is pretty neutral in that equation.

And the next question comes from Tim Conder from Wells Fargo. Please go ahead.

Thank you. And gentlemen, just somewhat following on that prior comment. So, again, just to make sure we’re understanding this, given that your investments in several of the areas are sort of let's say on the down slope, winding down, I think Mark, you alluded to that in your preamble. Could we see that high teens operating leverage or pickup rate? Could this potentially be conservative? And I guess, again, that's obviously dependent on, if you get a little bit more of a volume uptick, if the dealers now start to order a little more in line with what they are seeing the takeaway?

Well, I think the answer to the question, Tim, is really based upon the set up parameters we have defined with the growths being what they are and how they are going to happen around the world, what we think the markets is going to be, we think those are the leverages and the improvements are commensurate with that. So, then, when you start talking about, well, what if the market was better and what if the sentiments were better and what if -- those start creating some little different conditions. And if those conditions happened, yes, we probably have a little upside there.

Okay. And then, could you just remind us, especially maybe in the U.S. market on the marine side? It would seem that the back half of 2016 and first half of 2017 would have some more difficult comparisons from a retail perspective, because you got water basically in Texas in the middle of 2015, so that made the comp in the back half of 2016 tough, and then continuing on with the strong market. So, does it lay out that way from a retail perspective difficult first half comps and more normalized comps in the back half of 2017?

Well, if you think back to 2016, the first half of 2016 was pretty lumpy on a monthly basis. It was fairly significant there. So, I think we would expect to be a little more consistent levels there. You always got the nuance about is it in early spring, is it in the late spring, is it -- but our month-to-month was a little lumpy in the first half. I think the second half of 2016 as we talked about and showed in our slides, wasn't a lot of retail growth. And so, I think the comps for the second half of 2017 are going to be easier but the first half, Tim, as you know, it really is -- there' are so many factors that come into play around the shows and the timing of spring, and the list goes on there. But, it was a bit lumpy last year; and anytime you got that, you've always going to have a little volatility in the comps as well.

Okay, and then just to revisit -- yes?

Tim, I was just going to follow-up and just say, part of the Q3 market environment, I think at least can be attributable to the fact that we had very, very strong 2016 model year and ended the second quarter with extremely clean inventories. So, I think there's naturally some level of model year and sort of promotional activities that normally would occur that would stimulate some demand there. And that level of activity would have been substantially lower in 2016 than it would have been in prior years. I mean, A, we got off to a very early strong start to the season; and B, inventories ended very clean. So, as you look at the second half demand, that's got to be a factor.

And just to clarify the commentary about the slight growth in outboards that you saw and you cited the environment; that was more led by international. And then, how do you see that shifting here on outboards in particular as it’s baked into your engine outlook for 2017?

So, Tim, I would say that for 2017, we expect the U.S. to still be a very good market for us and then international markets will be better than they were in 2016. And then, if you look at Q4 specifically, I would kind of deem that to be more of a timing of shipments within 2016 in Q4 specifically for to be flat. We still have some weaker international markets for sure, but the U.S. market was a little bit stable and that's reflecting more timing. Overall, market demand for the U.S. is still very strong.

And our last question comes from Craig Kennison from Baird. Please go ahead.

Thanks for squeezing me in. Bill, first, could you confirm that your $250 million free cash flow target includes your pension contribution?

It does include pensions.

And then, Mark, could you comment on the M&A pipeline? How does it look right now versus this time last year? And where do you see more of the activity, whether it’s in marine or fitness?

Well, go back to the place, we've talked about from the standpoint of -- we clearly want to get to the 1.5 billion by 2020 on the fitness side. So, I'll take that piece first. And if you look at what the CAGR has to be on growth, it's not going to come from core. And therefore, there'll be more acquisitions as we move from 2017 now through 2020. So, our eyes and activities are clearly focused on things that we think make sense to add into the fitness mix. And we’re able to -- at the one year mark on the Cybex right now, so that integration is well understood and underway and feeling better and better, as we’ve said, about that. The second part, we’ve done ICG in September. So, we’re clearly evaluating opportunities that are out there and we’ll continue to do M&A in the fitness arena. On the margin side, what I would comment there, we’ve specifically talked about wanting to do 350 over five years. That started back in 2014 on the P&A. And this year we’ve done some P&A, but we also saw some nice opportunities to go in and we did Thunder Jet and we also bought the assets from the brand Heyday and stuff. So, I think we’re still tracking fairly well and continuing to look at opportunities that approximate roughly doing that $70 million, $80 million of top-line in the marine space going forward. I would tell you a lot of places where we go to get that, Craig, has been where people are looking for successors. And, I think until people have a little more certainty around the state tax and tax rates and -- it could be a little slower early in the year. The flip side, I think is when some of that becomes known, M&A activity could accelerate as well.

That’s very helpful. And if I could just finish with a follow-up on the fitness side, The Wall Street Journal recently ran an article about changes in the fitness market with some dollars shifting from clubs to more subscription apps and other alternatives. Do you see that trend affecting Brunswick and how you approach the large portion of your revenue that addresses the clubs?

It’s another good question, Craig. There has always been something out there. I am going to date myself a little bit. I mean, the Jane Fonda workout tapes and everything, there has always been the home exercise, the late night TV things. That’s always kind of been an element in the background and part of it. Some of it -- if you take some of the people that are in that space, I think they’re doing a nice job around it. But, there is still people who -- and we still see very strong things in the gym membership and revenue being spent there. I think one of the bigger things going on our market is just you see a little bit of the bifurcating. You got the franchise model and you got boutique models going on. But, those things have always been there, subscription wise. We think some of that is still going to continue to be there. But the fundamentals around our core market we believe are still very sound.

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

The only comment I’d close with is we really feel good. Seventh consecutive year; we said in our release of strong improvement in our operating performance, the record EPS earnings that we are having, the fact that we are able to maintain kind of the course relative to our three-year plan and feeling very good about our ability to achieve that. And I would add the other part, looking forward to November of 2017 where we can come and talk about the 2018 through 2020 as well. We're feeling pretty good right now.

Okay. Thanks, everybody.