Good morning, and welcome to Brunswick Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Al Marchetti, Senior Director, Investor Relations.

Good morning, and thank you for joining us. On the call this morning are Dave Foulkes, Brunswick's CEO; Bill Metzger, CFO; and Ryan Gwillim, Vice President, Finance and Treasurer. 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 will 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, on June 27, 2019, Brunswick completed the sale of its Fitness business. Starting with the second quarter of 2019, the historical and future results of this business are now reported 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 Dave.

Thanks, Al, and good morning, everybody. 2019 was a very successful year for Brunswick and our shareholders. We delivered record earnings for the 10th consecutive year, substantially grew margins, made significant additions to our product portfolio, manufacturing capacity and technology platforms, completed meaningful cost reduction actions and have emerged as the world's premier recreational marine company. Our solid fourth quarter performance reflects the continued successful execution of our marine strategy and reinforces the tremendous confidence we have in the future growth opportunities within each of our businesses. The more favorable retail trends in the U.S. persisted in the quarter and, together with planned lower wholesale shipment activity, resulted in us achieving our stated goals of lower field inventory than 2018 and relatively flat pipelines on a weeks-on-hand basis. Aside from our updated estimates on tariffs, our views on our 2020 financial goals have not changed, and I have a high degree of confidence that we will execute our strategy and deliver strong shareholder returns in 2020. We started the year off an exciting fashion with a spectacular debut at CES and new product launches at early boat shows, and I look forward to leading Brunswick through further successes in our first full year as an integrated marine powerhouse. I'll now provide some highlights on our segments and the overall marine market. The Marine Engine segment had tremendous success in 2019, again, posting record earnings and significant margin increases. This was in the face of approximately $25 million of headwinds from unfavorable changes in foreign currency rates and tariffs partially mitigated by a full year of solid performance by power products. Demand for higher horsepower outboard engines remains particularly strong, especially in the 175- to 300-horsepower categories introduced in 2018,and the 400- and 500-horsepower engines released in 2019. During the fourth…

Thanks, Dave. For the full year, net sales were up 1% versus 2018 with acquisitions providing 4 points of growth. Operating earnings on an as-adjusted basis increased by 6% with solid margin expansion of 50 basis points. We finished the year with an adjusted EPS of $4.33 per share, which exceeded our most recent guidance. This reflected a more favorable tax rate and strong execution by our businesses, particularly Mercury. As anticipated, fourth quarter sales were down 4% with slight decreases in operating earnings and margin. Our operating deleverage reflects the timing of some tariff-related activity in 2018, which I will address in upcoming comments. In the Marine Engine segment, revenue was relatively consistent with Q4 of 2018 as continued robust demand for higher horsepower outboard engines, especially in dealer and international sales channels, and gains in P&A sales led by solid growth at Power Products were offset by anticipated softness in outboard engines 150 horsepower and below, in sterndrive engines. For the full year, Mercury sales were up 3% with Power Products contributing 5% of growth. Mercury's adjusted operating margins and operating earnings were also slightly lower in the quarter as comparisons between years were unfavorably influenced by the impact of a tariff exemption received in December 2018. For the full year, adjusted operating margins increased by a substantial 100 basis points, outpacing our expectations. This performance included contributions from Power Products, improving sales mix and operating efficiency gains, which exceeded the impact of tariffs and unfavorable changes in foreign exchange rates. In the Boat segment, adjusted revenues were lower by 15% in the fourth quarter as we completed our planned pipeline rebalancing efforts. For the full year, sales were lower by 6% versus 2018 but were in line with our revised expectations from July. By category in the…

Thanks, Bill. I'd like to provide some commentary on our new segment reporting, which we signaled on our third quarter call. During 2019, Brunswick implemented a series of strategic and organizational initiatives to sharpen the focus of the company on the recreational marine market and adjacent opportunities. Starting in 2020, the company's strategies are now focused on 4 business pillars: Propulsion, Parts and Accessories, Boats and Business Acceleration. As a result, the existing Marine Engine segment will now be broken into 2 segments beginning in the first quarter of 2020: the Propulsion segment, which will contain both outboard and sterndrive engine businesses, along with controls and rigging products, which are closely associated with our Propulsion businesses; and the P&A segment, which will contain all of the P&A categories, including engine parts and consumables, electrical products, boat parts and systems and our distribution business. Concurrent with this change, the company has also decided to change its measurement of segment profit and loss due to a decision to streamline internal and external reporting practices related to Marine Engine sold from the Propulsion segment to the Boat segment. This change in presentation, which is not the result of a change in business practice, more closely follows current market dynamics and provides improved comparability with other boat companies. Consistent with past practice, we have provided select historical information reflecting this new reporting structure in today's Form 8-K. We believe that these changes will allow investors to more clearly evaluate the performance and value of each business, especially the aftermarket-focused P&A business, which contributes nearly half of the earnings of the corporation. Moving to our outlook by segment under the new structure. 2020 is setting up to be a fantastic year for all of our businesses. For our Propulsion segment, we anticipate net sales growth…

[Operator Instructions]. And our first question comes from James Hardiman with Wedbush.

It was a strong finish to the year, so I figure I'd start with a nitpick here. So inventory three months ago, you said you thought they'd be flat to down in terms of weeks on hand. It seems like the retail environment was, if anything, better than expected. They finished up just a hair. What's the difference there? And then as I think about competitive inventory levels, I think -- certainly, the checks that we've done would suggest that you guys have been a lot more aggressive maybe than some of your peers. Is there any concern that, that could create sort of a heightened competitive environment here in 2020?

James, and thanks for joining us. Yes, I think it's not possible for us to manage inventories down to the nearest 0.1. But I would tell you, given the start to the retail season in 2020, I'm pleased that we finished slightly on the upside versus slightly on the downside because I think that we have a potential risk of -- it's more of a risk of it's not having enough than there is of having too much right now. So I think we managed very diligently. We managed units down very well. Managing exactly to the 10ths of a week is probably -- is not something we can do. But I think to all intents and purposes, we finished as we planned, and I have no problem with that very slight kind of half a week. I think what we've seen more broadly across our competitors is good behavior. I think some started a little later than we did coming down. So I don't see, broadly across the industry, that excess inventory of competitors is going to be a hurdle for us going into the year.

Okay. And should I interpret the first answer as you feel a little bit better about where demand is likely to go than maybe you did three months ago?

Yes. You should interpret it that way. I think the early season dealer traffic has been good, boat shows have been good and dealer sentiment is positive. So I would say that the season is off to a good start for us. And yes, so that's a good interpretation. I'm glad we are where we are.

Got it. And then I think you essentially answered this. But the incremental tariff on the 40- to 60-horsepower outboards, that request actually got denied. Or have you just not gotten any approval yet? I guess I'm asking, is there any chance that, that could come back? It sounds like the answer to that question is no. Is that the way to think about it?

Yes. So I think the process, as it turns out, is different every time. And when we first were granted the exemption, the U.S. was speaking with companies individually. This time, of this, I think, several hundred extension requests, only a handful were granted. And the message that we got was that, that was it. So I don't know if we actually finally got a company communication, but the message that we have is that no further exemptions are on the table.

And our next question comes from Craig Kennison with Baird.

And congratulations on a big year last year. Bill, I had a question on gross margin. Is there any way you can frame gross margin for both Propulsion and the P&A segment? I know you're not going to give me a precise number, but any light you can shed there would help us build our models.

Craig, we really don't get to that level of specificity in anything that we report externally. I think we do talk generally about kind of how things may index above or below the boat companies, where I think we've been pretty clear with people, under-indexed overall to company gross margins. The Propulsion business is more in line, maybe a bit more favorable that -- to company margins. And then the P&A business, the new P&A segment would over-index to overall company margins.

Okay. And then Dave, a question for you. I mean there have been just so many changes here, including changes in the Boat group, and I'm just trying to maybe wrap my head around it. But you've made changes to the aluminum boat group and then the technology center. I'm wondering if you can provide an anecdote or 2 that'll help illustrate what those changes have created from a product standpoint?

Yes. Craig, and thank you for joining us, too. Yes, I think the way to think about this is that we are continuing to build strong brands, but it's brand focused as opposed to individual businesses. So we see a lot of benefits in consolidating some of the kind of back-end operations, if you like, of the closely related businesses to leverage scale and increase the expertise available to all of our brands. So the aluminum boat group, which is Lund, Lowe, Crestliner, Harris, a lot of commonality around operations, a lot of need to enhance the digital marketing, which is not necessarily possible on individual brand basis but is very possible on a collective basis. So -- and then on the value fiberglass side, we formed a venture group to achieve something similar. So this is really about making sure we have strong brands, but we leverage our scale and bring to bear the highest possible of level of expertise through leverage kind of back-end operations, if you like. So the two brands that we have not done that fully on yet are -- or don't intend to do are Sea Ray and Whaler. They have very strong kind of individual operations. But we have put together the fiberglass tech center, which is serving both of those brands. And you will see, possibly already seen, but certainly will see over the next year, the rate at which that tech center can push out new products for both of those brands and others is extremely high. And we have 160 engineers and technicians in that group now. That is more horsepower than any other company can bring to bear in that kind of product line. So think about it as maintaining strong brands, leveraging infrastructure, improving capability and -- but sharing best practices.

And our next question comes from Michael Swartz with SunTrust.

David, I just wanted to talk about your commentary around the -- your retail expectations for 2020. I think you've said flat to low single-digit growth. Just, I guess, a point of clarification. Is that global growth or U.S. growth? And then how to think about the cadence of retail through 2020?

Yes. It's a global view. So I think, typically, the U.S. over-indexes. U.S. will -- Europe will probably under-index a bit, but it's broadly global. In terms of cadence, I guess, versus last year, we were, at this point in the year, still anticipating a stronger first half to the year than we actually achieved. So we were still building wholesale, and the retail activity obviously didn't emerge quite as we expected it to. So I think this year will be a much more balanced year. We go in with lower pipelines. So I think we'll better match wholesale and retail throughout the year this year. Obviously, we'll still be building inventory in the first part of the year to serve the demand of the peak season, but I expect just an overall more balanced wholesale and retail across all quarters.

I think, Michael, the only thing I'd add to that is that I think we're kind of expecting or anticipating more normal seasonality, and 2019 probably didn't have -- exhibit kind of normal seasonality. It was a bit more back-end loaded than front-end loaded. On the retail side, wholesale was exactly the opposite, more front-end loaded than back-end loaded. So I think as you look at wholesale comparisons, '19 to '20, the comps get to be a little bit more challenging in the first half, back half obviously much more favorable. On the retail side, the performance in the back half of the year was a little bit more -- or the front half of '19, a bit more challenged. We'd expect maybe the comps to be a little bit more favorable in the first half of the year.

Okay. Great. That's very helpful. And then just maybe -- I think you've given us the total tariff impact you expect for 2020 and then the incremental versus '19. I guess how much of that increase was due solely to not getting the exemptions on the smaller horsepower engines? If I go back to '18, I think the number was some kind of in the high teens millions as far as that impact. Is that still the way to think about it from just that piece?

No. Mike, this is Ryan. The way to think of it is $10 million to $15 million incremental for the year, and it is all related to the 40- to 60-horsepower exemption not being renewed. There's a little difference in volume. There's a little bit of difference in how many engines we had on the way over here and inventory position. So it's within a margin of error. But 10% to 15% is the best way to think of it.

Okay. Great. Great. And then, David, I think in your closing comments, you had mentioned on the Boat group, you think you can get the margins back to double digits by 2021. I guess that caught me a little off guard. So maybe -- and I'm sure we'll get more color in Miami. But maybe give us a sense of some of the larger levers you can pull getting there, because I think the guidance for this year implies 8.5%, so 8.5%-plus. So that seems like a pretty big jump.

Yes. So I think we've articulated the kind of things that we're doing in the Boat group around a couple of areas. One is, as I referenced with Craig earlier, we have significantly leaned out the Boat group organization, including the management structure. So SG&A levels will be significantly lower, especially as we get into this year and beyond, and we see a full year effect of the actions that we took in the back half of 2019. And then we have a lot going on operational excellence and supply chain management that we will reap significant benefits from in this year and next year as well. And that is -- those are progressive benefits that will build over time, if you like. We also have some additional capacity in place that allows us to build more of that higher-content, larger boat product that is helpful to margins for us. And of course, in the -- just in the last 3 months, Boston Whaler, which was leaning out its pipelines ahead of product introductions, has already introduced 3 brand-new models. And that is just the start for Whaler, and there's more to come from our other brands as well. So I think a lot of efficiency in operating model, SG&A, in our plants and our supply chain and then some very nice new product coming through as well.

And our next question comes from Steve Zaccone with JPMorgan.

David, first question was just on the marine industry, following up on the first question today. Where do we stand on the health of channel inventories when you segment value versus premium or maybe saltwater markets versus freshwater markets? Are all markets pretty stable? Or are there some areas where maybe inventory is still a little bit high?

I think that -- I think we've done a pretty good job of bringing inventory down in all segments, and I think I mentioned on the last call that what we've been trying to achieve is not just an aggregate number. It is by-segment number as far as we possibly can, making sure that our inventories are in line with anticipated needs for 2020. I would say that the sell-through of premium products at the back half of 2019 in retail was probably a little higher than we anticipated. And in some earnings calls earlier, you probably heard a little bit more about that. But -- so I would say that we are below average on premium product, particularly Whaler, but really, we're not in bad shape anywhere.

Great. And then just the second question was just talking through the top line expectations for the Boat segment through the year. Any help around thinking about performance by specific category? And then one clarification within that segment. How much revenue should we be expecting from the Business Acceleration division? Just trying to figure out what the organic growth rate is for the Boat segment versus the guided 6% to 8%.

Okay. So Bill, do you want to answer the last one?

Right. I think it's going to be pretty similar to what it was this year, which is a couple of points.

Yes. That's exactly right, a couple of points, full year of Freedom.

Revenue acceleration for the Boat group by segment, I think Whaler will be particularly strong for us. But our other premium brands, we're anticipating good years for as well. So we're expecting everybody to contribute here. We -- the realignment of wholesale and retail, given our -- the wholesale was so far behind retail in the back of 2019, I think, allows a lot of options for -- a lot of possibilities across our brands. But I would say the premium brands, again, will be particularly strong.

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

And congrats on wrapping a strong year. Just a couple here, if I may. The Freedom Boat Club, how -- you commented that the adoption of Brunswick products is maybe trending a little bit ahead of your expectations, and I think you said also 210 locations or franchises by the end of 2020 from the current 200. So what do you have built into that 6% to 8% growth that -- due to the conversion or a picking up of Brunswick products by those locations?

So yes, Tim. So we just achieved 210 locations. We're expecting probably another 30 this year. So we'll be up in the 230, 240 range by the end of the year. Yes, the conversion rates, we've been very, very pleased, engaging with our franchisees on the very compelling product and service offerings that we can provide and the uptake of both our Boat products and our Engine products has been very, very strong. So that's really good. As we mentioned earlier, the fleet size of Freedom is roughly in the 2,500 range. It turns over every kind of 2 to 3 years. So you can expect roughly 800 new boats into the franchise every year, and we're expecting to become a significant portion of that. The rate that we'll accelerate will be accelerating more strongly in probably '20 back half of this year and 2021, but we'll make good progress already in 2020. I'm not going to give you an exact number here, but we'll make strong progress in penetrating that 800 this year, both on the Boat side and more on the Engine side.

Okay. Okay. No. Helpful, David. And then gentlemen, how would you frame -- I mean you narrowed your -- the range to your guidance kept your midpoint the same, despite the incremental tariffs being folded in there. But how would you frame, at this point, the upside/downside scenarios? Let's just say if the marine industry globally is down 5$ or plus 5$ versus you're kind of saying globally flat to maybe slightly up. What if we hit that down 5$, plus 5$? Or is that $5.10, $5.40 still achievable? Or would we fall outside of that range under the down 5$, plus 5$ scenario?

Yes. So yes -- so we -- as we set our guidance, we go through a list of risks in ops for the year, and we make an assessment. And I think what we have in place here is a very balanced assessment that includes considerations of potential downside and potential upsides to the market and various other factors. So I would say that we -- our guidance is robust, and we've considered various scenarios, obviously not extreme scenarios, but certainly plausible scenarios on the up and downside.

I think it kind of depends, Tim, of what other things accompany a market adjustment and how much of our portfolio is adjusted. I think we consider some of the opportunities on the premium boat side, high horsepower engines and things like that, not to be potentially as variable as overall market might be. If the 5% market difference in kind of the value end similar to what we experienced this year, our ability to manage the cost structure and things like that, I think, is pretty reasonable, and you could stay within that $5.10 area in that sort of scenario but -- with things like currency and tariffs and other parts of the market start to get influence and gets to be a little bit more difficult. But I think in general, when we've set a bottom end of the guidance range, we generally have tried to understand what sort of things do we need to compensate for, and we feel pretty comfortable that we've got a pretty balanced view of that, given what we know today.

So one of the -- remember -- Tim, remember also that when we went back to the dollar that took you from the $4.25 midpoint to the $5.25 midpoint, about $0.40 of that was capital strategy, which is relatively already completed due to the share repurchases last year. So there's a little bit more certainty on that piece because it relies on actions that have already been taken.

Our next question comes from Eric Wold with B. Riley.

A couple of questions. I guess one follow-up on the last one around the guidance for 2020. So obviously, you kept the midpoint of the range unchanged with the incremental tariffs being in there. I guess, what was the main factor that -- or factors that allows you to kind of absorb that incremental 10 to 15, because obviously now you're giving some better outlook on the sales side. Is the sales growth a little bit more robust than you would've thought, given what you've done to the pipeline, et cetera? Or kind of maybe what were the factors that are going to kept that -- and will keep that unchanged?

Well, I think certainly there was the unexpected tariff headwind. But if you think about the back half of the year, a lot of things are going very positively and providing a tailwind. I think when we talked to the kind of analyst investment community about the manufacturing expansions that we were doing on Mercury and the extent of them, there was some nervousness about that. But in fact, they went without a hitch. So we added that additional capacity with no issues. We saw retail tick up in the back half of the year, which was positive for us. When we started to get that manufacturing capacity in place, we also started to see clearly the margin benefits in Mercury from being able to serve the -- some of the higher-margin customers. So that is a validation of part of our strategy. And then our launch of the new boat products has also gone flawlessly, and the reception has been absolutely wonderful. So we saw this unexpected headwind. But overall, if you think about what I've just described, plus a pretty decent start to the year this year, I think we're in pretty good shape to offset that.

Perfect. And then just the follow-up on the Engine capacity. You obviously noted in the CapEx plan for this year possibly additional expansion. Kind of what was added in the fourth quarter around Engines? Is that fully in place? Does it need to kind of ramp a little bit in 2020? Or what else could you add this year?

No. It's fully executed. It was fully executed in the back half of 2019. So we're able to take full advantage as we enter 2020 and as we have entered 2020. Certainly, there's -- Mercury is always looking at making its operations more efficient, and if we need to add more capacity, we certainly will. But I think we are in very good shape as we enter the season to service all of our customers right now and to go after the Conquest opportunities that have really been in reach, but we couldn't quite get to them because of capacity. So I think the whole Mercury team is very, very excited about having that capacity behind it, to go after those additional opportunities.

And our next question comes from Gerrick Johnson with BMO Capital.

Bill, on the new segment reporting, the reallocation of operating profit to Boats from Engines. Can you talk a little bit more specifically about that, what is actually causing that?

Yes. Gerrick, thanks for the question. We -- the process that we're following here, we've decided to make an adjustment to the measure of segment profitability. I'd say what we're doing now is very consistent with kind of an ex-internal reporting methodology that we've followed for quite a while or had in place for quite a while, that we think better reflects market dynamics and comparability to external comps. I think it's important to note that it's not the result of a change in business practice. I think if you look at what's implied on the company sales, that amount is unchanged. We have had a kind of a parallel methodology internally that we've used externally that kind of reflects business practices that date back to over a decade ago. We are -- which maintain consistency with historical practices. But as we sit here today, we've made a decision to streamline and follow kind of what I would consider to be more current and relevant kind of economics between the Boat and -- or between the Engine and Boat segment. And the new segment change was an ideal time to do that.

Okay. I don't think I still understand, but we can take that off-line later. Moving on, on your realignment actions announced last year in June and July. You said you get about $50 million in annual run rate savings. Are you still expecting that $50 million? And is all of that being realized in 2020? And how do we face towards that through the year?

Yes. So the structural actions that we took in 2019, we expect the full benefit of in 2020. You'll note, I think, that we noted operating expenses down as a percent of sales this year versus last year. That is despite the fact that we have a full year of Freedom Boat Club expenses, despite the fact that we have put a full variable compensation provision back in and despite inflation. So yes, the structural cost reductions of $50 million are firmly holding.

Thank you. At this time, we would like to turn the call back to Dave for some concluding remarks.

Well, thank you very, very much for joining us today. We are very pleased about 2019, not only for the financial results but also because it was a transformational year for us. We're delighted with the way that the company is operating. We're delighted with the foundation that we put in place, both physically, through product and technology and capacity, but also via our capital strategy. So I enter 2020 with tremendous expectations for our business. We are built to win right now, and it's going to be a very exciting year for us. I cannot wait to share our 2020 to 2022 3-year strategy with you guys in Miami. I think you will be just as excited as we are. So I can't wait to see you in 2 weeks' time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.