賓士域 (BC) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Brunswick Corporation's 2013 fourth-quarter earnings conference call. All participants will be in listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President, Corporate and Investor Relations.

Good morning. Thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and Chief Executive Officer, and Bill Metzger, Chief Financial Officer.

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 in today's press release. All these documents are available on the website at www.brunswick.com.

During our presentation today we are using certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in these presentation, as well as in the supplemental information section of the consolidated financial statements accompanying today's release. I would also like to remind you that as a result of our decision to exit and end the subsequent sale of Hatteras and CABO on August 5th, the result of these businesses and the impact of that sale are reflected in discontinued operations. The figures in this presentation reflect continuing operations only unless otherwise noted. I would like to now turn the call over to Dusty.

Thanks, Bruce. Good morning, everyone. I will start with an overview of our 2013 results. Our revenue in 2013 increased 5%. We experienced growth in sales of outboard boats and engine, fitness equipment, and marine parts and accessories, partially offset by revenue declines in sales of fiberglass sterndrive board boat, sterndrive engines, bowling products, and retail bowling centers. Our gross margin increased by 70 basis points compared to the prior year. This outstanding improvement represents the highest annual gross margin since 2000 and further reflects our ability to execute against our strategy and generate operating efficiencies and leverage.

Operating expenses increased by 5%, including a 13% increase in research and development expenses, as we continue to invest in our numerous strategic initiatives. Total operating expenses, as a percentage of sales, were 17.7%, which is comparable to 2012 levels and consistent with our previously stated guidance for 2013. Adjusted operating earnings increased by 12% versus prior year, and in spite of increased spending on growth, operating leverage was 21%.

Continuing down the P&L, net interest expense was reduced by $22.8 million, reflecting our debt reduction activities which was enabled by our strong pre-cash flow performance. Adjusted pre-tax earnings increased by 27%, and diluted EPS as adjusted increased by 31% to $2.73 for the year.

As I mentioned, for the full-year, our sales increased by 5%. Consolidated US sales increased by 6%. Sales to Europe were up 5%. Rest of world sales were up 1% versus the prior year. Operating earnings, excluding restructuring, exit and impairment charges were $325.6 billion in 2013, an increase of 12% compared to 2012. In 2013, corporate expenses increased by $10.5 million. Reflecting a number of factors, including spending on strategic growth initiatives, and mark-to-market adjustments on stock appreciation. Operating margins, excluding charges, increased 60 basis points to 8.4%, due mostly to improvements in gross margin.

Diluted earnings per share for the full year were $8.26 per share, including a $6.39 benefit related to a reversal of deferred tax valuation allowance reserves, $0.22 of restructuring charges, $0.32 of losses from debt retirement, and a $0.32 charge from special tax items. Excluding these items, our diluted earnings per share would have been $2.73 per share. This compares to diluted earnings per share as adjusted of $2.09 per share in the prior year. As adjusted then, our 2013 EPS increased by $0.64, or 31%.

Sales in the fourth quarter grew by 9%. Our Boat and Life Fitness segments reported strong top line improvement of 16% and 15%, respectively. Mercury sales increased by 5%, and bowling and billiard sales declined by 5%. From a geographic perspective, consolidated US sales increased by 13%. Sales to Europe increased by 4%, and rest of world sales were up 2% versus the prior year.

Adjusted operating earnings for the quarter were $22.7 million, an increase of $5.2 million, or 30% compared to 2012. Operating margins, excluding charges, increased by 40 basis points to 2.5%. The increase in operating earnings includes the impact of continued expansion in gross margins, partially offset by an 11% increase in operating expenses, mostly resulting from investments in strategic initiatives.

Net earnings for the quarter were $6.18 per share, including a $6.35 benefit related to a reversal of deferred tax valuation allowance reserves, $0.09 in charges for restructuring, a $0.01 loss from debt retirement, and a $0.22 charge from special tax items. Excluding these items, our diluted earnings per share as adjusted equaled $0.15 per share. This compares to net earnings as adjusted of $0.02 per share the prior year. In summary then, our EPS as adjusted increased by $0.13. Now, I am going to turn the call over to Bill for a closer look at our segment results and financials.

Thanks, Dusty. I will start with the marine engine segment. From a geographic perspective, fourth-quarter sales to US markets were up 11%, led by growth in outboard engines and parts and accessories. For the full year, US sales increased by 8%. Sales to Mercury's European customers decreased 1% with growth in parts and accessories more than offset by decrease in engines. For the full year, sales to Europe increased by 3%. Rest of world sales decreased in all major product categories and were down 5%. Combined sales growth in these regions was flat for the full year.

From a product category perspective, our US outboard engine business sales increased in the fourth quarter of 2013, reflecting continued strong outboard demand, especially for its 150-horsepower FourStroke, as well as for the Verado engine family and engines in the 75-, 90-, and 115-horsepower range. Outboard sales in Europe and rest of the world markets declined modestly in the quarter. Sterndrive engine sales continue to be affected by unfavorable global retail demand trends.

Mercury's parts and accessories businesses reported solid sales increases in the quarter and full year, reflecting new product launches, market share gains, and stable boating participation. Growth was led by our US and European operations. Record sales were achieved by Attwood and Land 'N' Sea in 2013. Attwood's award-winning, portable and integrated fuel systems continue to be an important contributor to Mercury's P&A business. Attwood also launched several new exciting, MotorGuide trolling motor products in the fourth quarter, including a new, wireless trolling motor, which can be paired with a pinpoint GPS technology for precise operation. Land 'N' Sea also continue to grow through product line and distribution expansion.

Mercury's adjusted operating earnings were up slightly compared to last year's fourth quarter. For the full-year, operating margins were 13.6%, 110 basis points higher than the prior-year on an as-adjusted basis. This operating earnings performance reflects the benefit of higher sales of outboard engines and parts and accessories combined with an improvement in gross margin. These benefits were partially offset by spending growth on growth initiatives and a decline in sales of sterndrive engines.

In our Boat segment, fourth-quarter revenues increased by 16% compared to the prior year's period. In the US, which represents about 2/3 of this segment, sales were up 17%. This included strong sales growth in aluminum and fiberglass outboard boats as we increased dealer inventories in these categories in response to continued strong demand trends. We also increased shipments of smaller fiberglass sterndrive inboard boats in connection with new product introductions, and these increases were partially offset by reduced shipments of large fiberglass boats. For the full year, US sales increased by 4%. In the quarter, our sales to Europe increased $3 million, or 22% versus the prior year. For the full year, sales to Europe were flat. Rest of the world sales increased by 14%, a result of higher sales of outboard boats in Canada and fiberglass sterndrive inboard boats in South America, partially offset by declines in other regions. For the year, rest of the world sales increased by 1%.

Now, let's take a look at preliminary US powerboat industry statistics provided by Statistical Surveys Incorporated to get a view of how retail demand unfolded by boat category in the US in 2013. Based on preliminary fourth-quarter data, aluminum and fiberglass outboard boat markets continue to demonstrate excellent growth. The fiberglass sterndrive inboard boat category experienced declines in the fourth quarter, similar to the third quarter. The fourth quarter continues to reflect improvements in boats between 31 and 62 feet, while smaller fiberglass boats declined by a double-digit percentage. The quarterly trends in these categories are also consistent with year-to-date results. The US retail powerboat markets grew by approximately 7% in the fourth quarter and by 5% for 2013. This growth tracks to a total of about 160,000 units in 2013.

Brunswick's global retail unit sales increased by 2% in 2013 versus the prior year, and our global wholesale unit shipments increased by 3%. Our global retail growth rate reflects market share gains in aluminum and fiberglass outboard boats, which were more than offset by share declines in certain fiberglass sterndrive inboard categories. Regarding our pipelines, dealers ended the year with 34 weeks of boats on hand on a trailing-12-month retail basis, which compares to 33 weeks on hand a year earlier. Pipelines for aluminum and fiberglass outboard boats are up as compared to last year while fiberglass sterndrive inboard pipelines are down versus the prior year and remain at near-record low levels.

As we anticipated and discussed in our previous conference call, total pipelines increased for the full year, reflecting growth in the overall marine market as well as our efforts to maintain inventories at appropriate levels for current market demand trends. The Boat segment's fourth quarter operating loss improved by $8.4 million when compared to the prior year on an as-adjusted basis. This improvement resulted from higher sales in cost reduction actions, including plant consolidation activities initiated in 2012 and 2013, partially offset by increased investments which were primarily related to the instruction of new models. For the full year, the Boat segment reduced their operating loss by $1.2 million.

Now, let's turn our attention to our two recreational segments. Sales at Life Fitness increased by 15% when compared to last year's fourth quarter. In the US, strong growth in sales to health club and hospitality customers was partially offset by lower sales to local and federal government customers. The increase also reflected strong gains in international markets including Europe, which was up 18% for the quarter and the full year. Growth in Europe reflects benefits from distribution enhancements along with improved market conditions. New products benefited sales in all markets. Segment operating earnings in the quarter declined by approximately $1 million, and for the year, this segment reported an operating margin of 15.3%, a 90-basis-point reduction from the record achieved by Life Fitness in 2012. These comparisons reflect higher sales along with investments in R&D and other growth-related investment expenses as well as a lower gross margin.

Sales for bowling and billiards decreased by 5% compared to last year's fourth quarter. Gains in equivalent retail center sales were more than offset by a reduction in the retail center count and a decrease in sales of bowling products. As a reminder, our bowling organization completed the divestiture of its European bowling center portfolio earlier in the year. Excluding the impact of this divestiture, the segment sales were up 1% in the fourth quarter and down 2% for the full year. Adjusted operating earnings in the fourth quarter increased by about $1 million, as improved cost efficiencies more than offset the impact of declines in sales and spending on growth initiatives.

Now, let's take a look at debt outstanding, which we ended 2013 with $460 million, a reduction of $112 million versus year-end 2012. This ending balance represents our lowest debt level since 1996. While our debt reduction activities are largely completed, we may continue to opportunistically retire debt to a balance below our target of $450 million.

Net interest expense, which includes interest expense and interest income was $7.8 million in the quarter, a decrease of $6.8 million versus the same period in 2012. The reduction was the result of lower debt balance enabled by our strong free cash flow performance, as well as a favorable interest rate on our 2021 notes issued in the second quarter of 2013. Net interest expense decreased to $42.4 million in 2013, our lowest annual expense since 2005. Foreign currency had a minimal impact on sales and a positive impact on operating earnings comparisons for the quarter and full year, reflecting a mix of favorable and unfavorable exchange rate improvements and including the impact of hedging activities.

The effective book tax rate on an as-adjusted basis was 9.8% for the full year, which is mostly in line with the expectations stated on our third-quarter call. This rate excludes the tax impact of one- time charges such as restructuring charges and debt extinguishment losses, as well as nonrecurring special tax adjustments. Special tax adjustments in 2013 include the valuation allowance release in the fourth quarter and unfavorable valuation allowance adjustments related to stock compensation activity. As anticipated, the change in treatment for the tax valuation allowance will raise our book tax rate in 2014 versus 2013. The full-year effective book tax rate for 2014 as-adjusted is expected to be approximately 34%, while our effective cash tax rate is approximated to be at a mid-teen percent level.

Turning to a review of our cash flow statements. Cash provided by operating activities of continuing operations in 2013 was $204.8 million, an improvement of $21.2 million versus the prior year. Changes in our primary working capital accounts resulted in a use of cash and totaled approximately $66 million. The biggest changes occurred in accounts and notes receivable, which increased by $16 million. Inventory increased by $22 million, and accounts payable decreased by $18 million.

Our cash flow statement includes a new line item. Excess tax benefits from share-based compensation activity which adversely affected free cash flow in 2013. The amounts in this line item, which totaled $37 million for the year, result primarily from the stock options exercised in 2013 and are derived from the difference between the expense recorded for book purposes and the expense reflected in the Company's tax return. GAAP requires that these excess tax benefits be reclassified to financing activities and not included in operating cash flow. Normally, these benefits would lower taxes paid and the reclassification would have no impact on free cash flow. However, because of the Company's tax position, these excess tax benefits did not materially benefit our taxes paid in 2013. Consequently, this activity had a negative impact on our free cash flow in 2013, particularly in the fourth quarter. We are planning for these excess tax benefits to significantly moderate in 2014.

Total free cash flow from continuing operations totaled $75.9 million versus $90.2 million in the prior year, a decrease of $14.3 million. Capital spending in 2013 increased $33 million versus the prior year to approximately $148 million, which included investments in capacity expansion and in new products in all businesses. Free cash flow in 2013 also included approximately $18 million in proceeds from the sales of property, plants, and equipment in our marine segments. Our business units continue to remain focused on generating strong free cash flow, which enable us to reach our debt reduction targets and will also allow us to fund future investments in growth as well as increased returns to shareholders. In summary, cash and marketable securities totaled $369 million at the end of 2013. The decline from year-end 2012 includes the net impact of debt reduction activities partially offset by continued strong free cash flow.

Let me conclude with some comments on certain items that will impact our P&L and cash flow for 2014. Our estimate for depreciation and amortization is approximately $95 million to $100 million. We expect our 2014 pension expense to be approximately $15 million which is a decrease of $4 million from 2013. Net interest expense is expected to be in the range of $30 million to $32 million, a decrease of $10 million to $12 million for the year. We anticipate that our restructuring charges will be nominal in 2014, relating to activities initiated in 2013. And, we expect our diluted shares outstanding to be approximately $95 million to $96 million.

On the cash flow side, the Company plans to make cash contributions to its qualified, defined benefit pension plans of approximately $50 million in 2014. Let me take a minute to provide you with an update on our pension plan obligations, where our goal continues to be to fully fund the plans and to reduce or eliminate risks pertaining to these liabilities. The unfunded obligation on our unqualified plans was reduced by almost $200 million in 2013, and our funded position improved to just under 80% at year-end. This is a significant improvement in funding versus year-end 2012 and is the result of a sizable increase in the discount rate, strong investment returns, and contributions.

Our working capital performance in 2014 will primarily be a function of our revenue assumptions. Our current plan anticipates working capital changes to result in a usage of cash in the range of $40 million to $60 million. Our plan continues to reflect capital expenditures that approximate 4% of projected sales with a substantial portion directed at growth and profit-enhancing projects. Despite higher investment spending levels and a modest usage of cash for working capital, we plan to generate strong free cash flow for the full year in the range of $150 million to $175 million. I will now turn the call back to Dusty to continue our outlook comments.

Thanks, Bill. Our outlook and financial targets for 2014 are consistent with the three-year strategic plan outlined in November of 2013 at our New York investor day event. The details of our plan can be found on the slides [concerning] this event which are currently located on our website. We expect 2014 to be another year of strong earnings growth with outstanding cash flow generation. As exciting as those results are, in and of themselves, 2014 is even more exciting and important as a year as we are investing at new and higher levels in our future growth. Our strong operating results, cost control and reduction, and cash flow generation and debt reduction have combined to produce strong and steady earnings growth over the past four years.

With these actions and results behind us, we are now focused on revenue growth. Implied in the financial metrics Bill outlined, our increased investments in organic growth as we increase investment spending in R&D, marketing, sales, IT, talent, and capacity. We will also invest in new, adjacent business opportunities and explore small acquisitions which bolt on to our existing businesses. In 2014, we are targeting 5% to 7% sales growth. This improvement in our top line growth rate results from our increasing investment in growth initiatives in all of our businesses and is supported by the continuation of the solid growth demonstrated in 2013.

Our 2014 targets and plans are based on global economic conditions that are generally comparable to 2013 with weakness continuing in certain regions in Europe. As a result, we expect to benefit from the continuation of the modest recovery in the global marine market with solid growth in outboard boat and engine products, as well as in the global parts and accessories marketplace. In the fiberglass boat category, which also affects sterndrive engine productions, we are currently planning for a modestly declining market with stability in large boats. We believe this will aggregate the total global retail powerboat growth of 3% to 5%. Our fitness segment should continue to benefit from favorable health and fitness trends, as well as solid growth rates in global health clubs and hospitality businesses. Our bowling business should perform well under stable market conditions.

Against the backdrop of our revenue targets, our plan reflects a solid improvement in gross margin levels. Our organic growth platform will continue to benefit from increased investments in capital projects and research and development programs, along with the SG&A to support them. As a result of these ongoing initiatives, full-year operating expenses, as a percentage of sales, are expected to be slightly lower than 2013 levels. Approximately in the range of 17.3% to 17.6%. For the full year, we expect to generate greater levels of positive free cash flow in spite of increasing levels of investment spending. In addition, 2014 net interest expense should be lower than 2013 by approximately $10 million to $12 million due to our successful debt reduction plan which was enabled by our strong free cash flow performance. As a result, our adjusted operating and pre-tax earnings should continue to demonstrate strong double-digit growth rates. We expect our diluted earnings per common share, excluding restructuring, exit and impairment charges, debt extinguishment losses and special tax items to be in the range of $2.40 to $2.55, which is a result of a significantly higher tax rate. If we apply a 34% tax rate to 2013, our EPS guidance would reflect a 20% to 28% growth rate.

Before I make a few summary comments concerning our operating unit financial plans in 2014, I should note that in our judgment, the abnormally severe weather we have experienced in much of the United States to this point in 2014 could well adversely affect our 2014 first-quarter comparisons. Any impact, however, should not affect our full-year plan.

Now, take few minutes to look at the financial targets in our four operating segments. Our overall plan is based on continued revenue and operating earnings growth for our marine and engine segment, specifically revenue growth in the mid-single-digit range with solid improvement in operating margins. We will continue to make significant investments at Mercury, reflecting projects to further increase outboard manufacturing capacity and support new product introductions, including investments in our research and development operations. A quick reminder regarding the first quarter of 2014. Mercury's year-over-year operating earnings leverage will be negatively affected by the $5.5 million favorable gain on the sale of real estate that occurred in the first quarter of 2014.

Turning to our Boat segment, our plan is based on continued solid performance in outboard boats and contributions from our Brazil operations. Small fiberglass boats should also provide growth during the year as we continue to extend our day boat offerings. In the second half of the year, our large boat strategy should begin to generate growth, as an increasing number of new products are shipped into the markets in the latter half of the marine season. Year-over-year growth will be driven by modest improvements in global industry demand, market shares, and new product introductions. As a result, we are targeting revenue growth in the high single-digit range with a solid improvement in operating earnings.

Regarding the first quarter of 2014, we anticipate that our revenue growth in the quarter will be flat. The first-quarter growth rate will be inconsistent with subsequent quarters as we continue to execute our plan to curtail the production and sales of existing models of large fiberglass boats, as we transition to the production of several new models of large fiberglass boats, which will begin to reach the market later this year. We will reach full production of these new models in 2015.

In our Life Fitness segment, our plan is based on continued revenue growth in maintaining strong operating margins. Here, we are targeting revenue growth in the mid-single to high single-digit range. We will continue to make significant investments at Life Fitness. Aggressively leveraging innovation in order to achieve competitive differentiation in our products and services, which should facilitate market share growth and create business opportunities beyond their core business model. And, although Life Fitness' margins could decline slightly in 2014 as a result of making these investments, our plan continues to reflect very healthy margins in this business.

Finally, in our bowling and billiards segment, our plan reflects revenue growth and an improvement in operating margins. Specifically, we are targeting revenue growth in low single digits with a solid improvement in operating margins. I would like to remind you that revenue comparisons for the first three quarters of 2014 in this business will be unfavorably affected by the divestitures of the European bowling centers.

So, in conclusion, we are planning for 2014 to be the fifth consecutive year of strong improvements in operating and pre-tax earnings with excellent free cash flow, and we plan to accomplish these results while investing to enable product and innovation leadership in every segment. That's the foundation for top line growth. With that, I thank you, and I will now turn the call back to the operator so that we can take your questions.

(Operator Instructions)

Mike Swartz, SunTrust.

Good morning, everyone. I wanted to touch on gross margin. You put in the press release, and you talked about solid improvement. Digging into that a little bit and getting a little more granularity, how should we think of the major drivers? Any negatives to that outlook? Should we be thinking about a same kind of rate of growth in 2014 as we saw in 2013?

Yes, Mike. I would say that that is exactly what you should be thinking. I think the numbers that we laid out in New York were kind of operating leverage in the mid-20%. If you start to plug in the SG&A spending level that we've guided to, you get pretty close to where 2013 was in terms of improvement.

In terms of improvement.

And then, some of the major factors behind the improvement in gross margin going forward? Will there be anything kind of new or different than the major drivers in 2013.

No, I would say it is more of the same themes. We continue to get great leverage at the gross margin line, leveraging fixed cost, and we continue to get some benefits from new products.

Okay. And then, if I can ask another question, just in terms of some of the new boat products coming to market, and I guess how we think about the cadence or timing of when they reach market? As we look at this fourth quarter, revenue up 16% -- what types of products are really driving that? And, what should we expect as we move through 2014?

The drivers there first were interestingly -- let's put it in three buckets. Smaller new product introductions as we really focus more on this day boat market and focus on stopping the share loss that we have been experiencing there. Secondly, we are anticipating our outboard boat brands and businesses will continue to show improvement in 2014, and we needed to get the pipeline position to support that improvement. Then, there was continued benefit from the uptick in our -- well, not really the uptick -- in our Brazil operations really beginning to come online and run well.

As we think about 2014, let's think of it in two big buckets. First, we will continue to focus on this day boat market, and we will be bringing new products to market there. Secondly, we will see growth in all of our outboard segments. And then, thirdly, in the larger fiberglass product, fundamentally what we have done -- and we've talked about this before. Is we -- and you really see it here in the first quarter -- we've stopped making the older models of this new product. I am talking product 50 feet and above. We are now transitioning our production facilities to the new product, and it takes a while to get the facilities up and running, get the product built, and begin to get it in the marketplace. As I said in my prepared remarks, we will see that begin to happen in the second half of the year, and we will reach full production rates because we will have all the new products in the market, et cetera, at the end of 2014 going into 2015.

Okay. And, just in terms of the day boat product that is new, would the 350 SLX by Sea Ray fit in that smaller boat segment you are talking about?

Not really because we have actually only begun to get those to the marketplace, Mike. As you know, we are sold out -- trying to figure out how to double, triple production [and are] staying sold out. But, very few of those have come to the marketplace yet. You will start to see those come here in mid-first quarter, but we'll really get a nice pickup in rate in the second quarter and beyond for that particular boat.

Wonderful. Thanks, Dusty.

You are welcome. Thank you, Mike.

James Hardiman, Longbow Research. Please proceed.

Hi. Good morning. Thank you for taking my call here and appreciate all the color you are giving us on guidance. I don't think anybody that heard your presentation a few months ago should be surprised there. I guess my questions are more along the lines of the industry color that you gave. I think you said aluminum and outboard up, smaller fiberglass down, bigger fiberglass stable is kind of how you are terming things. I guess it is the last point.

Dusty, you and I go back and forth on all the time. Talk a little bit about that in the context of the most recent industry data that seems to be pretty positive at least in terms of the US. It actually seems like the cruisers and the yachts are outperforming the broader market, or at least did in 2013. Maybe this is a little unfair as the second boat Company to report in the last two hours. But, MarineMax seems really excited about big boats in general and your big boats, in particular. I guess all that's to say it seems like it is doing a little bit better than stable, but obviously, you have a lot more visibility than we do.

Well, first, we can probably wrestle around with the word stable. Stable from my perspective can mean up some. That is our view of the market. And, if we subdivide it, yes, there is clearly in boats above 40 feet -- at least in the fourth quarter and perhaps in the third quarter -- some building momentum. But, there are also very small numbers [games]. We obviously believe that is a segment that has real opportunity for us, and that is where we are bringing -- and I think we have been very open about it -- six new models to the marketplace. And, we will begin to have all of them in the marketplace by 2015, so we are pretty comfortable about that segment.

In terms of the smaller boats, I think if you add up everything in the day boat category and forget the small just fiberglass boats, there is nice improvement in the day boat category, but it is happening across a broad range of products. So, we are -- as we do our planning, we have to make some market assumptions, and this is where we put the stake in the ground. Now, if the markets are better, of course, our results get better and we love it. But, as we do our planning we have to start somewhere. Because, again, the biggest thing we can do wrong as an industry -- and I actually heard some criticism on Squawk Box this morning by some people talking about the car industry. And, it's overpopulate the pipeline. Let's be very disciplined in managing the pipeline. The market is better -- great. Let's move on it. If it is not, we are all still going to make money and be healthy is the way we think about it.

That make a lot of sense. I guess along those lines though to the extent that certainly the bigger boats outperform your expectations, it sounds like you may not necessarily be able to keep up with that increased demand just given some of the transition from a production perspective. How much upside could you capture if you are pleasantly surprised this year?

We would certainly capture more in 2015 than we would in 2014, but I would like to not go into any more detail, James, because that starts to talk about what our ability to flex in production of these large boats, but there is some ability to flex.

Okay. Last question here, and maybe this is repackaging what you've already told us. But, the dealer inventories within the channel -- last couple years, you'd increased those inventories in the fourth quarter to prepare for the spring selling season. I think I heard you say you did that again with aluminum and outboard, but that the smaller fiberglass was up and the bigger fiberglass was down. Remind us what you said there? And I guess, fundamentally as I think about the first quarter, and I guess the year -- wholesale versus retail, are there some rules of thumb we should be keeping in mind there, sort of seasonally?

First, you very accurately summarized, James, what I was probably not very articulate in saying is how we manage the pipeline in the fourth quarter. Up in outboard boats. Also, up in small, sterndrive fiberglass boats because we have some new models, and managing down the larger boats getting ready for the new products. As we look at the big picture across 2014, we are going to begin to come more in equality with wholesale and retail as we finish up 2014.

Okay. And, nothing to call out in the first quarter with respect to the difference between the two?

The only thing I have tried to call out in the first quarter is we are going to sell a fair bit fewer in terms of dollars and units large boats than the previous quarter, so we have this odd dynamic going on in the first quarter. Continued up nicely in outboard product. Remember, our sales are in dollars, we are not talking about units -- but as we get ready for these new models, we are going to sell substantially fewer dollar value of the large boats. And, that's why we think the quarter in dollars will be flat compared to the same quarter last year.

Excellent. Thanks. See you in Miami.

See you. Thanks

Rommel Dionisio, Wedbush Securities. Please proceed, sir.

Thank you. Good morning. I think you in the past have talked about your sterndrive engine business and about how you may not rely on GM blocks necessarily in the future and come out with some of your own engine blocks. Can you give us an update on how that technology pursuit is going? And, if you're still on track to be rolling that out soon? Perhaps what the impact might be on margins longer term as that business sort of takes over?

First, on track, great engines. I said a couple of calls ago, a couple of technology features, and all my friends up at Mercury called and screamed at me for getting that into the marketplace, but engines we are really happy with and on track to bring them to market this year, most likely in the second half of the year. In terms of margin improvement, there was slight margin improvement on a per engine basis, and the real margin pickup that would occur is if the sterndrive market continues to improve.

Okay. Fair enough. Thank you, Dusty.

Thank you, Rommel.

Our next question comes from the line of Greg Badishkanian with Citigroup. Please proceed.

Two questions, first is with respect to weather impacting the first quarter? You saw that in December in the fourth quarter, as well? Would you say -- how much of an impact would you say that had on retail sales?

Well, I am focusing a bit more on wholesale sales, Greg.

Okay.

If you look at our boat business and even to some extent our engine business, pretty slow production quarter, and therefore as we see bad weather hitting us -- it wasn't much of an impact. I am not predicting, but if this mess continues, I think it will affect our bowling retail business. Atlanta, I think, is still shut down there for the third day, and we have some high volume centers down there, as an example. I could go on and on and on about that stuff. In many regions where both we and our suppliers manufacture, we have had employees just having a tough time getting to work. Or, the weather is so cold schools are out. It disrupts everybody's schedule. So, those are just the sort of things that we are living with right now. If there is any impact, we will figure it out and make it up as the year goes on. I just wanted to caution everyone, there is the possibility or perhaps the potential that we will see some impact in the first-quarter comparisons.

Right. It feels like in Europe seems to be picking up a little bit for some of the other leisure companies. Wondering why you have a pretty conservative outlook on Europe?

Because fundamentally, we don't see anything changing in the overall economic situation in Europe. And, we think of Europe as a pretty broad category -- a pretty broad geographic area. Our judgment was as we plan on what we should be doing there, we should just plan conservatively and be prepared for any upside that might occur.

Very helpful. Thank you.

Great.

Jimmy Baker, B. Riley & Co. Please proceed, sir.

Good morning, and thank you for taking my questions.

Hi, Jimmy. How are you doing?

I am thawing out here. (laughter)

I am not, yet.

Just a quick follow-up to the commentary on Europe. Can you maybe just give us an overview of what you are expecting from the non-marine markets outside of North America? Both in terms of new boat sales, but also what you are seeing on the P&A front from Mercury?

I want to make sure I understand the question, Jimmy. Talk about non-marine, and then P&A? Is that what you are looking for?

Excuse me. Marine markets outside of North America.

Okay. Let's do it this way. We think Europe is still going to be a tough place to be. We will again see in our view, however, P&A growth in Europe because people are still boating there, they are just not buying new boats. When you begin to chunk that up in Europe, country by country, region by region, it is wildly -- the best way I can say it -- different. Italy, Spain, even maybe beginning to see a little bit in France, are tough places to be. Germany, Belgium, Netherlands, a good place to be and improving in Scandinavia, but, of course, Italy, for instance, was by far the largest boating country. That's how we see all of that shaping up. We think P&A will continue to grow, generally a little slower than perhaps the rates in the United States. A lot of our P&A growth here in the United States -- and we called it out in Bill's part of the prepared comments -- has been really great work at Attwood and Land 'N' Sea. We don't quite have those equivalent businesses today in Europe, therefore it is hard to get that sort of benefit from those businesses.

As we go to Asia, still -- we do rest of the world -- let's think of Asia-Pacific and Australia, generally flattish. We are in the boating season over in Australia. A little better, but again, it's not big enough to give us a big pickup outside of the United States.

Brazil is going to be interesting in 2014. We made a big investment down there. The operation is up and running on the boat side. We've always had a good engine business there. A lot now is going to depend upon what happens economically down there. They have got a couple of things that are going to be, in our view, a bit of a distractions. The first of which is a new election, an election for a new leader there. That, as you know, has had people in the streets and whatever, so we are going to have to watch how that plays out. And, the World Cup has always been great thing for the economy of a country and an infrastructure building, could be a bit of a distraction as we work our way through 2014. So, we think there is going to be improvement in Brazil, but we are a bit cautious about how much, even though we continue to believe it is a place we want to be. And, longer term, it is going to be a real good place to do business.

Thank you for all that color. It is very helpful. I have a very high level question for you, Dusty. As you think about allocating investment dollars on the marine side, it seems there's a real dilemma right now from a product planning standpoint where you have this baby boomer demographic that's seeing a real increase in wealth from rising asset values and that core voting demographic has the financial wherewithal to pay for some of these higher value-add, higher priced offerings. But, at the same time, you have the younger demographic -- a lower net-worth demographic that seems to be continually getting priced out of the fiberglass new boat market here. Can you talk about what you can do at the manufacturer level to address that dichotomy? Either on the boat or the engine side?

Sure. It is a great question, Jimmy. The first thing, let me jump into it backing up to a little earlier in 2013. We ask ourselves, is the boating industry in some sort of overall, secular decline? Or, is it going to bump along here where it is, and we decided we really needed to understand consumers all around the world. We conducted what had we believe is the largest consumer survey done in the industry in Europe, Canada, Brazil and the United States. Seeing large boating markets where we can find consumers and get good information. And, we surveyed -- we were very careful to say statistically correct as we surveyed across age and income gaps -- or units.

We found two things. Both of which really made us happy. The first was there is absolutely no question that people understand that boating is a wonderful reaction activity, and there still remains a high desire to participate in boating as an activity. The second thing we found, then, was that however that is not translating into increased sales of new boats because the cost versus the benefit of new boats is still not in line with what consumers expect. That really rang true to us because when we look at used boat sales in the United States, while the new boat market declined, say [in the past], the used boat market never declined in the double digits in any particular year.

Now, the last good statistics we have were 2012, and I suspect 2013 will continue to be the same case. Used boat transactions -- that is, used boat that changed hands -- were higher in 2012 than they were in the pre-recession years. So, it tells us people are really focused -- continue to be focused on boating, want to boat, and in fact want a different boat. We just haven't been able to entice them to new. Therefore, we have got to do several things, and we've to be laser-focused on it and get really good at it.

First, every new model that we introduce must cost less than the model it replaced. We have been working on this hard, and we have been talking about it for a couple of years. We are beginning to have real success. Our product development folks in our boating businesses, working with our engine people, are really starting to get into the correct cadence there, and I am confident we are going to get there.

Secondly, we've got to provide innovation, styling, and features in new products that will cause people to say I need new rather than used. And, that is actually a little harder as one might imagine than in reducing costs. Again, I am feeling like across our businesses, in fact from other people in the industry, we are really beginning to hit stride around that. So, as an example, who would have ever thought a 35-foot day boat that is a Bowrider would be with two engines and an axis control system would be a hit? But, buried in our research, we found that people who have been buying cruisers for the future tend to think they are going to spend less time at night on the boat, and therefore, day boating is becoming popular.

As we see the great rise in pontoon boats, in my judgment, a lot of that is driven by people seeing the real value in pontoon, and there has been great innovation in pontoon. Who would have ever thought you would have pontoons running around with 200- or 300-horsepower engines on them with a joy stick docking system. So, I could go on and on. But, what is happening here is we are getting our feet under us and understanding the consumer. We know what we have to go do, and now it has got to be very much disciplined, sleeves rolled up, stay at it, and don't move. Is that helpful in any way? It is a broad answer, Jimmy, to the question.

That color is very helpful, and I will take the rest of mine offline in the interest of time. But, do want to express my appreciation for the segmented guidance for the year. It's really helpful. Appreciate that, and I'll pass it off.

You can thank Bruce for that.

Craig Kennison, Robert W. Baird & Company, Inc. Please proceed.

Thank you for taking my questions. Many have been addressed already. I will start on the credit side. I recognize you are not directly involved in any lending, but I'm wondering whether you are seeing any changes to credit availability across the various tiers that you serve?

Craig, this is Bill. The intelligence I get from my guys who are involved in this is that it is improving modestly. We are still better than we were at the depth of the recession, but we are still not back to where we were pre-recession. But, we are starting to see a little bit greater availability and accessibility for consumers.

Great. And then, lastly, in dealer count, are you satisfied with where you are at with respect to your dealer footprint? Or, do you see any opportunities to maybe grow that base as the market recovers?

We have been growing our dealer base fairly steadily the last couple of years. It is generally, Craig, brand- or segment-specific as we feel we are underrepresented in certain markets and have the ability to get product there, et cetera. We have been fairly steadily increasing the dealer count and will continue to do so.

Great. Thank you.

You are welcome. Thank you, Craig.

Gerrick Johnson, BMO Capital Markets. Please proceed.

Good morning. Fitness. Can you just talk about fitness a little bit? You had nice top line improvement, but a deterioration in profitability. It looks like you expect those trends to continue. Can you talk about those trends in fitness with a little more detail? Thank you.

Thank you, Gerrick. Two things. We are investing heavily in this business, and on a percentage basis, we are investing more heavily in this business than we are in any other business. We talked in the past about the revival of some of the competitors, and our desire to continue to beat them with great product, better service, et cetera. And, that requires investment. Secondly, we began to signal in the first quarter of 2012 with our big analyst presentation down in Miami that has some of the competitors in the fitness industry began to get their footing under them from a business perspective, we anticipated that in order to move volume through their plants, et cetera, there would be pricing pressures. What we saw in the fourth quarter is that coming to fruition. As we look for the year, there will be a little pressure on fitness margins, but I think we are pretty well in line for 2014 as we were in 2013. And, the margins are going to continue to be outstanding there.

And, the only other point I would make is that fourth quarter last year margins were up substantially in the period. We are facing top, tough comps in Q4. Those relationships are much more balanced when you look at the full year.

Okay. To close out, I heard you mention the word acquisition. If you were to do something, albeit small, what kind of things would you be looking to buy?

I will say this. We believe the opportunities revolve primarily around our P&A business.

Great. Thank you very much.

Probably doesn't help a lot. [But, that is all we can say right now.] Thank you.

Tim Conder, Wells Fargo Securities, LLC. Please proceed.

Thank you. Dusty, let me echo my thanks for the additional detail on the guidance here, so kudos to Bruce on that. A couple of things, if you could just -- Bill, on the pension discount rate. Can you just give us an update what that went from and to?

I sure can. I think it increased -- we went up about 85 basis points, so from [400 to 485] is what we are using at year-end.

Okay. And Dusty, can you maybe give us a little more color about -- I think maybe some plans as far as your duties and position may have been extended over the last several months? Just a little more color there? Then, a thing that you all alluded to -- I am not saying it was a bad thing either, Dusty, so don't take that wrong. (laughter) But, the thing you alluded to at the analyst presentation and any additional color you may want to give or the opportunity magnitude with some licensing potential around your aluminum technology at Mercury. Any additional color there?

Sure. On duties and position, I still have the same duties. Someone had asked me how long I was going to continue to work? And, I said, when I was 50 I never dreamed I would be working at this age, and I have agreed to work a fair bit longer with the Board, so you have to put up with me for a while.

In terms of licensing -- first, to answer the question directly, then give a bit of color on it. We are continuing in testing with customers of the alloys and intellectual property-protected metal working that we bring to the market. We are encouraged by the requirements by cafe standards to reduce weight and, of course, what we thought of and worked in for a very, very long time is aluminum as a metal.

Secondly, we are watching with great interest, Ford with their new F-150 as they introduce a product with much more aluminum in it to reduce weight, a smaller engine, take costs out, decrease fuel usage. We think all of that bodes well for us, Tim. We are beavering away on this, I guess is the best way I can put it. These things start out with great technologists talking to great technologists on a cross-business perspective, and then, it eventually has to end up at an executive decision-making level. I would say we are somewhere in between the two right now on our track to get this business matured.

One clarification there, how much of that potential, if any, is baked into the guidance that you outlined at your New York meeting?

Peanuts.

I'm sorry?

Peanuts. Very small amounts.

Okay. Great. Thank you.

Thank you, Tim.

I would now like to turn the conference back over to Mr. Dusty McCoy. Please proceed, sir.

Thank you for getting on the call with us. Today was a very busy day. I know millions of folks who are on the call cover people who had released earlier than us and had calls, so we appreciate your interest very, very much.

I will just close by saying we are pleased as punch with 2013. We are really excited about 2014. As we look at our guidance and take care of the tax rate and shares outstanding and all that, we are staying right on course with what many of you in the market have been judging we were going to do. But, the thing we wanted to convey heavily in this call -- and it sounds like we were half-successful -- is this is the year in which we are really ramping up and upping the rate of investment we are making in our businesses for growth. It is occurring in every business. And, in every single business segment we have, we have got lots coming to the market at various times in 2014, and as we look ahead into 2015.

So, in my career here I am more excited about our potential going forward than at any time. And, as a management team, we are enjoying all this because we have had to do a lot around cost-cutting, reducing debt, et cetera. Now, we are really getting to do what we are paid to do, which is understand what the market needs, make investments so that we can meet the market, and then go over the top line in earnings. So, we look forward to 2014. Look forward to seeing many of you as we move around to the rest of the year. Thank you so much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.