賓士域 (BC) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Brunswick Corporation's 2014 first-quarter 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 Bruce Byots, Vice President Corporate and Investor Relations.

Good morning, and thank you for joining us. On the call this morning is Dusty McCoy, 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 those expectations. For the details on these factors to consider, please refer to our recent SEC filings and today's press release. All these documents are available on our web site at 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 this presentation, as well as in the supplemental information sections of the consolidated financial statements accompanying today's release. I would also like to remind you that figures in this presentation reflect continuing operations only, unless otherwise noted. At this point, I would like to turn the call over to Dusty.

Thanks, Bruce. Good morning, everyone. I'll start with an overview of our first quarter results. As we pre-announced on April 8, revenue in the quarter decreased 3%. We experienced growth in fitness equipment and outboard boats, which was more than offset by declines in outboard and sterndrive engines, fiberglass sterndrive/inboard boats, and in our bowling and billiards businesses.

It's our view that harsh weather conditions throughout the quarter had an adverse effect on our marine and bowling segments. Bill will provide more color on these trends in his remarks.

Our gross margin increased by 110 basis points compared to the prior year. This outstanding improvement was largely driven by our fitness and boat segments. We do not, however, anticipate this trend to consolidate gross margin to continue in the second quarter. We will explain why later in the call.

Operating expenses increased by 2%, including an 8% increase in R&D expenses, as we continue to invest in numerous strategic initiatives. If we exclude a $5.5 million gain on sale of real estate in 2013, operating expenses were down by 1% compared to 2013.

Adjusted operating earnings decreased by 1% versus the prior year. Continuing down P&L, net interest expense was reduced by $5.7 million, reflecting our prior year debt reduction activities, which were enabled by our strong free cash flow performance.

Adjusted pretax earnings increased by 6%, and diluted EPS, as adjusted, decreased by $0.16 to $0.60. If we apply our 2014 tax rate and shares outstanding to our 2013 results, EPS as adjusted would be up slightly.

Our LifeFitness segment reported strong top-line improvement of 6% in the quarter, while our combined marine and bowling and billiards segments declined by 4%. From a geographic perspective, consolidated US sales decreased by 2%. Sales to Europe increased by 1%, which includes a slight favorable impact from foreign currency. Rest of world sales declined by 6% versus the prior-year period, with foreign currency accounting for more than one-half of the decline.

Adjusted operating earnings were $94.7 billion for the quarter, a decrease of $800,000 compared to 2013. Operating margins, excluding charges, increased by 20 basis points to 9.8%. The increase in operating margin includes the impact of an expansion in gross margin, partially offset by the increase in operating expenses.

We are forecasting that operating expenses will increase in the second quarter as we fund various strategic initiatives, with a meaningful proportion related to second half product launches. I'll discuss a few of our new product introductions in my concluding remarks today. Given our relatively flat adjusted operating earnings performance combined with lower net interest expense, adjusted pretax earnings increased by approximately $5 million, or 6%.

Net earnings for the quarter equaled $0.60 per share on both a GAAP and an adjusted basis. This compares to net earnings as adjusted of $0.76 per share in the prior year. As a reminder, our current EPS reflects the significant increase in our effective book tax rate. Now I'll turn the call over to Bill for a closer look at our segment results and financials.

Thanks, Dusty. I'll start with the marine engine segment where sales were down by 3% in the quarter. From a geographic perspective, sales to the US markets were down 5%, reflecting a slight increase in parts and accessories, which was more than offset by lower engine revenues.

Sales to Mercury's European customers decreased 1% as growth in parts and accessories and diesel sterndrive/inboard engines was more than offset by a decrease in outboard engines. Rest of the world sales decreased 6%, reflecting an increase in diesel sterndrive/inboard engines which was more than offset by lower outboard engines and parts and accessories. Currency also had an unfavorable impact on rest of the world sales during the quarter.

On a product category basis, our outboard engine business reported sales declines in most major markets in the first quarter of 2014. I should point out that system-wide outboard inventory levels entering 2014, along with backlogs, were much better aligned with anticipated market demand that in 2013, which also contributed to the year-over-year wholesale demand dollar declines. Our outlook for outboard engine business continues to reflect favorable retail demand in most markets and both categories.

Sterndrive engine sales continue to be affected by unfavorable global retail demand trends. We are realizing some modest diesel engine growth, particularly in international markets, as we pursue our objective of expanding our presence in this market.

We believe harsh weather conditions in many North American markets were a major contributor to the decrease in engine sales. Sales for part -- Mercury's parts and accessories businesses were flat compared to the prior year, with growth in both Europe and the US offset by declines in the rest of the world.

Revenue benefited from new product launches and market share gains. The product launches included new MotorGuide trolling motor products, and Land 'N Sea introduced or continued to grow market share through service delivery improvements, rapid product availability, broader product offerings, and some additional new products.

Weather was also a negative factor for these businesses in many North American markets, causing early seasonal activity to be below normal patterns. Mercury's operating earnings declined compared to last year's first quarter, and operating margins were at 12.2%, 150 basis points lower than the prior-year quarter. Lower operating earnings resulted from the absence of a $5.5 million gain on the sale of real estate that occurred in Q1 2013, the decline in sales, and increased spending on growth initiatives.

In our boat segment, first quarter revenues decreased by 2%. In the US, which comprises about two-thirds of the segment, sales declined by 4%. This included continued sales growth on our outboard boats. However, these gains were more than offset by reductions in fiberglass sterndrive/inboard boats.

In the quarter, our European sales increased by approximately $9 million, or 38% versus the prior year. This performance resulted from improvements in our European outboard brands, as well as gains in our US fiberglass brands.

Rest of the world sales increased by 11% -- or decreased by 11%, which reflected lower sales in all major markets and the unfavorable impact of currency. Once again, we believe harsh weather conditions in many North American markets were a major contributor to the decrease in segment sales.

Before we discuss US power boat industry statistics, let's briefly review some weather trends that were influencing retail sales activity in the first quarter. As these charts clearly depict, colder than normal conditions affected the eastern two-thirds of the US in 2014, and were more widespread than 2013, which was also a difficult year.

Looking at data for the top 20 boating states provides some additional insights into the impact of the weather. First, states that experienced average temperatures of more than five degrees colder than normal reported on average double digit declines at retail, and second, states having more favorable conditions, for the most part reported results that were more consistent with our full-year expectations.

For example, Florida and Texas reported first-quarter increases of 9% and 4% respectively. I would also like to point out that a number of upper Midwestern states included in this summary have not fully reported their first quarter sales, including Minnesota, Wisconsin, and Illinois.

Weather conditions have continued to be adverse in certain key boating states, and may consequently affect April retail comparisons as well. At this early point in the marine season, we believe that retail sales could be deferred for later months. As you can see from the preliminary SSI data, retail demand for the first quarters of both 2013 and 2014 was weak and not consistent with prior quarterly trends.

Fiberglass outboard boat markets continue to demonstrate solid growth, while the aluminum category, the most vulnerable to cold and ice, was down modestly. The fiberglass sterndrive/inboard boat category also declined in the quarter. This decline was most -- most likely reflects the weather's impact, but also continues to be challenged by ongoing economic headwinds and consumer shifts to other boat types, factors that we have been discussing with you over the past few years.

The NNMA will soon be releasing their final 2013 US retail power boat market data. Our estimate reflects that the US market grew by approximately 3.5% in 2013 and totaled 158,100 units.

Brunswick's global retail unit sales were flat in the first quarter versus prior year. Our global wholesale unit shipments decreased by 4%. This compares to both group sales decline of 2%, as the segment benefited from a higher average selling price.

Regarding our pipelines, (inaudible) ended the quarter with 40 weeks of boats on hand on a trailing 12-month retail basis, which is comparable to the prior year level. Pipelines for aluminum and fiberglass outboard boat products are up compared to the last year, while fiberglass sterndrive/inboard pipelines are down versus the prior year. Our current pipeline levels are consistent with our annual growth expectations in various boat categories, and we continue to be comfortable with these overall levels.

The boat segment's first quarter adjusted operating earnings improved by $1.1 million when compared to the prior year. This improvement resulted from a higher gross margin, which included benefits from cost reduction actions including plant consolidation activities initiated in 2012 and 2013 and improved net operating efficiencies. Partially offsetting these factors were lower sales, and increased investment spending, primarily related to the introduction of new models.

Now let's turn our attention to our two recreational segments. Sales at LifeFitness increased by 6% resulting from strong growth in the US to health clubs, local and federal governments, and hospitality customers. Partially offsetting the US growth was slightly lower international sales, including an unfavorable impact of currency in rest of the world markets. We anticipate new products to benefit sales in all markets over the next several quarters.

Segment operating earnings in the quarter increased by approximately $5 million. This strong earnings performance reflected higher sales and improved gross margin, which included favorable warrantee expense comparisons, partially offset by the absence of a favorable prior year insurance settlement. Continued increases in investment and growth initiatives also negatively affected year-over-year comparisons.

Sales for our bowling and billiards business decreased by 8%. Revenues declined in each major business category, with weather being a negative factor in many regions for our retail bowling centers.

As a reminder, our bowling organization completed divestiture of its European bowling center portfolio in the second half of 2013. Excluding the impact of this divestiture, the segment sales were down 3%.

Operating earnings in the quarter decreased by about $2 million reflecting declines in sales and operating inefficiencies, including higher utility expenses. Foreign currency had a slight net unfavorable impact on total consolidated sales.

However, rest of the world sales were unfavorably affected to a greater degree than our marine engine, fitness, and boat segments. Foreign currency had a minimal net favorable impact on operating earnings comparisons for the quarter, reflecting a mix of favorable and unfavorable exchange rate movements, including the impact of hedging activity.

For the full year 2014 versus 2013 comparisons, we currently estimate that exchange rates will have a slight net unfavorable impact on sales and operating earnings. This assumes that rates remain consistent with current levels for the remainder of the year.

Now I would like to provide some brief comments on our tax provision. Our effective book tax rate on an as-adjusted basis was 34.3%.

This rate excludes the tax impact of any nonrecurring special tax adjustments. Our anticipated full year effective book tax rate for 2014 as adjusted continues to be approximately 34%.

We are, however, lowering our estimated effective cash tax rate to a low double digit percent level due to a revised assumption on our domestic tax liabilities. I also would like to note that our effective book tax rate for 2014 exclude any potential benefit from an extension of the US R&D tax the credit.

Turning to a review of our cash flow statement. Cash use for operating activities was $108.2 million, an increase of $14.4 million versus the prior year. Normal seasonal changes in balances, combined with the impact of lower than expected demand for our marine products, resulted in a use of cash in our primary working capital accounts and totaled approximately $210 million.

The biggest changes occurred in accounts and notes receivable, which increased by $111 million, inventory increased by $81 million, accrued expenses decreased by $84 million, and accounts payable increased by $68 million. Given the seasonality of sales in our marine businesses, we anticipate the anticipation the liquidation of working capital over the balance per year.

Total free cash flow amounted to a negative $130 million versus approximately $109 million in the prior year, a difference of $21 million. Capital spending in the quarter was approximately $22 million, which included investments in new products in all businesses along with capacity expansion projects. Our business units continue to remain focused on generating strong free cash flow, which will allow us to continue to fund future investments and growth.

Cash and marketable securities total $227 million at the end of the quarter. A decline from year-end 2013 reflects a seasonal free cash flow usage of $130 million as well as our quarterly dividend payment of $9 million.

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. And 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. As you can see, all of these items are unchanged from our previous outlook statements.

On the cash flow side, the Company's plans to make cash contributions to its qualified defined benefit plans is approximately $50 million in 2014. 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 modest usage of cash for working capital, we plan to generate strong free cash flow for the full year in the range of $165 million to $190 million.

This represents an increase from our previous guidance due to a lower estimate of tax payments. I will now turn the call back to Dusty to continue our outlook comments.

Bill, thanks for the good summary. As we stated in our earnings release, weather conditions at certain marine markets have masked the underlying consumer demand for our boat and engine products. However, at this early point in the marine season, our operating plans for the full year remain fairly consistent with the planning assumptions we communicated at the outset of the year.

We continue to target 2014 to be another year of strong earnings growth with outstanding cash flow generation. Our plan reflects 5% to 6% sales growth, which is supported by our increasing investment in growth initiatives, and by the continuation of the solid growth demonstrated in 2013.

We continue to anticipate 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 will increase, and as a percentage of sales are expected to be slightly lower than 2013 levels, approximately in the range of 17.3% to 17.6%.

As a result, our adjusted operating and pretax earnings should continue to demonstrate strong double digit growth trends. Further, we expect our adjusted diluted earnings for common share to be in the range of $2.40 to $2.55, which would translate to a 20% to 28% growth rate, assuming a 34% tax rate applied for 2013 earnings.

Regarding our outlook for the second quarter, assuming weather conditions in May and June are more normal, we're anticipating solid top-line growth in our marine segments as well as in our fitness segment. The bowling and billiards performance is expected to be comparable to 2013.

However, we do anticipate some near-term pressures on our gross and operating margins. Specifically, we expect our second quarter gross margin to be slightly lower than we reported in the prior year. In addition, Q2 planned operating expenses reflect low teens percent growth, as we fund various strategic initiatives during the quarter, particularly in connection with new product launches.

The second quarter operating expense growth represents a significant portion of our planned annual increase in operating expenses. We will continue to benefit from lower interest expenses, and therefore we estimate a slight increase in our adjusted pretax earnings.

As we look at our 2014 first half, our operating earnings will be down slightly compared to a 2013's first half. Thus, our view of the 2014 year reflects strong second half growth in sales, driven by an extensive array of new products, along with year-over-year improvements in gross margin, and more normal operating expense trends. The slide we have up now gives you an example of some of the new products in our marine businesses that we have introduced or we'll be launching in the upcoming quarters.

At recent boat shows Sea Ray introduced at top left a new product in the larger boat categories, the 650 Fly, which debuted in Miami. This is the first of Sea Ray's new L class family of yachts. The L class family marries style and substance as only Sea Ray can, and will change the way boaters look at luxury.

As we continue clockwise on this chart, Sea Ray also introduced its new 510 Flybridge, which has expanded Sea Ray's entry -- reentry rather, into large motor yachts. At the bottom right is the popular new 350 SLX [Day]rider, which was also in Miami. Demand is substantially higher than what we originally expected for 2014. And Mercury's outboard product line will continue to be comprehensively upgraded with new, more cost-efficient architectures and product refresh programs.

New products entering the marketplace from LifeFitness include, beginning at the top left on this chart, the Company's first in its history step climber. Another addition to the elevation series, and also available in the LifeFitness Integrity series, the PowerMill climber uses proven LifeFitness technology to create a powerhouse, perfect for high intensity, low impact training.

Continues clockwise on the chart, available in the summer of 2014, in the [Signature] series weight system we will replace the successful LifeFitness Signature series Select Rise line with a new look, improved feel, and [in-as] features. At the bottom right, Hammer Strength Select features a 22-piece line of Select Rise equipment with new technology integrations enabling exercisers to tailor the equipment experience to suite their needs. And finally in the bottom left, SYNERGY BlueSky is an extension of the groundbreaking SYNERGY 360, and is LifeFitness' first small training system designed specifically for outdoor use.

The full-year financial targets in our four operating segments remain largely unchanged. Our overall plan is based on full-year revenue and operating earnings growth in our marine engine segment. Specifically, we're planning for full-year revenue growth in the mid-single digit range with a solid improvement in operating margins. We will continue to make significant investments in Mercury, including projects to further increase outboard and manufacturing capacity and support new product introductions. Regarding the second quarter of 2014, we are currently expecting a lower operating margin compared to the second quarter of 2013, due to the absence of favorable insurance settlements and warranty adjustments in the second quarter of 2013, as well as investment spending increases.

We look at our boat segment, our plan is based on four key areas of execution. First, our large fiberglass boat strategy should begin to generate growth in the second half of the year, as an increasing number of new products are shipped into the market. Second, we'll have continued solid performance in outboard boats. Third, contributions from our Brazil operations will continue. And fourthly, small fiberglass boats should also provide growth during the year as we continue to expand our day boat offerings.

Year-over-year growth anticipates modest improvement in global industry demand, market share gains, and new product introductions. As a result, we're targeting revenue growth in the high single digit range with a solid improvement in operating earnings.

As we look at the second quarter of 2014, we will continue to execute our plan to curtail the production and sales of certain existing models of large fiberglass boats as we transition to the production of several additional new models of large fiberglass boats, which will begin to reach the market later this year. We'll reach full production to these new models in 2015. Further, we anticipate lower operating margins and earnings compared to Q2 of 2013, due to increases in operating expenses, including heavier investment spending and the absence of favorable warranty expense in the second quarter of 2013 offsetting benefits from increasing sales.

In our LifeFitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. Our 2014 and three-year plans are targeting revenue growth in mid-single to high-single digit range.

We will continue to make significant investments at LifeFitness, aggressively leveraging innovation in order to achieve competitive differentiation in our products and services, which should continue to enable market share growth and create business opportunities beyond our core business model. And although LifeFitness' margins could decline slightly in 2014 as a result of these investments, our plan continues to reflect very healthy margins in this business. As we look at the second quarter, we expect a lower operating margin compared to the second quarter of 2013, as benefits from sales growth are more than offset by investment spending increase related to new products and business opportunities.

Finally in our boating and billiards segment, our three-year plan reflects revenue growth and an improvement in operating margins. However, as a result of the unfavorable weather conditions and the resulting loss to Q1 sales, we're now targeting 2014 revenue for the segment to be flat with the prior year.

However we still believe we can achieve a solid second half improvement in both operating earnings and margin. I'd like to remind everyone that revenue comparisons for the first three quarters of 2014 will be unfavorably affected due to the divestiture of the European bowling centers last year.

So to conclude, we're planning for 2014 to be the fifth consecutive year of strong improvements in operating and pretax earnings and excellent free cash flow. And we plan to accomplish these results while increasing investment to enabling product and innovation leadership in every segment, and as the foundation for our top-line growth. Thanks, and now I'll turn the call back to the operator so we can take your questions.

(Operator Instructions)

Our first question comes from James Hardiman with Longbow Research.

Hi, good morning. Thanks for taking my call.

Dusty, the top-line guidance, I hesitate to even call it a reduction, 5% to 6% versus what was 5% to 7% before, sort of looking at the line-by-line guidance. Correct me if I'm wrong, it seems like bowling and billiards is the only area where you're actually reducing the revenue guide.

And I guess first question, does that account for the entirety of that 50 basis points versus -- worth of reduction at the midpoint? And I guess just walk us through the last couple of weeks. It seems like when you gave your pre-announcement a few weeks ago, you wanted to leave the window open with respect to the top-line guidance.

March data wasn't great, and yet it seems like you still feel pretty good about the guidance in boats and in engines. Can you walk us through that thought process?

Sure, absolutely. Bowling is, the decline in bowling is a big part, but if we do the mathematics, it doesn't account for all of it. Frankly, it's just we as a management team being fairly conservative, as we all know what the first quarter retail results were.

And frankly, April is turning out to be a good month, but there's still tough weather in a few places and it's not going to be as big a month as we had originally planned. But we're comfortable that, as we get past this month, we're going to continue all the growth targets and hit them all that we have set.

But we just tried to be realistic since we were guiding in ranges, be a bit more realistic about what we thought we could do so we wouldn't be disappointing anybody in revenue growth.

We're neither excited nor disappointed or anything about the 5% to 6% versus, I think, the 5% to 7% we had been giving. Doesn't change our view of how we're going to perform through the year, and you saw we raised our free cash flow guidance.

We're comfortable with the way it's all playing out. We just wanted to be a bit more realistic in taking into account what had gone on in the first quarter and where April looks.

Excellent. And then maybe talk a little bit about, I don't know, for lack of a better word, the backlog here. Marine Max, and obviously it's a little unfair for me to use some of their commentary since they reported an hour ago, but it sounds like there were a lot of, quote unquote, sales that just weren't delivered, whether it be the ability for them to spec the trade-in or just people not wanting to take delivery given how bad the weather is.

Talk a little bit about that. What are you hearing from your dealers beyond Marine Max?

And then maybe in specific, some of the new products, the 350 SLX and then the 510 and 650 Fly, what's the initial demand for those products, or at least the updated demand that you're hearing? And is there any doubt that you'll be able to sell as many as you can make this year?

First, generally what we're hearing from dealers is more than I have heard in my time here at Brunswick, is that they got a lot of product sitting around that's been sold, they haven't been able to deliver. And that's especially true in the upper Midwest where there's still ice on all the water. And that's a pretty big boating market.

So, yes, generally we have heard more than we normally hear that we've got boats sold, we just can't deliver. And obviously that makes us feel comfortable about underlying demand.

Specifically looking at the 350 to 510 and 650, we are, -- I think we have said fairly openly to everyone, we're sold out through calendar year 2014. Nobody's backing off. And our operating folks have got their sleeves rolled up and are really working hard because these are new models which require integration.

The 510 and 650 are very big, a lot of work to get it done. So they got a hill ahead of them to get all these boats delivered. So really the issue is more, from my perspective, not demand but the ability of our hard working folks to get the boats out. And I'm pretty relaxed they're going to be able to do it because they're really good.

Excellent. Thanks guys.

You're welcome.

Our next question comes from Greg Badishkanian with Citigroup.

Great. Thank you.

Just two questions. First, what are you seeing in terms of your competition in terms of whether it's new products or promotions? How have they been responding in this type of market?

First, on new product, I think there's a pretty steady flow of new product coming into the marketplace. My judgment is that to route our marine business and our fitness business, our product introduction is going to exceed the competition in 2014 and into 2015. We have a good look at the pipeline, and all the work that we're doing.

So everybody's doing a good job. Believe me, the competition is always great in all these segments. As we keep saying, we're really ramping up spending.

Second quarter is one of those little fall-through quarters you have in business where we're really confident about all that we're doing. We just need to push ourselves on through getting it done so we can get all the benefit from it that we're going to see, beginning third, fourth quarter and then early into 2015.

In terms of discounting, the market is really rational from where we sit. In particular, our discounts are not above what they have been the last couple of years. And I think that's because we've got good, smart competitors in all the segments and everybody's just staying calm and doing what they need to do to keep product moving.

Great. And then as you talk to your dealer customers, what's their outlook generally about, let's say for the upcoming year and for recovery in some of those -- some of the fiberglass sterndrive segment?

Well, first, in general the dealers are buoyant. And the belief is we're going to have a good year, consistent with what we have been thinking the overall year was going to look like.

Perhaps an exception to that is the, let's say, under 40P sterndrive/inboard business. As we look at SSI continue to be a tough world for that part of the business in the first quarter. And we -- I think when we told everyone what our view was as we began the year, we did not view that segment as growing throughout the year. And we continue to have that view, and I think our dealers share that view of it.

Now, Greg, one thing I ought to say is we're, and let's say Brunswick brands and I think a lot of other brands, are really now beginning to attack the style of boat in that size range with outboard power rather than sterndrive/inboard power to some extent, and that's working well, and consumers are beginning to move to outboard. And of course we're absolutely fine with that from top line and a margin perspective.

Great. Thank you.

You're welcome.

Our next question comes from Gerrick Johnson with BMO Capital Markets.

Hello, good morning.

I have two questions, one boat, one engine. Your rest of world boat sales are down excluding currency. Were units down, and why would that have been?

I'm looking to Bill, were the rest of unit sales were down. We were up in Europe. We had real growth in Europe, and I'm not sure right now. Bill's looking for me.

They were down.

They were down. And here's my judgment as to what's been happening there. First in Australia, which is a pretty big market for us, it's continued to be a flattish to down market. And while we continue to maintain share and do well there, that whole market is not letting us move the needle.

As we go to South America, that is a place where they're coming out of the summer season going into the fall season, and I think the performance of the economy down there is pretty well known to everyone. So again, we were down slightly there in certain size ranges and up nicely in the boats we're making there. When we added all that up, Gerrick, we were down.

Great, thanks.

And on engines, in Miami you had mentioned that you had increased the number of boat brands where Mercury outboards were an option. I guess step number two in that process is getting the dealers or consumers to request those boats come with Mercurys versus Yamaha, et cetera. How is that part of the equation going? I realize that might be early, but wondering what you might be seeing so far.

It's too early for us to give you a good view, but Gerrick, that will be a great end of second-quarter question.

Okay. I'll save it for then.

Okay. Thank you, Gerrick.

Our next question comes from Tim Conder with Wells Fargo Securities.

Thank you.

Dusty, just in general on the sterndrive outlook here, is it fair to say that has as your outlook weakened a little bit over the last 90 days for that segment, or is it fairly well intact with where we were at the beginning of the calendar year?

I'd say it's weakened a bit. We said flat. Now I think we would say flat to down slightly will be the (inaudible) performance.

Okay. And then is that by definition the sterndrive market? Maybe we're slicing hairs here [a knot], or are you talking -- would that be made up by what you mentioned a little bit earlier about you're swapping from the sterndrives into the outboard. So on a net basis there, is that weakened a little bit, or is that unchanged, then, when you factor that in?

That would be strictly the sterndrive market, and on a net basis we're more near flat. And what we're saying is I think increased acceleration of outboard-based product, and that's driven by the fact that ourselves and many other in the industry are now introducing product that's outboard-power.

Okay. And then, Bill, good news, as Dusty has said also, on the free cash guidance taken up. I guess the next question off of that then is, what do you plan to do with that? Any changes or new opportunities? What you're going to do as free cash continues to come in a little bit better than expected?

Here's the way we're thinking about it. We're going to be increasing the dividend. And we'll begin to do that in a structured way, and our goal is to be in line with, let's say, the mid-point of S&P 500 on a yield basis would be around 2%.

Secondly, we're increasing our focus on investment in our existing businesses. And we talked a lot, Tim, about all the capital investment we're making, et cetera. We're also, and we've hinted at this before, we have our sleeves rolled up, looking for tuck-in or bolt-on acquisitions to support, first our marine T&A business, which is a very powerful, strong business, nice margins. We think obviously there's some more opportunity there. And our guys are out working really hard there.

And we're beginning to think fairly significant cash investments in our fitness business, to supplement the fitness portion of our business with other activity. So we've got good plans to continue to invest in the business. And over the next 18 to 24 months we're going to continue to really fill out those plans and make them more visible to our shareholders.

And I think the only thing I would add on the dividend, Tim, is that we plan to try to get to that over time. It certainly wouldn't be in a big, significant step.

Okay, Great, Thank you, gentleman.

You're welcome.

Our next question comes from Jimmy Baker with B Riley and Company.

Thanks. Good morning, everyone.

Hi, Jimmy.

I'll start with one on the boat group. I understand the sources of Q2 margin pressure. Even, let's say, in a bear case that industry retail does not meaningfully accelerate from here even though it certainly seems like it should.

Would you say even in that bear case, you already have the order book or order backlog to drive your expected second half uptick in that segment? And am I thinking about it right, that your expectations imply positive operating earnings for the boat group in both Q3 and Q4?

Answer is yes to both questions, Jimmy.

Okay, simple enough.

And then just moving onto the wholesale engine business, I understand the weather impact at retail, but can you maybe just explain what gives you confidence that weather was the cause, or a primary contributor to the Q1 decline in wholesale engine demand? I ask this in part because as you probably know one of Mercury's customers reported yesterday that their Q1 production was down 5% and that that was not in response to weather, and it may need to respond to weather-related retail weakness with production cuts going forward.

Here's where we're at with Mercury. We played really hard catch-up in 2012 and 2013 with demand, Jimmy. So as we started up the sterndrive plant when we moved it from Oklahoma to Wisconsin, we had the normal little start-up hiccups, and we got behind on demand there.

When we introduced the 150 outboard engine, we were wonderfully surprised by demand for that engine, and we really got behind there and had to play catch up. The 7590-115 category of engine, for a lot of reasons out in the market, but one of the bigger ones was the enormous growth in pontoons, and a lot of our pontoon customers wanted those horsepower ranges. We got behind there.

So what we have been doing is just really beavering away to, the best way I can describe it is we needed the sponge to be a bit saturated, not completely dry so that it was sucking up everything we were making. So what we've got now is out in the marketplace the right saturation of engines.

And now what we're doing is wholesale is going to be more in line with retail going forward. So as we look at what happened in the first quarter, we had a lot of boat builders who -- and other customers, who had generally been thinking, perhaps going into 2014 that they needed to keep ordering heavily because they didn't want to get behind, and then as they get into 2014 there's this growing understanding, we can now meet demand and we're not going to have any backlogs.

So now the marketplace is more relaxed and saying we don't need to keep ordering ahead, you guys will be able to meet what demand we want, and that's what we're going to be doing going forward.

Makes perfect sense. Thanks a lot for the color, Dusty.

You're welcome, Jimmy.

Our next question comes from Craig Kennison with Robert W Baird.

Good morning. Thanks for taking my question.

No problem, Craig. How are you?

Doing great, thanks. My question is on the product cycle. You're at the beginning of a pretty compelling product cycle in many boat categories. Let's take Sea Ray for example. You've got 350 coming out, the 650 out. I'm curious how that product cycle evolves. Is it a five-year cycle, or lifespan for that particular product line? And when would the peak in volume be in a typical product cycle?

Well, first, let me help -- give you a statistic I think that will really help understand the product cycle at Sea Ray. Say 12 months ago the average model age of a Sea Ray model was a little over four years. We want in 2015 the average age of our models to be 2.5 years. And then our goal going forward will be to keep our model lineup at -- new models versus old to be at about that age.

Now, as to a specific model, when does that leave the marketplace? There's never a completely pat answer because you can have a model that just is so good in the marketplace there's nothing you can do to make it better, and demand stays very high. And I can think of in the late 1990s and early 2000s a couple of Cruiser models, we just sat there and churned them out because customers really wanted them.

Other times, especially in the past, we would strike out. We would put a model out there and it wouldn't do well, and we would shorten the life fairly significantly. One of the things we're very focused on now, and I can remember when I came here to our business, we would put a bunch of product out, and we were happy, I used to say, if we batted 300.

Well, our goal now is to bat 1,000. I think our product development folks are really in the groove right now. And every product is hitting. So then if every product keeps hitting and then you start looking at, we want the average age of models to be 2.5 years, obviously it depends upon model necks. But then you're in a mode where models last six years, and then you keep rolling them over.

So is that's how we're thinking about it. It's a fairly big change. And we have said we wanted to cut in half our product cycle time for new product. We're not quite there, but I will tell you our boat folks are performing heroically and completely reinventing the product cycle in order to get there.

That's helpful, and as a follow up you've been pursuing what I would call an affordability strategy where you have been launching some lower priced, more affordable boats. Obviously that's the theory. It seems like a good one. How is it playing out so far this season as you launch some of those less expensive boats?

It's, first, a great question, and it's really fun to start watching this. So let me give you just a couple of examples. The 350 SLX, which we keep talking about, I was going to say bragging about. It (inaudible) sound like that. We're trying not to be. We've now had to triple the production of that boat.

It's a 35-foot boat, and the transaction price is generally, round numbers, a little over $100,000 less than a 35-foot cruiser. So what we're seeing is, bringing a product with exactly the right features into a size segment that's significantly -- the transactions are significantly less than the same size boat with different features, is a real home run.

In our Lund business, our guys in Lund is, we never talk about it much. It is a powerful business. Nice margins, growing market share. And our product guys there went to work and what they fundamentally did is they got it so that a 19-foot boat cost what an 18-foot boat used to cost, an 18-foot boat costs what a 17-foot boat used to cost, and a 17-foot boat costs what a 16-foot boat used to cost.

Then what we're seeing is, quite interestingly people moving up in size. So the folks that used to want a 17-foot boat are now buying an 18-foot boat. So it works, but it doesn't quite work the way one would have thought, which is okay, people will buy the 17-foot boat because we've gotten so much cost out of it. Rather they're saying, shoot, I can have a bigger and better boat.

As we lock at the 350, it's a different boat but they're saying, look at this size range, this much less, so that's what I'm going to take, I don't want a smaller boat. So it's working quite well. A bit different than I would have predicted, but one always knows that marketplace rewards great product and an attractive cost position with innovation and features, and that's what we've try to stay after.

That's great. Thank you.

You're welcome.

Our next question comes from Mike Swartz with SunTrust.

Hello. Good morning, everyone.

Hi, Mike.

Just wanted to touch on the fitness business. In particular the margins in that business this quarter. I know that you -- I think they were up like 200-plus basis points, and just kind of dovetailing that with your commentary around the 14% to 16% outlook that you have laid out for really the next three years. I mean, how to think about that as we move through -- I mean, are we to understand that a lot of that benefit we saw in the first quarter was either one time, or will be offset with strategic investments, or do you expect some kind of promotion to come down the pipe? Just how to look at it broadly.

Think of it in the second quarter of this year as offset by strategic investments. Our fitness guys are in, any way we look at them, knocking the ball out of the park. Great gross margins. But we're making big, big investment in that business in the second quarter. And that will level out as we get through the year.

But I just mentioned in the prepared remarks, Mike, a few of the new product they have out, there's actually more, and we have really got to get it ramped up to get that all into the field.

But in terms of --

Mike, a big part of the lift in Q1 was very much attributed to the warranty, favor warranty comparisons between year, and that's very much a Q1 phenomenon that doesn't continue throughout the rest of the year.

Okay. That's helpful. Thank you.

And then just in terms of the outboard business, maybe hopping on top of Jimmy's question. I mean, understanding there's a lot of new product and the new platform coming out, I believe later this year, this fall. I mean, is there any risk that dealers or other boat manufacturers play a hold-off strategy where they wait for a new product to come out, or is that something you're not anticipating?

We're not anticipating that. What we do is we build ahead for existing products so that nobody's short during the time we're doing an introduction. And when one's running the pipeline correctly, and if demand is lining up with the way the pipeline's set up, the product needs to be sold in order for the dealers and boat builders to continue to service their customers.

Okay. Thanks for the color, Dusty.

You're welcome. Thank you.

Our next question comes Rommel Dionisio with Wedbush Securities.

Hi, good morning.

Hi, Rommel.

Dusty, in the past you guys have talked about you're so dominant in the Mercury business and fresh water but building your business in salt water. I wonder if you could just give us an update here in the early season? I realize it's still early in the season, but just to see the progress you're making in terms of potentially building that market share in the salt water business for Mercury as well?

Gerry asked that earlier, and I was saying ask us again in the second quarter and we can give you a better view, but my view is that we are having success, and the extent of the success, I think, will be really measured as we get to the middle of the season. So Rommel, I think we'll be able to give you a lot better view second quarter.

But I think our guys have done a great job with great engines, and beginning to work with a bunch of really good salt water outboard boat customers to get on the price list, which was important.

Okay. Thanks very much, Dusty.

You're welcome. Thank you, Rommel.

Our next question comes from Carla Casella with JP Morgan.

Hi. I'm wondering if you can give a sense for the pricing differential today in the used versus the new boat? And if that's -- and I guess the trend in that you expect to see?

And I would say, Carla, it hasn't changed from what we talked about toward the end of last year, which is we're back now to normal differentiation. It's difficult to give a percentage differentiation because so much depends upon the size of the boat, the year of the used boat, et cetera, but I would say we're back to normal.

We have done a lot of statistical work, and toward the end of last year we had begun to see what could be a narrowing trend of the difference between new and used. We haven't rerun that work right now because first quarter's just not a good quarter with the low volumes for us to take a look at that. But we'll be all over that as we go through the second quarter. And my anticipation is that it will get -- that we will continue to see a narrowing.

It's not going to be a big, fast narrowing, but it will be that steady, inexorable pace, because as the number of late model, low hour used boats available out in the marketplace is going -- I mean, it's just arithmetic. It's going to continue to decline, and as that happens, we'll see that price range narrow.

Okay, great. And then on the international front, how many or what percentage of your international boat sales are you making in those local markets at this point?

I think we have that on one of the charts.

Okay.

If you look at -- let me give you the exact chart. I'll dig it up here real quick.

The question, how many -- what's the percentage of boats that we sell internationally are being made internationally?

Yes.

I'm sorry. I blew that. Okay. I'm sorry. Let's say 5%.

Okay. So there's still more opportunity there. How high can that get, do you think?

Maybe it's a little higher. We make a lot of boats in Poland and Portugal that satisfy the local market under the Quicksilver and Uttern brands.

Probably a third to 40% would be my guess, Carla.

Okay. Is there an opportunity to take that up and improve efficiencies or margins, or is that probably where it could stay -- where it should stay?

I think what you'll see is that the number of boats we make outside the US will continue to grow because we have growth planned in those particular brands, and you'll see us continue to grow in Brazil. And that's assuming the US market and those markets recover at about the same rate.

Yes. And one of the big factors is freight. Where it's expensive to ship something and cheaper to make it locally, we make it locally. Where freight doesn't have that big of an impact, like on a bigger boat, we tend to make it here and export.

Okay, great.

And then you just -- you had mentioned acquisitions, M&A, specifically on the parts and side for the marine. It sounded like also on fitness. Are there any large properties out there in the fitness that are available, or are you also just looking for more small tuck-in there?

It would be small tuck-in.

Okay, great. Thank you.

You're welcome.

At this time we would like to turn the call back to Dusty McCoy for some concluding remarks.

Thanks, everyone, for being with us today. As we thought about this call and talking about the first quarter, we sort of wore out the word weather. I think it's important, and then I'll tell you we're thinking about in the Company, okay, we're through talking about weather.

We're in the spring. We're going to go to work. We've invested a lot of money in some great new product that's going to do really well in the marketplace, so we're over it. We're now just ready to move forward with all the work that we've done, and take advantage of it. And the weather's going to be what it will be, and we'll just have to work around it.

That's the way we're thinking about the remainder of the year. That's why we're comfortable that we can keep our guidance, top and bottom line, EPS range, and now it's just up to us to go back to work and make it happen.

So thanks, everyone, for the interest and all the great questions. And I'm sure we'll be seeing you as we do various conferences and road shows, et cetera.