Brunswick Corporation (BC) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to Brunswick Company's (sic) [Brunswick Corporation's] 2018 First Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. [Operator Instructions] Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I'd now like to introduce Ryan Gwillim, 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 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 of 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 reconciliation sections of the consolidated financial statements accompanying today's results. As a reminder, on December 5 of last year, we announced our intention to sell our Sea Ray businesses, including the Meridian brand. Starting with the fourth quarter of 2017, we are reporting the 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 now like to turn the call over to Mark.

Thank you, Ryan, and good morning, everyone. Our first quarter performance was an excellent start to what we believe will be another year of successful execution of our strategy and the creation of shareholder value. Our marine businesses continue to benefit from strong demand for outboard boats and engines, successful new products, and our strategy to grow the parts and accessories businesses. As a result, our marine businesses had revenue growth of 8% in the quarter, with a very strong increase in operating earnings versus our first quarter of 2017. At this point in the marine season, our current outlook for the global marine market remains in line with our initial expectations. While unfavorable weather conditions in certain markets, including the Northeast and Midwest regions of the U.S. and Europe, have contributed to a slightly lower start to boating activity and the marine retail selling season. Based upon feedback from our boat shows, dealer sentiments, reaction to new product offerings across the industry, the favorable replacement cycle dynamics and positive global macroeconomic conditions, we remain confident in our view of the industry for 2018. We continue to focus on product leadership as evidenced by Mercury's launch of the 175 horsepower to 225 horsepower V6 outboard engines, the first in a series of major outboard engine launches planned for 2018. These products, which will begin shipping in the second quarter, along with other award-winning, new products within our other marine categories, respond to the customers' desire to migrate to products with enhanced features, resulting in overall business results that exceed the market. In our Fitness segment, we also continue to execute against our digital strategy, as demonstrated by our release at IHRSA of the Halo Fitness Cloud, a dynamic software platform for club operators that both enhances the exerciser experience, while simplifying facility management. In the quarter, the business experienced improving demand in certain European and Asian markets which drove top line growth, while margins remained under pressure. Finally, we continue to make progress on both of the Sea Ray sale and the Fitness separation, which I will address further in my closing comments. Turning to the first quarter financial metrics, revenue increased by 6.8% year-over-year, with growth in all three segments. Gross margins were 26.6%, with gross margins for the combined marine businesses increasing by 60 basis points over the first quarter of 2017. Adjusted operating earnings were up 6%, led by the performance in our marine businesses. Diluted earnings per share, as adjusted, of $1.01 were up 15% year-over-year, also due to the strong performance of our marine businesses, along with a lower effective federal tax rate. Overall, a very strong quarter and a great start to 2018. Now, I will provide our perspective on the U.S. marine market. Industry unit volumes were flat based upon preliminary SSI data for the first quarter, which when fully reported, on average, comprises about 17% of the year at retail. As noted earlier, this performance reflects the impact of unfavorable weather, which also delayed delivery and registration of boats and has resulted in a later start to the marine retail selling season in certain regions of the U.S. As a reminder, SSI reporting for the first quarter remains preliminary as this current report only reflects 63% of the activity in March with several keys states not yet reporting. This is significant because March normally comprises about half of the retail activity in the first quarter. One category enjoying strong growth continues to be fiberglass saltwater boats over 23 feet, which has been an area of significant investment for Boston Whaler and Mercury in recent years. As I noted in my opening remarks, we continue to be confident in our marine market outlook and have not changed our forecasted assumptions of domestic unit market growth of between 3% and 5% for the full year. Next, I would like to share some perspective on our retail data for boats based upon our pipeline inventory activity. Against the very strong first quarter 2017, our internal U.S. retail boat registrations for the first quarter of 2018 were up 3%. This performance is above the overall industry and better than the results reflected in the SSI retail performance data reported for Brunswick. Global retail unit sales decreased 1% over the first quarter of 2017, also against a very strong comp. Next, I would like to review with you our current perspective on regional marine markets. On a constant currency basis and excluding acquisitions, marine revenue for the first quarter was down slightly in Europe against a very strong comparable quarter in 2017, where growth was 12%. As dealer sentiment in Europe remains positive and with more than 85% of the annual selling season ahead of us, we continue to believe that this slight decrease will normalize and that the international markets will continue to be a tailwind throughout 2018. In Canada, our retail and wholesale unit demand for the year improved versus the prior year, as the recovery that began in 2017 continues. Our 2018 outlook assumes that the demand environment in Canada will continue to improve. The balance of the international markets continued to show modest growth as we continue to benefit from engine share gains in commercial markets, capitalizing on our expanded range of SeaPro commercial FourStroke engines and strengthened distribution channel relationships across the regions. In summary, we expect full year 2018 global unit market growth to also be in the 3% to 5% range. Our revenue growth will continue to outperform as a result of the market share gains and favorable changes in product mix, each positively affected by our continued new product launches throughout the year. Moving to our Fitness segment, revenue increased by 4% in the first quarter, with 1% growth on a constant currency basis. Fitness segment sales in the U.S. were down 5% in the quarter, primarily the result of lower Cybex sales in advance of its new product launches, along with weakness in several vertical markets, partially offset by gains in sales to the domestic health clubs, which showed a strong increase in the quarter. Domestic sales would have increased slightly for the quarter had Cybex revenue just remained consistent from Q1 of 2017. European sales experienced strong growth in the quarter, with higher sales to both direct markets and distributors. Asia Pacific also continued to see strong growth, with China and Japan leading the way. We anticipate that these positive trends will continue in 2018, resulting in sustained growth in these regions. Our global growth in cardio offering has been influenced by certain delays in new product launches that we have referenced in the past several quarters. Moving forward, the new Life Fitness, Integrity and Cybex cardio products are now fully available, with two remaining updated console options to be released in the second quarter. We expect that these products, along with the Halo suite of digital solutions that were launched in March, will continue to accelerate global demand. And now, I'll turn the call over to Bill for additional comments on our financial performance.

Thanks, Mark. For the first quarter, sales in our combined Marine segments and Fitness segments increased by 8% and 4%, respectively. From a geographic perspective, consolidated U.S. sales increased by 4%, and sales outside the U.S., on a constant currency basis, increased by 6%. First quarter adjusted operating earnings were $118.3 million and our adjusted operating margin was 10.2%, which was slightly lower than Q1 of 2017. The company adopted the new revenue recognition standard on July 1 of this year, using the modified retrospective approach. The adoption of this standard does not have a material effect on the comparability of our results with prior periods. As anticipated, the adoption of this standard had a net positive impact to earnings comparisons of approximately $2 million, mostly in the Boat segment. The full year impact of the new revenue recognition standard on earnings comparisons is expected to be minimal. Please refer to the schedules included in today's press release, along with our Form 10-K for more information. Turning to our Marine Engine segment, sales in the first quarter increased by 9%. Propulsion revenue, led by strong gains in outboard engine sales, increased by 11% year-over-year. Sales growth in outboards continues to benefit from our strengthening market position, particularly in the 300-plus horsepower range. P&A sales continue to report solid consistent growth, including gains in our controls and rigging products, as well as in our distribution businesses. I would like to note that P&A activity has also been unfavorably influenced by the delayed start of boating activity due to weather conditions. Mercury's operating earnings in the quarter grew by 9% and operating margins were 13.9%, which was in line with the prior year. The increase in operating earnings in the quarter was primarily due to benefits from higher net sales and favorable movements in foreign exchange rates, which were partially offset by planned spending increases stemming from new product introductions, capacity expansion and product development. In our Boat segment, first quarter revenues increased by 7%, with strong growth in the fiberglass freshwater boat businesses, which is comprised of our Bayliner brand, along with our European brands, Quicksilver and Uttern. Aluminum freshwater posted solid growth, including gains in pontoons resulting from successful efforts to increase production levels. Sales of aluminum fishing boats were flat, reflecting the impact of Bass Pro's acquisition of Cabela's, which was a meaningful channel for our Lowe boat brand. Finally, revenue in the fiberglass saltwater business was comparable to a very strong first quarter of 2017. This category is poised for growth over the remaining of the year as production of the new Realm models ramps up and capacity expansion efforts continue. Global wholesale shipments for the first quarter declined 2%, and were down 5% in the U.S., both against very strong comps in the first quarter of 2017. Changes in average selling prices increased by 8% in the quarter on a constant currency basis. These increases resulted from changes in mix across the portfolio as customers migrate to boats with more content and higher horsepower engines, which is adding to top line benefits. In addition, we have raised prices in response to inflation, particularly in pontoons. Our 2018 plan anticipates continued growth in average selling prices, but at a slightly lower rate than 2017. Dealer pipeline inventories ended the quarter at 39 weeks of boat on hand measured on a trailing 12-month retail basis. This was one week higher than prior-year levels, which is to be expected given the current – given the early season retail market dynamics that Mark described earlier. We believe that our pipeline levels are appropriate given our growth expectations in various boat categories and markets as well as dealer sentiment and outlook for the market in 2018. For the full year, we are planning for weeks on hand at year-end to be comparable with year-end levels at the end of 2017. Consistent with this assumption, we're also assuming wholesale growth rates will slightly trail retail unit growth rates. The Boat segment's adjusted operating earnings for the quarter grew by $5 million, resulting mostly from higher sales and the positive timing benefits from the adoption and implementation of the new revenue recognition standard. For the first quarter, adjusted operating margins were 8.1%, which is 120 basis points higher than Q1 of 2017. Shifting to the Fitness segment, sales for the first quarter increased by 4%. Sales of commercial cardio decreased slightly in the quarter as strong sales to health clubs were more than offset by declines in sales of Cybex product in advance of new product introductions and sales to certain vertical markets. Commercial strength sales continue to grow globally as demand for these products increases due to our well-positioned product offering and changing exerciser preferences. Adjusted operating earnings for the quarter were at 5%, which was 380 basis points lower than a year ago. This reduction was caused by margin declines, reflecting several factors, including higher freight costs, challenging pricing dynamics in certain international markets, unfavorable changes in product and customer mix and cost inflation. These factors were partially offset by benefits from higher sales. On freight cost, Fitness business continues to experience a number of challenges, including higher national transportation rates, along with additional complexities around the shipment and installation of new products. The business is focused on resolving the issues under its control and adjusting price where appropriate. Next, I will discuss the impact of foreign currency is having on our performance. In the first quarter, sales comparisons were positively affected by approximately 2% and operating earnings comparisons were positively affected by $3 million, which was relatively consistent with our plan. Our estimates for the full-year period remain consistent with our previous expectations as we're expecting a positive impact on consolidated sales comparisons of approximately 1%, and a favorable impact on operating earnings comparisons of $10 million to $15 million. These estimates for 2018 assume that foreign exchange rates will remain consistent with average rates over the last three months. Our first quarter book tax rate, as adjusted, was 20.9%. This includes net tax benefits resulting from share-based compensation activity of $1.3 million. This rate is lower than previous year due mostly to the impact of tax reform and came in lower than anticipated due principally to further clarification of the new tax laws. Our updated estimated effective book tax rate for the full year, as adjusted, is approximately 22% to 23%, which is based on tax guidance to date and is also subject to change as additional interpretations of the new tax law become known. Our estimated cash tax rate for 2018 is expected to be in the high single digit percent range, reflecting the favorable impact of a tax refund, along with deductions from capital expenditures and pension contributions. Turning to a review of our cash flow statement, cash used for operating activities was $43 million, which improved by $23 million versus the prior year. This improvement includes the absence of a pension contribution in the quarter, the previously mentioned tax refund and improved operating performance, which more than offset seasonal working capital growth. Capital spending was $35 million for the quarter, which included investments in new products as well as capacity expansion initiatives, mostly in our Marine segment. Free cash flow for the quarter was an outflow of $73 million, down $30 million versus 2017. Let me conclude with comments on certain items that will impact our P&L and cash flow for 2018. Aside from the changes in tax rate, which I discussed earlier, the 2018 estimates on these items are not materially different from our estimates from the last earnings call. Our current plan reflects diluted shares outstanding of between 88 million and 88.5 million shares for the full year, which includes the planned share repurchase activity in 2018, which I will discuss further on the next slide. We continue to project free cash flow in 2018 to be greater than $275 million, which excludes costs related to the planned Fitness separation, as we will be treating that spending as ex items consistent with our earnings metrics. Our business units continue to remain focused on generating strong free cash flow, which will allow us to continue to fund future investments and growth, including acquisitions, and successfully implement our capital strategy. Our guidance includes pension contributions of between $70 million and $75 million, consistent with our de-risking plan. However, we may accelerate contributions into 2018 as we can lower our after-tax cost of funding the plan by making contributions before the middle of September. Under this scenario, our contributions could reach $130 million to $150 million in 2018. We continue to execute against our share repurchase program, with repurchases of $35 million completed in the first quarter. With $100 million of planned share repurchases in 2018, we continue to view our share repurchases as an attractive use of capital and will balance additional repurchases against other investment opportunities. I will now turn the call back to Mark to continue our outlook comments.

Thanks, Bill. Our outlook for 2018 remains generally consistent with our recently provided three-year strategic plan and reflects another year of outstanding revenue and earnings growth, with excellent cash flow generation. We expect our Marine business' top line performance to benefit from the continuation of solid global market growth, along with the success of new products. In the Fitness segment, we expect to benefit from recently introduced new products, particularly in the second half of the year, although we have lowered our expectations slightly, which I will address in a moment. We are raising the lower end of our revenue guidance for 2018 and now expect revenue growth of 6% to 7%, absent any significant changes in the global macroeconomic conditions. For the full year, we anticipate improvement in both gross and operating margins in our Marine businesses as we plan to continue to benefit from our new products, volume leverage, cost reductions related to efficiency program and changes in the foreign exchange rates, while continuing to invest in our growth-related initiatives. In the Fitness business, we are projecting margins to decline, but year-over-year comparisons to stabilize as we move toward the end of the year as the margin pressure discussed earlier moderate, including assistance from the positive effects of recent new product launches and cost management actions. Our plan assumes the inflationary factors are mostly offset by price. However, the impact of trade policy changes could possibly create some additional pressures moving forward, which our business would address accordingly. Operating expenses are estimated to increase in 2018 as we continue to fund the incremental investments to support growth. However, on a percentage of sales basis, we expect them to be consistent with 2017 levels. We're also narrowing the range of our full-year expectations of diluted EPS, as adjusted, to $4.50 to $4.65, which takes into account the benefits of a lower tax rate, continued success for Marine business performance, potential inflationary pressures and an additional revenue and margin risk in the Fitness business for the remainder of the year. Looking at the second quarter, we anticipate revenue growth to be at the top of our annual guidance range. We're also planning for higher spending levels on the new product introductions and product development in the quarter and for adjusted EPS to increase by a mid-teens percentage over the second quarter of 2017 EPS. So turning to our segments, our 2018 forecast includes ongoing revenue and operating earnings growth in our Marine Engine segment. Specifically, supported by continued strong demand, we are increasing our revenue growth target for the year to the high single digit percent range, with solid improvement in operating margins. Our Engine segment is expected to continue to deliver growth that exceeds the market. We have the freshest lineup of outboard engines in the industry, with 2018 adding to that momentum. And by the end of 2018, on a run rate basis, more than 80% of our outboard revenue will come from products introduced since 2012. Also in the quarter, we launched NAUTIC-ON, which provides a connected boat system that enables you to stay connected to your boat from anywhere in the world, while also allowing your boat to easily relay boat system diagnostic information to your service provider and promptly get the help you need fast. Importantly, we're also enhancing and expanding our manufacturing and distribution capability to drive future growth, while continuing to invest in research and development, and capacity expansions and modernizations where necessary to support the achievement of our growth aspirations. This achievement will also require an energized and talented workforce. Accordingly, in the first quarter, Mercury extended the agreement with its labor union in Fond du Lac, Wisconsin, through 2023 enabling Mercury to be the employer of choice in the area. Our Marine Engine segment continues to strengthen its competitive position in many facets, led by product leadership, with 2018 shaping up to just be one momentous year for this business. Moving to the Boat segment, we're targeting annual revenue growth for 2018 in the high single-digit percent range, led by continued strength in the fiberglass and aluminum freshwater markets, including strong demand in the pontoon business. We anticipate that operating margins will improve modestly for the full year. Our Boat Group remains a market leader in recreational boating with many of the industry's most recognizable brands, led by Boston Whaler and Lund. Our portfolio of companies continue to compete and be market leaders in the widest number of boating segments. They're sold through the strongest distribution channel, and we win with product leadership, resulting from continuous investment in growth. Our Boat business provides an excellent return on invested capital and we continue to invest in these businesses. For example, we're currently increasing capacity at Boston Whaler to expand our ability to produce larger boats, which also complements the strong and expanding Mercury outboard engine platform I just discussed. In our Fitness business, our plan projects revenue to grow in the low single-digit percent range over 2017 levels, and we expect operating margins to remain under pressure, while stabilizing toward the end of 2018, as I just discussed. There is an element of uncertainty as it relates to our relationship with Planet Fitness. We've provided an aggressive response to the Planet Fitness RFP, and we believe we are the leading partner to support Planet Fitness' goals for growth, technology and development, and improve club operator and user experience. However, we've incorporated a more conservative view of the second half into our plan based upon an expectation that Planet Fitness will offer a broader equipment choice to its franchisees. We continue to have a very strong relationship with Planet Fitness and feel we're best positioned to satisfy their equipment needs on a go-forward basis. As discussed earlier, the second quarter marks the completion of the rollout of the updated Life Fitness and Cybex cardio products, complete with a wide variety of console options, including the launch of the high-end SE3 HD console that is compatible with the new Life Fitness, Integrity cardio lineup. We believe that these new products, which also will enable the continued uptake of our digital solution offerings, will benefit sales and margins in the back half of 2018. We remain encouraged by the overall trend in the global fitness marketplace and the progress we're making to take advantage of the growth opportunities in newer segments such as boutiques and group fitness. Evidencing this progress is the recently completed three-year agreement with Orangetheory to equip their international locations with specialized equipment and a unique user interface to motivate and connect members. We believe that we're well-positioned to leverage these trends and we'll position our equipment and digital solutions to help fuel this growth. Overall, the Fitness business continues to position itself to succeed in the changing commercial fitness market. In closing, we believe that 2018 will result in another year of strong revenue and earnings performance, along with excellent cash flow generation. Led by our strategic pillars of product innovation, being the best partner and operating excellence, we remain well-positioned to execute against our plans and to take advantage of market opportunities in the Marine and Fitness businesses. We are also making progress on our two portfolio actions. The sales process for Sea Ray is advancing as planned and our goal remains to complete the divestiture in the first half of this year. In March, we announced our intention to separate the Fitness business into a separate publicly-traded entity. The work on this planned separation is underway, but still early in the process. We now expect to file the initial Form 10 registration statement in the third quarter of this year and remain on track for completion by the end of the first quarter of 2019. We'll obviously have more information on the separation process on the second quarter call. I'm excited about this business moving forward. I'm confident in our management team and the over 15,000 dedicated Brunswick colleagues are also committed to delivering and executing our growth strategy for 2018 and beyond in a continued effort to deliver value to our shareholders. And with that, Bill and I will be happy to take your questions.

Thank you. We will now begin the question-and-answer session. And our first question comes from Gerrick Johnson from BMO. Please go ahead.

Hey, good morning. Last year, I believe, you were capacity constrained on aluminum fishing pontoons. Were you able to deliver all you needed in the quarter and do you expect to do so going forward?

Yeah, we were able to do so in the quarter. If you go back, Gerrick, to the specific issue on pontoon, it was more of a supplier issue than internal capacity capabilities. But we've been able to make productivity and efficiency changes within our operations and fundamentally have been meeting the demand. The pontoon market is very strong and I think the whole industry's kind of been sold out, okay? And I don't – so I don't want to mislead you on that. But fundamentally, we're building and meeting our expectations there.

Okay. And in that market, what has the retail reaction been to an increase in selling prices? Pontoons I would think would be a little bit more price-sensitive consumer.

Well, there's a wide range across the pontoons, whether it's length and features and horsepowers and the list goes on there. But again, fundamentally, the industry's sold out for the year, year being the model year, and therefore, those pricing actions have been implemented and fundamentally are achieving their desired result.

Gerrick, I think the one thing I'd point out there is that pontoons is not necessarily a market where there's a healthy level of used product out in the marketplace to satisfy demand. So I'd say what we're seeing now is in a market that's been strong, we continue to see really nice strength in that market moving forward...

Great. Thank you, Bill. Thanks, Mark.

... in spite of prices going up. Yeah.

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

Hey, good morning, guys. Just wanted to touch on the new engine platform you rolled out in Miami. I know you haven't started shipping that yet, but can you give us maybe a sense of customer reception to that lineup? And then, remind us, again, what your market share is in the 175 horsepower, 225 horsepower range and maybe where you see that going over the next 12 or 24 months?

Yeah, there are two things. I mean, as I said in the comments, we'll begin shipping the new V6 175 horsepower, 225 horsepower. That'll happen in the second quarter. Customer reception to that has been just phenomenal. I mean, we started previewing that product with our customer base, lot of the OEMs last fall already, and had them on the water, and we've just had nothing but great feedback. I do not worry at all about being able to sell all the ones we are building. In terms of the other part, our horsepower in that – our market share in that 175 horsepower to 225 horsepower is about half of our share, Michael. So put that in the low-20s is where we're at on that. So we have a lot of upside to grow in that area.

Okay, that's great. And then – go ahead.

Keep in mind, Michael, that in that space, we've also been making manufacturing investments over the last two or three years in anticipation of this product launch. So there is – through the vertical integration process, everything from casting all the way through to coating and assembly, the capacity is all been planned to handle increased demand from this launch. So we feel like we're very well situated going into 2018 to meet demand that's going to be there for the product.

Okay, that's helpful. And then just...

So Michael, just a real quick add to Bill's even. As we've done the new 150hp and the new 75hp, 90hp, 115hp and even the top end of the Verado addition, all that was basically being put on existing assembly capacity, but we were adding casting and machining and coating stuff to go with it. This series of product launches we're doing in 2018, of which the V6 is the first one, it has a significant assembly capacity going in with it. So this is great news for us in the current market.

Okay, that's helpful. Thanks. And then just on the Fitness side, margins for the quarter a little compressed and several reasons. But going back longer term, we've seen a more – maybe more structural compression there and then the business seems to be shifting a little bit now more towards a technology services play. So is there a way to think about maybe how the margin structure of that business looks longer term as it continues to evolve?

Well, yeah, I think if you look at other models that are out there as the digital solutions tend to carry higher margins on them than the product margins. So I think one of the things that as we have larger and longer term as the digital solutions becomes a bigger piece, that will be part of the mixing up on margins versus the pure equipment play.

Okay. Thank you.

And our next question comes from Craig Kennison from Baird. Please go ahead. Craig R. Kennison - Robert W. Baird & Co., Inc.: Good morning. Thanks for taking my question. I wanted to follow-up on the Engine question Mike had. But I think your largest competitor has struggled with capacity issues at the same time that you've made some really good bets on product and capacity. I'm just wondering if you think some of the share gains you will have earned because of that bet will translate into more sustainable wins. In other words, have you seen wins with OEMs that might prove more durable than maybe just a temporary fill-in?

Yeah, I don't – Craig, I don't view that we've really had temporary wins with anyone. We've been growing our share of the product that's coming out. My comment that 80% of the revenue was going to come from product introduced in the last six years, and the other one, I would – the reason I don't see this as temporary is if you really go back from 2011 to 2017, between R&D and capital into Mercury, it's about $1.1 billion, and I would challenge you that no one else is making those kind of sustained investments in a business, and I think we're clearly differentiating ourselves in that space. Craig R. Kennison - Robert W. Baird & Co., Inc.: But just a follow-up, do you see OEMs and other partners kind of realizing that maybe Mercury is a better long-term partner that would enhance your view on growth in that space?

Well, you've got – some of our competition, they may have longer term supply or multi-year supply arrangement. And so those will convert as time or could convert as time. But I would tell you where there's a mixing of the business with an OEM, and we're continuing to grow our share with that mix and/or picking up our own exclusive customers as well. Bill mentioned, for instance, in his comments about the Bass Pro acquisition of Cabela's having some impact on our Lowe boat business, but then fundamentally, we picked up all the engines. So we have people very willing to align themselves with Mercury and the Engine business. Craig R. Kennison - Robert W. Baird & Co., Inc.: That's great. Okay, thanks.

And our next question comes from Tim Conder from Wells Fargo.

Thank you. Good morning, gentlemen. A couple of things. On the Planet Fitness part, just wanted to clarify here. Basically your expectations, if I'm understanding them right, are unchanged. You continue to expect to win a majority of that business, but not the same level as the prior contract, is that the proper way to interpret that?

Tim, what we've really said in the – Planet hasn't announced anything yet. And so our belief in those conversations is that they're not going to do an exclusive arrangement. And as a result of that, we've adjusted the mix down until we actually know what and how they're positioning, that's a little difficult. But we are the incumbent, we've got a great product, we think we've got great technical solutions, but it's clear that I think they're not going to have an exclusive agreement and therefore, we adjusted our second half down a bit for that.

Okay, okay. But I mean, your – I think you'd stated before that your expectations were, you would be at the same level. So, has that level – the new level, I should say, has that changed at all?

Yeah, yes, Tim. The new level is a slight – is a lower participation than previous, and that's what's going to incorporated in the second half. Yes.

And that was incorporated in your guidance 90 days ago also, correct?

Correct.

Okay.

Well, no, incorporated in the guidance 90 days ago was more of a continuing current state. This incorporates a little bit of a reduction from that.

Okay, okay. Okay, that helps. Thank you. And then just wanted to read this if the margins on the engines, Bill, I think you alluded to, given the season – some of the impacts of weather that hurt the P&A, but Bill or Mark, whoever wants to take this, are you – should we start to see here more in Q2 and beyond likely share gains from your larger competitor given their delivery issues that they've been having and continue to have, and then also as the V6 products starts to get into the market? And then therefore, margins, we should see better margin performance over the balance of the year in the Engine segment?

Yeah. We – I think the direction we gave, we said we were going to have margin improvement in the Engine business for the year, that's making the assumption, obviously. And as we move through the year, we're going to have some of the benefits from the V6 and other launchers that will follow. And obviously, we've never been bashful about saying that new products we're bringing out are generally at a lower cost than the product they're replacing. So we'd expect to see some margin expansion as we go across the year, based upon the new product, but also the elimination of some of the launch and start-up, and investments in that regard.

Okay.

Tim, I think the long-term view here is that we've got – in the second quarter, starting to see some of the benefits of the new engines that Mark referenced. But there's still quite a bit of investment going on. A, making sure that we're doing the right amount of promoting in advance of the products coming out into the marketplace, especially in customers' hands. And then two, we're not turning the spigot off on product investment and new programs continue, they all have, I think, very good long-term prospects and the second quarter is a period of time where we see maybe a little bit more investment, which, if you start to think about timing of margins, the back half of Marine segment, margins ought to be improved versus kind of more flattish in the first half.

Okay, okay. And then last question, gentlemen, on boats. Ongoing, I think you were doing expansion in Whaler last year. You mentioned you're doing some further expansion in the high-end. Was that planned, or ending in late last year and into now, are you just continuing to see greater than expected demand requiring further expansion?

No, I think, Tim, I guess the clarification, it's a multi-year expansion relative to Whaler all the way from purchasing the land next door and parking lots, and then putting buildings where the parking and increasing lamination or increasing assembly or increasing. So it's a multi-year capacity expansion that we're doing on the Whaler facility.

Okay.

But it is in response to strong demand and probably a bit earlier than we would have anticipated when we did the first expansion a couple years ago.

Yeah.

Demand for the product has far outpaced what our expectations were at the time.

Okay. Thank you, gentlemen.

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

Hi. Good morning. So a lot to like about the quarter and the guide, but, of course, I'm going to focus on Fitness, which is where maybe there's a little bit of a dislocation versus how we and you were thinking about it. So I guess my first question to follow-up on Tim's question about Planet Fitness. So, it was my understanding that with exclusivity came better pricing. So if you're no longer going to be exclusive, I would think that that would be a negative to sales and a positive to margins. The guidance change would seem to suggest the opposite of that, that the top line guidance for Fitness, as an entire category, is unchanged, whereas the margin guidance is down. So I don't know if those two are connected in any way, but help me understand that.

Well, I mean, all of those matters. The easiest way to answer is it's all part of the negotiation and discussions that are still going on. There's been no finalization or announcements at this point by Planet Fitness.

But in terms of how you're factoring it into your guidance, you said that you're no longer assuming that you're going to have – yeah.

So we factored down some volume declines, but based upon the fact we don't think it's exclusive, but there's puts and takes, and we're still in negotiations, James. So that's the best place to leave that.

Okay. Let me ask you this then. The first quarter, it seemed, versus how you were thinking about it previously, better than expected revenues, dramatically worse than expected margin. You're bringing down the margin for the year. When we talk about the various issues afflicting the Fitness business, it's a similar lift to what you've talked about in the past. So I guess, what's incremental on Fitness? What sort of took you by surprise that's leading you to keep the revenues the same, but bring down the margin assumption?

Well, I mean, there's – freight, we saw it first in the fourth quarter, so I would clearly keep the element of freight as something that we haven't been able to totally turn that spigot off. And part of that, James, is really rate related nationally. So that's from a new development. The other I'd say is, although we buy very little foreign steel, it's a small, small, small percent. We're seeing the impact of some of that coming through for domestically purchased steel. And so there's some new factors like that around some continuation of freight, which is a bit of new news, but also the impacts of the duties and tariffs that are likely and starting to happen a bit coming through us as well as we look at the business and the balance of the year. And Bill, I don't know if you want to...

No. That's...

I mean it's some of those things that are playing. It's difficult when somebody is talking about putting a tariff in fairly quickly and the market moves on steel, where you've got orders and pricing and things out there to get those changes in. So there's a time delay there, James.

So just so I'm clear. Did that – some of that guidance includes new duties and tariffs on some of your international product?

It includes higher cost of raw materials that could result from market – that could be tied into market prices, James. So we are assuming that our input costs are going up.

Got it.

And we'll not (52:09).

And then, I guess, just more broadly – got it. So I guess bigger picture here. We sort of reset our thinking on Fitness after 3Q, another time after 4Q. We're, to some degree, resetting expectations in 1Q. I guess, what assurances can you give us that you finally got your arms around the issues pertaining to Fitness? And I guess as I think about Fitness as a separate entity, the increased focus that comes with that, will that allow the business to not only better address some of these issues, but may be better anticipate some of these issues?

Well, I think it's pretty broad question there. I think the first part of this is there are new elements that have come in from – I don't think in the third quarter, we're thinking about tariffs on steel. I don't think we're seeing some of the freight impacts and things that we saw in the third. So there's been new elements, James, that have come into play as we've moved from third to fourth to first. I think the other – I don't think it would surprise you in saying this. The new product and the new model launches didn't go as smooth as we expected in the third quarter, and we've had some carryover of that. But I think the important thing is really that as the guidance we've given and we talk about, I think the exiting of 2018 is going to be at a different place than we are today. And I think that's the real important element for – as we look at 2019 and beyond. But there's some new variables that have come into play and I would tell you the product launches weren't as clean as we would have liked to have seen them.

Got it. That's helpful. Thanks, guys.

And our next question comes from David MacGregor from Longbow Research. Please go ahead.

Yes. Good morning. Congratulations on the quarter.

Thanks, David.

Just while we're talking about kind of raw materials and some of the inflation around tariffs, I mean, it wasn't only steel, it included aluminum as well. So I guess I'm wondering about your aluminum fishing boat business and just become a margin headwind into the second half?

Yes. So we buy very, very little foreign aluminum as well. The thing you've seen, though, is obviously aluminum prices going up. When there was the actions around Russia, you saw the stuff spike. They pulled some of that away, prices overnight dropped about 10%. So there's a lot of volatility in the aluminum market. But in the case of things like our pontoons and the aluminum fish, we've obviously – it's not a function of the tariff per se, it's the function of literally how the domestic market's going to respond to the – with that tariff being in place. And fundamentally, we think everybody's going to be affected equally there and it's probably going to result in pricing across the board to the industry, which isn't material enough, in our opinion, to really change the demand profile and therefore, shouldn't impact our margin profile.

Have you advanced on pricing on those categories now or is that something you'd approach maybe later in the year?

Yes. Yeah, we have already made those – some of those announcements. And then typically about this time of the year, we're doing pricing for 2019 model year. So we've already taken some action, and we'll be looking at 2019 as well.

I mean, is this an issue that we need to think about with regard to the fiberglass product as well just with resin prices and everything else there?

No, the resin stuff – those things are more around the oil side, and...

Yeah.

...a lot of that stuff is – it's not as tied to purely oil as one might think, but those – a lot of those things are in multi-year contractual arrangements as well.

Okay. My second question was just there's been sort of a longer-term concern about your ability to attract first-time boaters. So I guess I just wanted to take your temperature on opening price point boat product and maybe just the Bayliner brand or just at lower end of the market, lower price point. What kind of traffic you're seeing there and how that's trending?

Well, Bayliner – I mean, first of all, the Bayliner brand is doing extremely well.

Right.

And on the entry side, our Lowe brand is really focused around the entry market coming in. So if you look at some of that, and you'll notice, we – in the slide presentation, we showed the things around aluminum fish, but we also started to separate some of the smaller fiberglass areas. And Bayliner has had some really nice – the other – one other things – one of our customers who – Tracker, for instance, has been running some heritage model and some things around those entrant, I think the data would tell you they're actually attracting used boat buyers into buy new. So there's a lot of things going on, David, about the entry boater and being a tenant to those price points.

Great. Thanks very much.

And our next question comes from Joe Altobello from Raymond James. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Great. Thanks. Good morning, guys. First, just kind of one big picture question on the U.S. powerboat market, obviously, the slowdown, in the first quarter dealer inventories backed up a little bit. You guys did – or it should it be that's weather, which I don't disagree with, but I'm just curious how confident you guys are that it is really weather-related because you are looking for 3% to 5% growth this year after that slow start in the first quarter? And I understand the big months are still in front of us, but what are you hearing from dealers, what are you hearing from customers that gives you comfort that it is weather-related and not just a slowdown after multiple years of expansion?

Yes, and some of this is quantitative and some is qualitative, Joe. But it goes all the way from attendance at boat shows to dealer sentiments. The fact that we're getting dealers, even with the current weather still doing some additional orders because of their anticipated selling out or wanting some more product going into the season, there's things like request for assistance to sell product, we're not seeing any of that kind of things going on. So fundamentally, we think it's more a case of a delay or when you call the dealers, they'll talk about they've got contracts and deposits on the products. So all those things continue to tell us it's timing, not really market demand. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay, great. And then secondly on Sea Ray, it sounds like the timing hasn't changed, you're still looking at late June for a close there. You guys have talked about that you expect to book a loss on that sale, any update on the expected loss?

No, the sales process is continuing as we outlined. We expect to close in the second quarter and that's really the direction and what was communicated. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. Thank you, guys.

And this concludes the question-and-answer session. I'll turn the call back over to Mark for final remarks.

I want to thank everyone for their – the time and attention here today. We think we've started off the year – a great first quarter and I said it in my comments, I think the Marine business and in particular, Mercury, it's just going to be a momentous year for us as we really look at this whole array of new products we're bringing to the market across 2018. And I think as we continue to bring these out, you'll continue to understand our confidence in the guidance and direction we're giving around the Marine business. So, I thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect.