Good morning, and welcome to Brunswick Corporation's 2018 Second 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 like to now introduce Ryan Gwillim, Vice President, Investor Relations.

Good morning. 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 this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results. As a reminder, as a result of the June announcement regarding Sea Ray, starting in the second quarter of 2018, the results of the entire Sea Ray business are reported in continuing operations for GAAP purposes. However, as adjusted, non-GAAP results exclude the Sea Ray sport yacht and yacht operations that are being wound down. Therefore, all figures and outlook statements included in this release incorporate these changes unless otherwise noted. For more information, please see the Form 8-K dated July 19, 2018, which includes metrics on a GAAP and as-adjusted basis reflecting these changes. I would now like to turn the call over to Mark.

Thank you, Ryan, and good morning, everyone. During the first half of 2018, we launched or completed a number of substantial strategic and operational enhancements that we believe will strengthen our marine portfolio and continue to increase long-term shareholder value. We will discuss aspects of these actions throughout the call this morning. We continue to have a favorable outlook on the marine business, which will benefit from unprecedented demand for outboard engines, exciting new products, the successful execution of our strategy to grow the parts and accessories businesses, and a global marine market that remains healthy. Our product leadership strategy was significantly advanced in the quarter, as Mercury Marine completed its largest launch of outboard engines in the company's history, comprised of 19 total models of V6 and V8 engines from 175 to 200 (sic) [300] (00:03:11) horsepower. Shipments of these products began in the quarter as expected; however, production will reach full run rates by the middle of the third quarter. There is substantial demand for these products that is far exceeding our expectations. Consistent with our prior plans, we are planning for significant production increases in the second half of 2018, enabled by recent investments in capacity expansions. However, we expect that the demand will outpace production into 2019 and we are aggressively working on plans to further increase capacity. In our Fitness segment, we continue to focus on stabilizing our operating performance and executing against our digital initiatives with growing acceptance evidenced by recently announced technology-enhanced partnerships with Retro Fitness, Apple, and Orangetheory Fitness. Steady market conditions resulted in a slight top-line growth and sequential quarterly gross margin performance is beginning to stabilize, which is consistent with the plan we discussed on the first quarter call. Turning to the second quarter financial metrics on an as-adjusted basis,…

Thanks, Mark. For the second quarter, adjusted sales in our combined Marine segments increased by 8% while the Fitness segment grew 1%. On a consolidated basis, as-adjusted U.S. sales grew 6%, while international regions increased 7%. On a constant currency basis, international sales grew 4%. For the year, adjusted sales in our combined marine segments also grew by 8% with 2% growth for the Fitness segment. On a consolidated basis, as-adjusted U.S. sales grew 5%, while international regions increased 9%. On a constant currency basis, international sales grew 5%. Turning to our Marine Engine segment, sales in the second quarter for both propulsion and P&A grew by 9%. Propulsion performance continues to be led by double-digit sales gains in outboard engines, where we are gaining market share, especially in higher horsepower products. Our internal outboard engine registration data is consistent with this strong growth with an 8% increase in registrations in the quarter and a 6% increase year-to-date, which is especially notable given the slow start in the first quarter resulting primarily from unfavorable weather conditions. P&A sales again demonstrated solid consistent growth in both products and distribution businesses. We look forward to closing our announced acquisition of Power Products next month, which will bolster the already strong financial profile of our global P&A business. Mercury's operating earnings in the quarter grew by 2% and operating margins were 18.2%. This 120-basis point reduction in operating margin was more than expected due to a number of factors. In addition to higher sales in the quarter, earnings were favorably affected by changes in sales mix and foreign currency exchange rates. However, the favorable impacts of these two items were smaller than anticipated in the quarter. Operating earnings comparison also reflected unfavorable plant efficiencies associated with production ramp-up for new outboard products and…

Thanks, Bill. Our outlook for 2018 remains generally consistent with our recently updated three-year strategic plan targets and reflects another year of outstanding revenue in earnings growth, with excellent cash flow generation. We expect that our marine businesses top line performance will benefit from a steady global marine market, new products, and the successful execution of our M&A strategy as evidenced by our announced acquisition of Power Products. In the Fitness segment, we plan to benefit from recently introduced new product, including console and technology enhancements that we believe will stimulate demand. We now anticipate consolidated revenue growth of 8% to 9% for the full year, including the impact of announced acquisitions, the tariffs, and changes in foreign exchange – foreign currency exchange rates. For the full year, we continue to anticipate improvement in both gross and operating margins in our combined marine business as we plan for ongoing benefit from the new products and volume leverage. These factors, along with certain pricing actions should more than offset the impacts related to cost inflation, as well as the enacted tariffs and other known trade policy changes. In the Fitness business, we continue to project a decline in margins. However, our year-over-year comparisons are expected to stabilize in the fourth quarter, consistent with our discussions on our last earnings call. As a reminder, these targets, along with EPS guidance and the Q3 targets on the subsequent slides, assume a mid-August close of the Power Products acquisition and exclude the impacts of purchase accounting related to the transaction. And all comparisons are against the adjusted figures provided in the Form 8-K dated July 19 of this year, which removes the sport yacht and yacht results from prior periods. Bill and I have referenced tariffs in a number of places on this call.…

Thank you. We'll now begin the question answer session. And our first question comes from David MacGregor from Longbow Research.

Yes. Good morning, and thanks for taking my question. A lot of concern here, I guess...

Good morning, David.

Yeah. Good morning. I just – I want to talk around capacity. Clearly, within the outboard engine business, your new products, the V6 in particular, doing extremely well in the market, but you're in backlog and it's creating plant inefficiencies. I just wonder if you could talk a little bit about how you remedy that situation, how fast you can increase the velocity through those plants and the incremental expense and burden to the second half P&L?

Well, we've got a number of – obviously, as we're ramping up those – the new product launches, as we've talked before, we've added incremental assembly capacity as part of doing that, and we're actually in the process right now of also adding a partial third shift, which wasn't part of our initial plan. So, some of this is just a matter, David, of adding more people and resources and ramping up. Some of it is physical capital and capacity in either our facilities or into our supplier – or from our suppliers. But clearly, the things that are within our control and capability, we're ramping up and working on, David.

And David, the only thing I'd point – David, I'd point out, too, that the industry grows above 75 horsepower has been trending in the low teens for the last several years. Our capacity increases that we had planned for the second half outpace that by quite a bit. So, we didn't go into the second half of the year with what I would call – we went in with fairly aggressive capacity expansions and demand has just outpaced what we expected.

Is there a large incremental cost associated with putting that extra day or putting that extra shift on? Can you fill that incremental capacity?

No, because...

Sorry. Go ahead.

No, it's not an incremental – it's a start-up expense as you train the workforce.

Right.

But beyond that, the volume and the production pays it.

So, do we see some alleviation on this in the third quarter?

Yes. Yes. Absolutely.

Okay. Thanks very much.

And our next question comes from Scott Stember from C.L. King. Scott L. Stember - C.L. King & Associates, Inc.: Good morning.

Good morning. Scott L. Stember - C.L. King & Associates, Inc.: Can you maybe talk about – you put through some price increases for commodity inflation and freight, I guess. Can you maybe just talk about how the sensitivity is there as far as the acceptance at the consumer level?

Yeah. The place we put the most in, which I would comment on, have been in the pontoon segment, which have had some material inflation has hit us the most in that area. And the demand's very strong in that category. Many of the suppliers are sold out, running at capacities. So, I think on first gulp, people don't like price increase, but it really hasn't affected the demand or the market. Scott L. Stember - C.L. King & Associates, Inc.: And maybe just talk about the retaliatory impacts in Canada. You talked about – and again, you flushed it out very nicely in the deck about in this back half of the year some dealers might start to cut back on what they're taking in. Are you concerned that that could accelerate beyond what you already have or what you're already factoring with your guidance or do you think this covers that pretty good, what's in your guidance?

I think we've covered it fairly well. We had product that was able to get out before the tariff went into effect. And I think we've weighed that in. You'll see that we, as we mentioned, we've taken the pipeline down by a week for the year ending. And again, I think we've dialed in what we think is going to happen there. Scott L. Stember - C.L. King & Associates, Inc.: All right. That's all I have for now. Thanks.

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

Hey, good morning. Thanks for taking my call. I thought the bridge on page 31 was extremely helpful. Should we ultimately be taking from that the notion that, on a core basis, your guidance is unchanged with maybe a little bit better Engine offsetting a little bit worse Boats? That was sort of my takeaway. Just wanted to see how you guys are thinking about that.

Yeah. I'd say that's an appropriate conclusion, James.

Okay. And then...

Maybe a little bit better – when you start to factor out FX, maybe a bit more from the core business, so a bit more of a positive, but that's an appropriate conclusion.

Okay. And just to dig into that a little bit, so the Marine Engine guidance going from high single to low double, obviously you've got Power Products in there, but it sounds like what you're telling me is that on a core basis that would still be going up a little bit, and then on the Boat segment we're going from high single – this is obviously all revenue guidance, but we're going from high single to 5% to 6%. I don't know how, if at all, Sea Ray, the Sea Ray reinclusion affects that. Obviously, we've got some tariff stuff in there. But is it safe to say that that guidance on a core basis is coming down a little bit?

Yeah, to your first part about the engines are spot on, James. On the Boat side, boy, the Sea Ray piece is a small, small piece of that. So, you shouldn't be concerned there at all. Part of what happens in some of the revenue is there is as we talked and changed the view on what Europe's going to be for the year, and parts of those things factor into some of those numbers, James.

Europe and the Canadian stocking orders in the second half of the year are really the two big headline changes in the Boat number.

Okay.

Very, very little as a result of Sea Ray.

Got it. And then it seems like you're now saying the industry is going to come in sort of at or below that 3% to 5% number. I guess, first, why shouldn't I be concerned with that and assume that the industry is slowing and will continue to slow? And second, maybe, I thought the discrepancy between the 8% outboard growth and the, call it, 1% to 2% growth for you in the industry in the second quarter was interesting. Maybe any explanation of sort of what's going on there. Typically, those numbers don't see that wide of a gap, but how should we think about that?

Yeah, James, we spent a little bit of time looking in that, trying to understand really on a state-by-state basis what some of the discrepancies might be, and I would say that some of the states that have been excluded from SSI are the ones where we're seeing a bit more outboard momentum. That's ultimately what we think is going to get reflected in the SSI data when it's fully reported.

But you don't...

I think the outboard data for the second quarter is more reflective of demand than perhaps what the SSI data is because of incomplete reporting.

Okay. But you...

I'd just add the other little piece there. James, the Bass Pro's acquisition of Cabela's helps us on the – as we mention, there's a little low impact, Boat impact, but from a channel – but there's actually a little positive lift coming on the Engine side with that acquisition. So, that's there as well, James.

Okay. But I'm assuming you feel comfortable with your own internal data, which also seems to be underperforming, that 8% number. Now, some of that you talked about being the Bass Pro acquisition.

Yes.

But is that – it seems like you're still underperforming the outboard number. Why would that be the case?

Well, first let me go to the first part. We do feel very comfortable about our numbers. I'm not sure that – I'm not sure I'm at the same conclusion you are. Could you explain that a little more, James?

Well, I just – the outboard number for the industry seems really strong at 8%. I get that the SSI is behind, but even your own internal numbers have you at, call it, low-single digits on an absolute basis and maybe more like mid-single digits excluding...

James, I...

Yeah. Go ahead.

James, I would look at it this way. At this point in time in the season, we're a lot more focused on the first six-month number than we are the quarterly numbers just given some of the historical disconnects we see when you're kind of going through month-to-month, quarter-to-quarter data. The 3% outboard data for the first half of the year is probably a bit more indicative of kind of where we see the industry.

Got it.

And when you think about what the data is, excluding the impact of low Boats, we are trending a bit north of that number. So, we think we're holding up very well from a share perspective.

Okay. And then to the question about sort of maybe lower industry guidance for the year at or below that 3% to 5%, I don't know if all of the trade war activity has maybe, on a global basis, hurt growth to a degree, but why shouldn't I be concerned with that? Or should I be?

Well, go back, first of all, when we said the – could be below, that was global, and we said the domestic is probably still within that range. So, I want to make sure that's clear. The other part is that, given the fact – stay with the examples on the trade, on the Boat side particularly and the industry, our production's over – largely all over in Europe already. And it's not going to be subject to some of that, as well as our Princecraft brand up in Québec has a lot of domestic production and content in Canada as well. So, we think we've dialed in what the impact is going to be. I don't think any of us know exactly everything that's going on. It changes daily up to including yesterday. So, I think we've got it dialed as good as we can based upon everything we know today.

And, James, remember that the boats that are sold in Canada are the same boats that are sold in the U.S. So, there's opportunities there to shift production and demand for periods of time and still be in a very good position. So...

Our next question comes from Craig Kennison from Baird. Please go ahead. Craig R. Kennison - Robert W. Baird & Co., Inc.: Hey, good morning. Thanks for taking my question. Obviously, it has been a busy year so far. Bill, maybe you can just remind me of the earnings contribution from Power Products for the rest of 2018?

Yeah, I'd say what we've got modeled in to the – what we have modeled in to the bridge that we provided, it's about two-thirds of the earnings contribution with Sea Ray comprising the remainder is the way to look at it. Craig R. Kennison - Robert W. Baird & Co., Inc.: That helps a lot. Thank you. And then, Mark, with the Sea Ray dynamic this year, how disruptive has that been for either your people internally or with your dealer community? And is that something that could see a resurgence next year?

Well, I think our employees, by and large, would fall in – those who have obviously being displaced because of the elimination of some of the models, but we're working with them, trying to find other employment, job fairs. We're – and I think in general people are pretty appreciative of how we're handling that. The portions of the business that stayed with us, they're very excited to remain part of the Brunswick Corporation. I think if you look at the dealer side of it, we have a great partnership with MarineMax and that continues going forward. And I think there's a lot of Sea Ray dealers that get excited about as we talk about the reinvention and reinvigorate, all the things we want to do with what's staying. So, I think in general, if people took – take a little longer-term view, they're pretty positive. There's a little short-term disruption and we're, again, we're, as we mentioned on the call, we're being aggressive in helping dealers move their inventory through the system. I think we're doing the right things. Craig R. Kennison - Robert W. Baird & Co., Inc.: Have you lost any Sea Ray dealers as a result of this?

We have not lost a Sea Ray dealer going through this process. Craig R. Kennison - Robert W. Baird & Co., Inc.: Great. Thank you.

The only thing I'd comment on, Craig, is we're very excited about the product lineup of the sport boats, sport cruiser business. There's a lot of new product there that is going to have, we think, a good impact over the second half and into 2019. And if you think about dealers trying to replace lost volume on models that we're taking out of the system, there's certainly opportunities for them to focus more of their resources around selling products that we still have in the lineup, and that should bode very well for demand moving in to the second half as well as into 2019. Craig R. Kennison - Robert W. Baird & Co., Inc.: That makes sense. Thank you.

I'd just amplify. Craig, I'd just amplify the one piece. I think we're going to be more focused, obviously, and I think the dealers can be more focused and I think both of those have positive results. Craig R. Kennison - Robert W. Baird & Co., Inc.: Got it. Thanks.

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

Hey, good morning, guys. Just a quick clarification on Sea Ray. Did you break out what the sport cruiser business, the piece that's sticking around, did in the second quarter, sorry, from a revenue perspective and from an earnings perspective? And the reason I ask is because most of us had not built that back into our model, so I'm just wondering how incremental that was to the quarter.

Yeah. Michael, it wasn't in our prior guidance, so you are correct there. It's only a couple pennies in the quarter, so not a big impact there. And so you're correct in your assumption there.

Okay. And then, maybe, Bill, operating leverage this year going to high-single digits from your prior outlook of mid- to low-double digits, I believe it was – or, sorry, low- to mid-double digits. I guess help us bridge that gap. How much of that reduction is from Power Products or Sea Ray versus the tariffs, currency, and just core operations? I'm just trying to understand the moving pieces there.

Well, tariffs is obviously the big negative in the equation. But positives, Power Products is actually accretive or in line with what we'd expect leverage to be given their strong margin profile. And if you think about first half versus back half, the second half performance we're projecting is significantly improved from the first half. A lot of that has to do with the new products that we're coming out with at Mercury. A lot of that has to do with improved operating performance in our manufacturing operations really across the board, as well as I'd say a bit more reasonable and a bit more muted year-over-year investment spending between the two. So, I'd say our second half performance really starts to show the benefits of some of the things we've talked about getting done in the first half of the year from a product perspective, really starts to effect the second half and then sets us up very well going into 2019.

Okay. Thanks a lot. That's it for me.

And our next question comes from Gerrick Johnson from BMO Capital. Please go ahead.

Hey. Good morning. So, if I'm reading your reconciliation properly, it looks like the yacht business dropped about 62%, 63%. Is that – am I right, one, and, two, is that because you're going to sell it and stop really supporting it? Or is that a result of just weak demand?

I would say, Gerrick, it's more of a function of the sale process and dealers dropping their ordering activity in advance of the sale process.

Okay, that makes sense.

So, it was a little bit due to demand. It was a little bit due to dealer stocking activity.

Okay. Thank you. Thank you, Bill. And then on Engines, of the products you've released between Miami and the products release – or announced in May, what would have been the most popular? Which ones are you chasing right now? And which ones are you seeing the most traction with?

Well, it's the range, Gerrick. As you know, from 175 to 300 horsepower, and I would tell you, we're literally seeing demand across that range both at the V6 and the V8 level, and CMS and AMS versions. So, we've had success across that entire spectrum. I wouldn't...

Okay. So, it would be – the answer would be...

Yeah.

It would be all of the above.

All of the above. Yeah.

And then...

And there's actually still very strong demand in the rest of the product lineup as well.

And I was going to say, the 350, the Verados and the horsepowers above have been going extremely well, and I don't want anyone to forget our 150 horsepower demand has just been going up extremely strongly as well. So, we've got the new products we're very proud of. But we're seeing Verado on the top end and 150s on both products that have been there, getting very nice lifts to them as well.

Okay. Okay. Great. And then, in the Boat segment, what was the new product that caused the plant inefficiency you're talking about?

Well, we've had the – we've had things around the 400 and the 320 cruisers and stuff on the Sea Ray side. And then just the other part is typically in the second quarter, we'd be doing all the new model launches for 2019, and so that's just a series of products that can be going on at Lund, Lowe, Harris, Princecraft, et cetera. So, collectively, second quarter will always have – and we're – there's not a specific item on the aluminum boat side. It's more a case of just lots of things that happened in the quarter, getting ready for dealer. I mean, we'll start the Lowe dealer meetings next week and Lund the week after, so all that stuff had to happen in Q2.

And the next question comes from George Kelly from Imperial Capital.

Hi, guys. Thanks for taking my questions. So, first, just on the new engines, clearly very positive trend that you're seeing. Wondering if that gives you confidence or how you view pricing with the engines. As you look to 2019, do you think there's an opportunity to be more aggressive?

Yeah, I mean, one of the – we took some pricing actions in the second quarter on our outboard engines for the U.S., and I think we'll continue to look at where and how we're positioned against competition as we move through the balance of 2018 into 2019. Clearly, it's – I think there's any number of things that could say there's probably some opportunity there. But when you're just launching a new product, it's probably not the most opportune time. But we'll continue looking at the opportunities there, George.

Okay. And then, second question, I may have missed this in your prepared remarks, but what's after your pension payment this year? What will be left? And do you anticipate paying that in 2019?

It's up to $30 million, George, and that would be a 2019 payment.

Okay. Thank you.

And we're done. Yep.

Got you. Great.

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

Yeah, I just want to thank everybody for participating today. As you all know, there's been lots of puts and takes in this particular quarter, but that speaks to all the things we really have had going on. I truly believe that at a later point, when people really look back at the first half of 2018 that people are just going to marvel about what's all been accomplished from a strategic standpoint and a transformation of this company and the long-term benefits it's going to provide to our shareholders. The first half of 2018 has been a really, really exciting time, and we fully intend to execute against the actions we've taken in the quarter. Thank you.

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