Good morning, and welcome to Brunswick Corporation's 2017 Fourth Quarter and Full 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 like to now to introduce Ryan Gwillim, Vice President, Investor Relations. You may begin, sir.

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 with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we'll be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to the presentation and the reconciliation sections of the consolidated financial statements accompanying today's results. Just a reminder, on December 5th of last year, Brunswick announced its intention to sell Sea Ray boat businesses, including the Meridian brand. Starting with the fourth quarter of 2017, Brunswick has reporting this historical and future results of these businesses as discontinued operations. Therefore, for all periods presented in this release, all figures and outlook statements incorporate this change and reflect continuing operations only, unless otherwise noted. I would like to now turn the call over to Mark.

Thank you, Ryan, and good morning, everyone. Today, I will focus my remarks on our fourth quarter and the full year results as well as provide insights into the global Marine and Fitness markets. Bill will elaborate on our financial performance, including comments pertaining to our segments as well as the P&L and cash flow expectations. I will then wrap up with our outlook for 2018. Our results in 2017 reflect the continued successful execution of our strategy by our business teams with our emphasis on creating and increasing shareholder value. Our performance represents the eighth consecutive year of adjusted EPS growth and with this record high EPS, resulting from the strong operating performance by our Marine businesses. The U.S. Marine market performed consistent with our expectations throughout the year and remains healthy moving into 2018. Overall demand in international Marine markets also remains strong. Our largest business, Mercury Marine, continues to leverage this market growth into outstanding performance and continued strong market share through product leadership, overall operational excellence and our Boat segment also recorded strong results. As a result, our combined Marine businesses reported a 10% increase in both revenue and operating earnings over 2016. In December, we announced our intention to sell our Sea Ray boat business. The sales process is underway and there has been significant interest in the business. Our goal remains to complete the divestiture in the first half of this year. Our remaining Boat portfolio is very well positioned to serve healthy, expanding market segments and will complement our other Marine offerings, including engines, arts and accessories, while operating an improved margin profile. Our Fitness businesses is executing against its strategy to overcome some market headwinds and enable future growth. Revenue grew 5% for the year, reflecting growth in international markets, while domestic…

Thanks Mark. I would like to start with an overview of our revenue performance in 2017. For the year, sales in our combined Marine segments and Fitness segment increased by 10% and 5%, respectively. From a geographic perspective, consolidated U.S. sales increased by 8%, while sales outside the U.S. on a constant currency basis increased by 10%. Adjusted operating earnings for 2017 were $501.6 million, an increase of $24.4 million. Our adjusted operating margin of 11.1% was 40 basis points lower than the prior year. For the fourth quarter, sales in our combined Marine segments and Fitness segments increased by 14% and 3%, respectively. From a geographic perspective, consolidated U.S. sales increased by 11%, while sales outside the U.S. on a constant currency basis, increased by 7%. Fourth quarter adjusted operating earnings were $93.4 million, a 6% increase versus the prior year. Our adjusted operating margin for the quarter declined 40 basis points to 8.6%. Diluted EPS from continuing operations as adjusted for the year equaled $3.89 per share. This reflects a 12% increase versus the prior year. On our third quarter call, we revised our full year EPS guidance to $3.85 to $3.87 per share. As a result of removing Sea Ray from our continuing operations reporting, adjusted operating earnings and diluted EPS, as adjusted for 2017, improved by approximately $70 million and $0.13 per share, respectively. This benefit was offset by several factors, including some additional margin weakness in our Fitness segment due mostly to freight cost, adjustments recorded in our engine segment to warranty and litigation reserves, some additional earnings weakness at Sea Ray and project expenses incurred at corporate. Turning to our Marine Engine segment. Fourth quarter sales increased by 13%. From a geographic perspective, revenue growth was strong in the U. S. driven by outboard…

Thanks Bill. Our outlook for 2018 is generally consistent with our recently provided three-year strategic plan, and indicates another year of strong revenue and earnings growth with excellent cash flow generation. Our recent results reflect the ongoing execution of our strategy, and we believe we are well-positioned to generate increased shareholder returns throughout our three-year plan. We expect our Marine businesses' top line performance to benefit from the continuation of solid global growth, along with the success of new products. In the Fitness segment, we're planning for market demand similar to the second half of 2017, and are anticipating contributions from the new and recently introduced products, particularly in the second half of the year. As a result, absent any significant changes in global macroeconomic conditions, our plan reflects overall revenue growth rates in 2018 in the range of 5% to 7%, including benefits from completed acquisition and favorable movement in foreign exchange rates. For the full year, we anticipate improvement in both the gross margins and operating margins, as we plan to continue to benefit from a number of factors, including new products, cost reductions related to efficiency initiatives and a favorable impact from foreign exchange rates. Operating expenses are estimated to increase in 2018, as we continue to fund incremental investments to support growth. However, on a percentage of sales basis, we expect to be slightly lower than 2017 levels. Considering these targets and taking in account the benefits from the recently enacted U.S. tax reform and ongoing execution of our share repurchase program, we are increasing our guidance for 2018 to a diluted EPS, as adjusted, ranging $4.45 to $4.65 versus our previous guidance, we are projecting a 45% to 50% improvement in EPS from the lower effective tax rate, and we're also planning our businesses to…

[Operator Instructions] And our first question comes from Craig Kennison from Baird. Please go ahead.

I guess, this is a Fitness and tax related question, but I'm just wondering if there's any evidence of that some of your Fitness club customers might eventually accelerate spending on equipment, given the changes in tax policy as it relates to capital expenditures?

I guess, my comment on that is at, obviously, the tax reform and the immediate expensing is something that should be favorable for people who are investing in capital assets. I would say that cash flow has always been an extremely important part of the investment decisions on the part of the clubs, so I think that, that is something I would put into favorable column moving into 2018. That being said, we've had some form of immediate expensing as part of the tax provisions for - on and off for several years and I think when we've seen it turned on, it has had a positive impact, should be something that's favorable to us.

And then as a follow-up, just on the broader tax windfall. How do you see investing that windfall, whether it's with consumers in the form of lower prices, employees or with shareholders?

Craig, what we've down as we've outlined in here, we essentially taken about half of the tax benefit and putting that benefit directly to the shareholder and the other half is really things that we'll be looking at and addressing of ways to look at longer-term opportunities, growth initiatives for the company that may be would have been initiatives, would have kicked off in 2019. The other point is that, there'll be things that we'll continue doing relative to being an employer of choice. But fundamentally, the takeaway would be about half of it is going to shareholders and about half of it would be things we'd want to do relative to investing, growing and further improving the business.

And our next question comes from Michael Swartz from SunTrust. Please go ahead.

I just wanted to touch on the Fitness business. I guess, the margins in fourth quarter were the most striking thing to me, and it looks like you're now expecting flat margins year-over-year. So maybe just give us a little backdrop on, I guess, why margins should be flat year-over-year, I know there's some cost improvements things going on. How much of that is structural pricing product mix, et cetera. That I think with your 2020 plan, you had expected 100 basis points to 200 basis points in margin improvements in that business, is that still the outlook?

Just to touch on the fourth quarter little bit. Freight was the big change between kind of what we’ve seen through the first nine months of the year, and then that - it really related to two things. First, seasonably, obviously, a very big quarter on the delivery and install side. I would say, we saw great increase on that activity beyond what we had planned for. I think there's probably people outside of our industry that just - that rely on a delivery of products in the fourth quarter, they probably saw some of the same thing. We also had some actions that we had to take to expedite product in response to new products that we introduced, maybe had little bit different mix than we needed on console options, and we ended up expediting some product to be able to meet demand that we incurred some additional cost on. I would view that latter activity as something that should not be with us moving into 2018. The freight delivery install is something that may continue, but I think that's a place where we are keenly focused on trying to offset that cost and/or change the way we price and execute transactions with customers to offset some of that. So I would say, moving into '18, that's something that we expect to be less of a headwind. And I'll just say, in general margins moving forward, I think, we've got some balanced actions. We certainly consider some of the headwinds we faced in '18 will continuing on and comp should improve on that as we move into the back half of the year. Our Lean Six Sigma efforts are increased and enhanced moving into '18. We've got some product margin factors that we expect to be beneficial and currencies a little bit positive for the business. So feel comfortable with our guide on kind of flat margins moving into 2018, especially with sales growth in the low single-digits should be something we are able to get accomplished.

And then just to 2020, I know Mark had mentioned that you raised your numbers largely ,looks like tax rate, but you said there were some offsetting factors as well, is one of those fitness margins through 2020?

Yes. I would say, what we've done is to we've essentially said that 100 to 200 basis-point increase is going to occur off of a lower 2017 base than what we expected. And the timing is probably going to be a little bit more based on '19 to '20 performance than expecting some improvement in 2018.

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

A couple of things here, maybe just continuing on the previous question there, so you're still looking for 100 to 200 basis points, but has there been any change also on the engine on the boat? I mean, overall, by 2020, it would seem that the answer is no but just as far as the cadence; do you see any change in that here over your plan?

No, Tim, we don't. I think we're still targeting improvements in engines. We're still targeting that 7% to 8% for boats, and that's something that we adjusted when we made the Sea Ray announcement back in December.

In general, you talked about some of that redeployment, Mark, and Billy you touched on a little bit to some of the tax savings here. You have M&A opportunities; you said that there's some M&A baked it to your outlook here both for '18 and obviously through 2020. Can you just remind us what's your hurdle rate is for the company, the ROICs that you need to get on that. Maybe not in the initial year, but maybe over a three-year period or whatever, what's your target to basically do a no or go decision on M&A?

Tim, I guess, relative to the M&A starting from hurdle rates. I mean, we're looking for some sort of excess where a reasonable amount of excess over our cost of capital. I think as you look at some of the P&A deals we've done, that's typically been mid-teens or higher. I think some of the larger deals we look at tends to be mid-teens or lower, would be kind of where the hurdle rates would be. Obviously with tax reform, that certainly helps with cash flow performance and things like that. So should be favorable from an M&A perspective.

So even with tax reform, your still haven't changed your hurdle rates on a go-forward basis?

Well, I think our premise is still based upon a reasonable or a substantial sort of excess over our - a cost of capital that we believe is necessary to make the investment worthwhile.

So basically...

Depending on what kind of asset we're looking at.

So mid-teens would be fair?

Yes.

I'll take it the next step then. Fitness. Historically, when all has been asked, even when Fitness was going really well, you'd say, people say, why are you in Fitness, it doesn't fit with Marine, your answer had been, it gives us a very good return we're the leader in that, we can have scale, we believe we can operate this business very, very well. Now that's turned a little bit, and you're looking at things to repair that. At what point I guess, are you earning? And how long would it take to say, hey, we can't get to that hurdle rate that we continue to need so therefore, whether we're going to spend this or we're going to sell it? How long was that decision process take?

Well, Tim. I'd start with the answer we gave as a result of the shareholder letter this week. We've got a very robust process that we use with the board. We're constantly looking at the portfolio and the board has a very solid track record of addressing and dealing and doing the reviews and acting accordingly. And we'd expect that looking at the - all our business portfolio wouldn't be any different on a go-forward basis.

So if the outlook for Fitness is where you can earn that mid-teens return favor that getting back to that in the next couple of years, you would look to divest or do something else with that, is that a fair assumption?

Tim, I'm going to answer. When you look at all the fundamentals around the Fitness industry, healthcare calls, wellness, millennial's, diabetes, obesity, people, millennial's, the list goes on, the fundamentals are very good. I think one of the things we're seeing it's in industry going through a better transition. And all businesses kind of go through that clearly the way a little more even direct. Clearly, the way when we're doing portfolio, we look at longer term views and the longer term view in the fundamentals in the industry are still good.

Okay.

Tim, this is a multifactor - what we go through is a multifactor, Mark referenced, longer term. I think to comment on any specific factor just isn't something we're going to engage in.

Lastly, just a little color, if you would, on the litigation detail, whether that's complete, warranty cost and also whether that's complete with an engine? And then the higher corporate spending that you alluded too and seems to be implied going forward.

Yes. Let me start with the first two. It's public out. I mean, we're addressing a steering pump, was the steering pump issue, so I want to make sure you know it's not an engine issue. So we had that, and we've been addressing that in the marketplace, not anything new. The other part is that when you look at the specific litigation, it's something that goes back to over five years, back to the - when we were doing facility consolidation work post recession. So there, again, it's over five year ago issue and not around product or service or a customer or anything in that regard.

And then the…

Tim, I would just kind of - Tim, I comment to warrant that we continue to have just really exceptional warranty claims experience in that business. Typically, recognize some level of favorability, but we probably were a little bit optimistic on what we were going to be able to recognize in the quarter based on what happened through the mechanics of accrual calculations, et cetera. So some of its just estimate differences between what we expected and what ends up happening. So I wouldn't read anything into this that's a change in our warranty rates at all. We still have very strong warranty rates moving forward.

In corporate too?

Corporate, we term as Q4 as Project expenses and I don't want to get into a lot of detail beyond that. I would say, moving next year, we've got things on the technology side, on IT side, that we are funding at corporate so it's more growth related and investment related than it is more corporate overhead, it's the best way that we put it.

And the next question comes from Scott Stember from CL King. Please go ahead.

Could you maybe talk about what the reception has been? What you're seeing to some of the newer predicts on the integrity line that's going on so far?

The feedback is it's been pretty positive, there are customers now in the first quarter, we are making. They're 100%. We have some going 100% convergence happening from the prior gen product. And we're continuing to come out with, as I mentioned, in my comments, some of the console enhancements to go along with the new equipment. So we're feeling pretty positive about the response we've been getting from customers with the new products.

And I would say, the comment I'd add is, like-for-like, the new integrity line that's available today is better than the old, but the attachment of the new console options is really going to be, I think, a bigger game-changer than just the change of a like-for-like sort of product.

Got it.

So 2018, there should be more lift from the fact that we've got new console options available. I would point out that this is a kind of a multiple event, they're not all coming out that once. They get layered in or phased in over the first half of the year.

And this experience that you're seeing, this is across the entire gamut of your distribution, whether it's some of the bigger change or discount change, or is it more towards any one of those, particularly?

No. It goes across the entire spectrum of our customer base. Obviously, you've got the base platform of the cardio we're working off of into those points, it's improvement versus prior. But then various customers are going to add different ways they want to participate from the console and its capability. And some of that will vary by customer mix, but they're going to have some of that capabilities to differentiate. But literally, the reception in the movement will go across the range.

And then the last questions also in Fitness. You talked about in Europe, I guess, some competitors have come out with some products that are kind of leading the way, and you sound like you're about to launch some new stuff over there as well. Maybe just give us an estimate on the timing and whether or not any of your customers over there have seen any of the new product?

Customers over there have seen the new product and what we've talked about the competition, we have some competitors who were pulling what would traditionally be some of the console things on higher end products down to lower end products, and we, fundamentally, as we're rolling out our new product, we had to address it through price. And as the new product comes out now, fundamentally, it is they're seeing that new product, we have a lot of different options on how we can address that versus the options we had available with the prior product range.

And our next question comes from James Hardiman from Wedbush. Please go ahead.

So a couple of questions for me. I guess, first, I want to make sure I have the math right, and then I guess beyond that sort of a justification for the math. I think you guys called out a $0.40 to $0.50 benefit from the lower tax. I guess about $0.15 taken Sea Ray out, and then you had some FX balance sheet. And the 2018 guide, looks like it's going up $0.25. So it seems like an apples-to-apples basis, it's coming down pretty meaningfully, maybe $0.40, somewhere in that range. So I think I heard two things. Obviously, Fitness is coming down, but then, Mark, I think you said that you were given the tax benefits that may be some investments that you were going to make in future periods or brought back into 2018. I guess, first, does that math shakeout? And maybe if you could quantify sort of those pieces, at least, maybe order of magnitude, Fitness piece versus just the timing piece, which I think we should probably think about slightly differently. But then as we fast-forward 2020, it sounds like the delta there, which is also less than the tax benefit, that's all Fitness, and I'm assuming that the timing of expenditures sort of works its way out over the three-year period?

Let me start because not all the math works that you just went through, James. So I'll try to put it together. First of all, let me deal with the easy, well, they're all the easy, but I’ll deal with the Sea Ray piece. And that is as you look at 2018 and beyond, Sea Ray wasn't in our guidance and go forward from our Investor Day of being at a loss. So you first have to address that you can't count that on a go-forward basis. Our '18 plan was essentially Sea Ray being at breakeven. So now would be in the - our basis of the 4.20 to 4.40 is a breakeven. The tax benefit that we said $0.40 to $0.50, and I'll just - let's keep it simple and call it $0.50, so if you take the midpoint 4.20, 4.40, $0.50, it gets us up to $4.80, and so we put half of that to my earlier comments about $0.25 moving to the $4.45, $4.65. The other half, it's really kind of in two buckets. The Fitness portion, it's probably about $0.15 going down and the growth and investments are probably a worth about $0.10 of the favorability we get from the tax reform. So essentially, that's the math, James.

But I guess part of my question is do you get that $0.10 back, it seems like you were talking more in terms of that being a timing thing.

We'll get it back longer term because again, as Bill talked a little of some of the things from a corporate and things we're looking at, the tax reform is giving us the ability to look at some longer term investments so that we might all get kicked off and going on in 2018. So it's not going to have a 2018 impact, and maybe even not a lot in 2019, but we would expect a future periods to benefit, yes.

Got it.

And James, I would look at it this way. We're doing more faster, should get benefits earlier but - and it derisk the plan for 2020, right, by having some incremental earnings improvement that, I would be the first to admit we haven't necessarily incorporated fully into our 2020 targets.

And then my second question here. So on the Fitness side, obviously, the biggest take away coming out of the third quarter was that that wasn't up to expectation, and we had to really sort of reset expectations on that business. But seems to be the biggest take away of this call is well, I guess, how do we have confidence that over the course of the next year, we won't be bringing down expectations on that business again? And I guess, specifically, and I understand how dedicate it is to talk about a particular customer, but given that your - I believe, your biggest customer in Fitness side is making a decision, whether it's to stay with you or growth somewhere else some time mid-year. How does that factor into this guidance, if it's the guidance still - I guess, for time to come from how you think about that? And does that affect how you look at the business and for some reason you might lose some contracts?

Yes. So let me start with some of the - when we talk about some of the fourth quarter perspective. I think we've been a fairly clear. The biggest item we had in the fourth quarter was really around the freight impact. And so I would consider that, a, call it, a rifle shot of an issue to go work around at address from either logistics, efficiency, price, whatever those equations are. So I categorize that very differently, James. I think the second part, I would just tell you, our guidance clearly, to the customer, it doesn't assume the worst case scenario but nor does it is the assumption that everything is going to be status quo. And fundamentally, that's the manner in which we've looked at creating the guidance for Fitness.

And our next question comes from Joe Altobello from Raymond James. Please go ahead.

Quick question, I guess, I'll pick up on the Fitness or the RFP there. What's the timing that the guys will find out about that? And where is the test now? I believe all three of your each in five locations at this point?

Yes. A lot of the detail you really need to talk to Planet Fitness about. They have indicated that they'll make a decision in the first quarter. And they've indicated there's five locations per - and of course, we're in a five locations, so we know that piece as well. So Joe, it's a decision they're going to make, at least, we've been told they're going to make somewhere in the first quarter.

And then secondly and more strategic, I guess, with Sea Ray soon to be gone officially, how does that change the way that you guys operate the Boat business in terms of allocating resources. I mean, it seems like your sales outlook for '18, a little bit slower than '17, I know you probably don't get as much ASP improvement this year as you did last year. But I would think that would Sea Ray gone that visible out of resource you can divert toward some of your other faster growing brands like Whaler or Lund for example?

Yes, I think I'd answer it two dimensions. One of those is, obviously, it freeze up management time and focus that gets very clear. I think the other part of just how much gets freed up is a function of who the buyer is and what services are the things they want to have for some short period of time. So some of that is still detailed, that I'll have to be worked through when they actually get to a transaction but, clearly, focused time and attention of the Boat management team gets more directed and there's goodness that comes out of that.

Joe, I'll just comment that the capital allocated to our other brands was not affected by the presence of Sea Ray in the portfolio. Our investments were very much on what brands required and not necessarily tilting investment towards one brand as the expense of others.

And our next question comes from Joseph Spak from RBC. Please go ahead.

First one, I guess, a couple of just housekeeping. Sorry if I missed this, but can you quantify the impact in Marine Engine this quarter, ideally between, let's say, like warranty litigation and then the investments? So what was sort of more for the business and what was more out of the ordinary?

Joe, that's kind of a low to mid-single-digit millions sort of number that affected comparables between years.

And then just to follow-up on the RFP. I understand that's somewhat out of your control but can you remind us of what's embedded in your guidance for '18? And I guess, after '20 in terms of your retention?

Yes. I'm going to just repeat what I said before, and that is we haven't assumed the worst case scenario, nor have we assumed that everything remains the status quo, and that's really how we've given our guidance for 2018.

Okay. And then just…

Joe, if you look at top line assumptions of low single-digits and flat operating margins, we certainly incorporated some change, but we're not going to get into the details of what's there because then we start having to deal with the variables about we've got in for other things as well. I think the top-level kind of speaks for itself.

And just to circle back on a topic you're talking about before in terms of returns in Fitness. Look obviously, they're lower than they were and we don't have access to the complete maybe financial picture as you do. But if we look at just returns on the assets by sort of segment, as you described, there's clearly a wide gap now between Marine and Fitness. And it used to be narrower and so maybe you can get back to that. That gap still - it seems like it was always persistent. So I guess, the question is I know you're not the constrained for capital per se, but how do you really think about and/or justify commenting that incremental dollar capital when that return profile even in sort of the best case, was always different and lacking?

One thing I'd point out, Joe, is that the Fitness business compared to some of the Marine assets, still carries considerable amount of acquisition intangibles associated from the original purchase of Fitness combined with other acquisitions we've made along the way. So in some ways, you're dealing with apples and oranges between the two comps. That being said, we fully recognize that in a business where margins have declined by 300 basis points in a low growth, we're in a position where returns on invested capital, especially when combined on asset levels with intangibles are some place where we need to go to work to improve. And then I think our plans address incremental improvements in margins and a top line growth without a material level of investment required to make that happen. So I think most of the money we need to have spent has already been spent to drive the growth. Now it's just a matter of whether we monetize those investments or not.

And I realize ROA's isn't imperfect measures to my point to what we have. But I mean, I guess, so to your point, the plan assumes that if you can fix this business, you can drive the growth, and then really ROIC between the Marine and Fitness is pretty negligible?

Well, I think realistically, Joe, the ROI's of Fitness will never approach for Mercury's are given the acquisition intangibles. I think our plan is based upon driving improvement in ROI seized over time. And if we're able to accomplish it, that we think we generates - that being said, I'm not going necessarily engage in a conversation on to specific targets of what sort of ROICs we are looking for by segments and what might be embedded in portfolio decisions we make.

Thank you. This concludes the Q&A session. I'll now turn the call back over to Mark for final remarks.

Yes, I just want to thank everyone for your time and focus, attention, some very meaningful questions as we went through this. 2017 is reported and done and quite frankly, our focus is all around 2018. We think we've got some really exciting things coming on, on the engine side of the equation. We're encouraged by all the interest we've been seeing on the Sea Ray side, and as we mentioned before the Fitness business, the new products there and the maturing of that, and the technology strategies that go with it, all to us point some very positive things for 2018. And I thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. And you may now disconnect.