賓士域 (BC) 2014 Q3 法說會逐字稿

Good morning, and welcome to Brunswick Corporation's third-quarter 2014 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 Dustan 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 these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at Brunswick.com.

During our presentation we 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 results. I would like to also remind you that the figures in this presentation reflect continuing operations only, unless otherwise noted.

On July 17 of this year the Company announced the signing of an agreement to sell its retail bowling business and its intention to sell its bowling products business. On September 18 the sale of the retail bowling business was completed.

Starting with the third quarter of 2014, the historical and future results of these businesses are now reported as discontinued operations. The historical and future results of the billiards business, which remains with the Company, are now reflected in the Company's fitness segment. Therefore, for all periods in this presentation, all figures and outlooks statements incorporate these changes and reflect continuing operations only.

I would now like to turn the call over to Dustan.

Thank you, Bruce. Good morning, everyone. We'll start with an overview of our third-quarter results.

Revenue in the quarter increased 13%. We experienced double-digit growth in outboard boats and engines, marine parts and accessories, fiberglass sterndrive/inboard boats, and fitness equipment, which is partially offset by a decline in sterndrive engines.

Our gross margins increased by 20 basis points compared to the prior year. Operating expenses increased by 1%, as we continued to invest in numerous strategic initiatives at increasing levels. Adjusted operating earnings increased by 45% versus the prior year. Net interest expense was reduced by $1.2 million. As a result, adjusted pretax earnings increased by 56%, while diluted EPS, as adjusted, increased by $0.05 to $0.63 reflecting the higher 2014 effective tax rate.

All three of our segments reported double-digit top-line growth in the quarter. Sales in our combined marine segments increased by 14%, while our fitness segment increased by 11%. From a geographic perspective, consolidated US sales increased by 15%.

Sales for Europe increased by 19% due to growth in marine sales. If we exclude the impact of the Whale acquisition, sales to Europe increase by 13%. Rest-of-world sales increased by 6% versus the prior-year period, due to gains in fitness. In summary then, combined sales outside the US increased by 10%.

In the nine months, the fitness and boats segments reported top-line improvements of 7% and 6% respectively. Mercury year-to-date sales were up 4%. These year-to-date growth rates are now at or approaching our full-year guidance targets.

From a geographic perspective, consolidated US sales increased by 6%. Sales to Europe increased by 10% due to growth in marine sales. Rest-of-world sales declined by 1% versus the prior-year period due to weakness in marine markets mostly offset by gains in our fitness segment. In summary, consolidated sales outside the US increased by 3% for the nine months.

Adjusted operating earnings were $94.6 million for the quarter, an increase of $29.3 million compared to 2013. Operating margins, excluding charges, increased by 220 basis points to 10.1%. The increase in our operating margin includes the impact of the strong sales growth combined with a slight increase in operating expenses of 1%.

During the third quarter, operating expenses continued to reflect investment in numerous strategic initiatives and continued emphasis on expense control. In addition, corporate expenses decreased when compared with the prior year due to lower variable compensation expense as well as favorable mark-to-market adjustments on certain equity-based awards.

We're forecasting our operating expenses in the fourth quarter will increase by a low single-digit percentage when compared to the prior year. For the nine months, adjusted operating earnings were $317.9 million, an increase of $33.5 million compared to 2013. Our operating margin, excluding charges, increased by 70 basis points to 11%.

As the result of the solid improvement in our adjusted operating earnings, combined with lower net interest expense and higher other income, adjusted pretax earnings in the third quarter increased by approximately $32 million or 56%. For the nine months, adjusted pretax earnings increased by $48.6 million or 19%.

Diluted EPS from continuing operations as adjusted, for the quarter equaled $0.63 per share, reflecting a 9% increase. As a reminder, our reported EPS for 2014 reflects a significant year-over-year increase in our effective booked tax rate. Diluted EPS from continuing operations as adjusted for the nine months equaled $2.09 per share. This compares to net earnings as adjusted of $2.41 per share in the prior year. If we apply a 34% tax rate to our 2013, our 2014 EPS as adjusted would reflect an 18% growth rate.

Before I turn the call over to Bill, I'll take a moment to provide perspectives on the global marine market. The US market is unfolding generally consistent with our annual expectations of solid growth in outboard boat and engine products as well as parts and accessories, partially offset by fiberglass sterndrive weakness.

Year to date, the US fire boat industry moved up approximately 4.5%. On a rolling 12-month basis, the market has improved by about 4.7%. In the fiberglass sterndrive/inboard boat category, which also affects sterndrive/inboard engine production, modest year-to-date unit growth in boats greater than 30 feet is being more than offset by the declines in boats under 30 feet.

Certain international markets, however, have experience declines in retail sales, specifically in Canada and South America. In Canada, an unusually cold and wet spring led to a late start to the boating season. In currency, rare building caused some consumers to delay or defer purchases. In South America, weaker than expected economic conditions are the primary factor causing the lower market demand in Brazil, Argentina, and Venezuela.

Although we are experiencing excellent top-line growth in Europe, due to factors that Bill will elaborate on, we believe the majority of the European marine marketplace is very challenging. In total year-to-date global marine growth is below our annual expectations.

I will now 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 up 11% in the quarter. From a geographic perspective sales in the US were up 9%, reflecting an increase in outboard engines and parts and accessories, which was partially offset by the impact of lower sterndrive/inboard engine revenues.

Sales to Mercury's European customers increased by approximately $17 million or 35% as growth was experienced in outboard engine and parts and accessories. Growth in parts and accessories benefited from the recent Whale acquisition and growth initiatives, while stronger outboard performance included benefits from new products, improved conditions in the Nordic region and sales timing.

For the nine months, sales to Europe were up 10%. Rest of the world sales increased by 2%, as these regions benefited from gains in outboard engines as well as parts and accessories while sterndrive/inboard engine revenues were down compared to the prior year. Latin America was the only major region to experience declines in overall sales.

On a product-category basis, the outboard engine business reported solid overall sales growth in the third quarter of 2014, which included Mercury's new 75-, 90-, and 115-horsepower FourStrokes. These new engines, which are built with the same architecture as the popular 150-horsepower FourStroke have also been well received by OEMs and consumers. Our outlook for the outboard engine business continues to reflect favorable retail demand in most markets in boat categories.

On the sterndrive side, Mercury's award-winning and recently launched 4.5-liter, 250-horsepower purpose-built engine is receiving very positive feedback from OEMs. Sterndive engine sales, however, continue to be affected by unfavorable global retail demand trends, while diesel engine sales are up slightly year to date.

Mercury parts and accessories businesses delivered strong sales growth during the quarter with gains in most major markets except Latin America. Revenue benefited from recent acquisitions, new product launches and market share gains. The acquisitions of Whale and Bell recreational products group accounted for approximately $15 million or 3 percentage points of Mercury's overall revenue growth rate in the quarter. We again reported record sales in the third quarter at Land 'N' Sea and Attwood.

Mercury's operating earnings increased by 24% compared to last year's third quarter. Operating margins were at 16.5%, 180 basis points higher than the prior-year quarter. The improvement in operating earnings included the benefit from higher sales, recently launched outboard products and favorable warranty experience.

In our boats segment, third quarter revenues increased by 22%. This included balanced growth of sales of outboard boats as well as in fiberglass sterndrive/inboard boats. In the US, which represents over 2/3 of the segment, sales increased by 31%.

European sales increased by approximately $4 million or 36% versus the prior year. This performance resulted from the introduction of larger, higher priced products by our European outboard boat brands. Rest-of-the-world sales decreased by 2%, which reflected the weaker demand in Canada and South America referred to by Dusty earlier in the call.

In the third quarter, Brunswick's global retail unit sales increased by 7% compared to the prior year. Global wholesale unit shipments also increased by 7%. This compares to the boat group dollar sales increase of 22% as the segment also benefited from higher average selling prices resulting from a favorable shift in mix across most of its boat lines.

For the nine months, global retail unit sales increased by 1% compared to the prior year, while global wholesale unit shipments were flat. Our plan assumes that wholesale unit growth rate for the full year will be consistent with our retail unit growth rate.

Regarding our pipelines, dealers ended the quarter with 27 weeks of boats on hand, measured on a trailing 12-month retail basis, which is one week higher than the prior-year level. Pipelines for aluminum and fiberglass outboard boats are up compared to last year due to an expanded distribution network, new product introductions, and weaker than expected retail demand in Canada. Fiberglass sterndrive/inboard pipelines are down versus the prior year.

Our current pipeline levels are appropriate given our annual conditions in the various boat categories, and we continue to be comfortable with these overall levels.

The boat segment's third-quarter adjusted operating earnings improved by $8.2 million or 57% when compared to the prior year. This improvement resulted from higher sales including several new product introductions along with increased production rates and capacity. Operating performance in the quarter did include costs associated with new product integrations and production ramp up.

Sales at Life Fitness increased by 11% resulting from growth in the US to health clubs, hospitality, and local and federal government customers as well as net sales growth in international markets, especially in the Middle East, Africa, and Latin America. The segment continued to benefit from new product introductions in all regions, with this quarter representing its eighth consecutive quarter of revenue growth.

Segment operating earnings in the quarter increased slightly, as the impact from higher sales was partially offset by a lower gross margin percent and continued increases in growth initiative investments.

In the quarter, foreign currency had minimal impact on changing the total consolidated sales and operating earnings. For the full-year 2014 versus 2013 comparisons, we currently estimate that exchange rates will also have a minimal impact on sales and operating earnings. We do, however, expect a slight unfavorable impact on Q4. These comparisons include the impact of our hedge programs and assume that rates remain consistent with current levels for the remainder of the year.

Now, we would like to provide some brief comments on our tax provision. Our effective book tax rate as adjusted was slightly below 34% for both the quarter and nine-month periods. Our plan assumes that the as adjusted rate for the full year is consistent with the year-to-date rate. Our estimated effective cash tax rate continues to reflect a low double-digit percent level. I would also like to note that our effective book tax rates for 2014 exclude any potential benefit from an extension of the US R&D tax credit.

Turning to a review of our year to date cash flow statement. Cash provided by continuing operating activities was $122.7 million, a decrease of $17.8 million versus the prior year. Pension contributions were a factor in the year-over-year decline due to planned increases and timing of contributions. In addition, net increases in our primary working capital accounts totaled approximately $151 million. Excluding acquisitions, the biggest changes occurred in accounts and notes receivable, which increased by $42 million; inventory, increased by 74% million; accrued expenses decreased by 55 million; and accounts payable increased by $22 million.

To date, working capital movements have been unfavorable versus the prior year do mostly changes in inventory, which resulted from new product introductions along with higher sales and production levels. For the remainder of the year, we anticipate that working capital changes will be favorable versus 2013 and end the full year with the net usage of $40 million to $60 million.

Total year-to-date free cash flow amounted to $49 million versus approximately $69 million in the prior year, a difference of about $20 million. Year to date, capital spending was in line with the prior year at approximately $80 million, which included investments in new products in our marine and fitness businesses as well as 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 in growth and enhance shareholder returns.

Cash and marketable securities totaled $597 million at the end of the quarter. The increase of $228 million from year-end 2013, reflect the net proceeds received from the sale of the retail bowling business and free cash flow from continuing operations, which were more than offset by acquisitions and dividends during the nine months of $42 million and $30 million respectively.

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 $80 million. We expect our 2014 pension expense to be approximately $15 million, which is a decrease of $4 million from 2013. Interest expense is expected to be in the range of $28 million to $29 million. We anticipate that our restructuring charges will be between $4 million and $5 million in 2014. We expect our diluted shares outstanding to be approximately 95 million to 95.5 million.

As you are aware, we announced on Wednesday that our Board has authorized a share repurchase program at $200 million. We expect to systematically complete this program over approximately a two-year period beginning in the fourth quarter. Consequently, there will be no meaningful impact on Q4 and full-year shares outstanding.

On the cash flow side, the Company plans to make cash contributions to its defined benefit pension plans of approximately $75 million in 2014. This includes an estimated amount, which will be used to fund planned lump-sum settlement payments to certain participants.

I would like to note that our restructuring charge estimate and adjusted earnings per share do not include the impact of any pension-related settlement charges associated with this payout plan. Our plan reflects capital expenditures of approximately $140 million, with a substantial portion directed at growth and profit enhancing projects including meeting capacity expansion requirements in each of our segments. 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 $110 million to $135 million.

I will now turn the call back to Dusty to continue our outlook comments.

Thanks, Bill. Our operating plans and assumptions for the full year remain fairly consistent with those we've been communicating throughout the year, after adjusting for the bowling divestitures. We continue to target 2014 to be another year of strong earnings growth with outstanding cash flow generation. Our plan reflects approximately 6% sales growth, which includes benefit of the success of our new products and continuation of the growth demonstrated in the US thus far in 2014 as well as the mixed performance in international markets.

We continue to anticipate a solid improvement in gross margin levels. As a result of ongoing growth investments, full-year operating expenses, adjusted for these divestitures, will increase, but as a percentage of sale, are expected to be lower than 2013 levels, approximately 17.6%. As a result, our pretax earnings should continue to demonstrate strong growth of 28% to 31%.

On our last earnings call, we established our 2014 EPS, as adjusted, guidance of $2.25 to $2.35. Today, we're updating our guidance to a range of $2.30 to $2.35.

The full-year financial targets for our three operating segments remain largely unchanged. Our overall plan reflects continued 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 at Mercury.

Looking at our boat segment, our plan assumes that we continue to successfully execute our large fiberglass boat strategies, which will help to generate growth in the fourth quarter. It is a key part of an increasing number of new products that will shipped into the market. As a result, we should continue to see the benefits from a more favorable sales mix leading to higher average sale pricing.

Continued strong performance in outboard boats and contributions from our Brazil operations should also benefit the segment's growth in the final quarter. As a result, we are targeting 2014 annual revenue growth into the high single-digit range with a solid improvement in operating earnings.

Further, we anticipate a significant year-over-year improvement in operating losses during the fourth quarter, but the segment is expected to have a modest seasonal operating loss. Our full-year plan reflects the segment achieving solid profitability.

In our fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. Our 2014 and three-year plans are both targeting revenue growth in the mid single- to high single-digit range. We'll continue to make significant investments at Life Fitness. Aggressively leveraging innovation to achieve competitive differentiation in its products and services, which should continue to enable market share growth and create business opportunities beyond its core business model. Although Life Fitness's margins could decline slightly in 2014 as a result of these investments, our plan continues to reflect very healthy margins in this business.

In closing, I want to comment on our current capital strategy. We will continue to maintain strong cash and liquidity positions. This strong foundation combined with continued execution of our growth plan should enable us to regain an investment-grade credit rating.

Our top priority will be to deploy capital to strengthen our marine and fitness segments. We will do this both organically, through continued investment in capital expenditures, R&D and SG&A. This commitment is an important foundation in our effort to drive an aggressive pace of new product introductions, which is imperative in our overall goal to grow revenue and market share.

We'll also be actively pursuing acquisition opportunities, with an initial focus on Mercury's parts and accessories businesses. As we've told you, we have already completed two such acquisitions. In doing so, we've executed about 20% of the plan thus far, and anticipating executing additional transactions over the next several years.

We'll continue to grow our fitness business by expanding into new product categories and growing distribution in customer segments in regions we serve throughout the world. In addition, we're currently exploring and piloting certain adjacency opportunities in both in fitness equipment and health and wellness sectors as well as pursuing acquisitions.

Finally, we plan to execute our pension de-risking plans, as well as return cash to shareholders through a balanced approach that includes dividends and share repurchases. Yesterday's announced authorization for the repurchase of stock, reflects our confidence in the successful execution of our operating and financial plan as well as in our future performance.

And with that, we'll quit talking and take your questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from James Hardiman from Longbow Research. Please go ahead.

Good morning. Thanks for taking my call and congrats on a real strong quarter here. It looks like things are really playing out the way you guys suggested that they would. Some nice acceleration here in the back half, or at least in the third quarter of 2015. It seems like the fourth quarter is probably going to look pretty similar.

I guess my question is, if we look to 2015, can you maybe talk about how that year is shaping up? It seems that, at least in the first half, you're going to benefit from a lot of the things that are driving this double-digit type top-line growth here in the second half of 2014. So maybe in the context of mid to high single-digit longer-term targets, how should we think about 2015, just given all the dry powder you guys have with respect to new products?

First, James, thanks for the compliment and the folks talking to you here have very little to do with it. It's all our people out in the field. We always want to make sure that we and everybody who works with us recognizes that.

In terms of 2015, a fair question, with the big acceleration that we have seen here in the second half. As I look at 2015, I think we'll see continued revenue growth within the range that we had given for the 2014 through 2016 time period that we laid out in November last year up in New York. So that's 5% to 7%.

Then, the next thing we probably ought to focus on is leverage. Again, my judgment is today that we'll see leverage in the 20% to 25% range. We had said last November that we thought this year would be on the high end or a little above that range, but that as we looked over the three-year period, we would be within that range, and I think that will prove to be true in 2015. As we sit here today, that is how I am looking at 2015 and how it ought to shape up.

Okay. Fair enough.

Then to the leverage point in the third quarter -- engine business leverage looked great, north of 30% by my math. Can you help us understand what is driving that? I think you spoke to a favorable warranty expense, maybe quantify that?

Then the boat business, south of 20%; that doesn't look nearly as good. I know you had some integration and product ramp up going on there. How significant was that? When does that roll off? How should we think about normalized rates, at least in the fourth quarter?

James, I'll take that. This is Bill.

On the Mercury side, volume was obviously a very key factor for Mercury as well as the new outboard engine product that was introduced. That's got a favorable margin impact as well. For Mercury, there were a handful of items along with warranty that were very favorable for them in the quarter, which is why the leverage was so high. On the boat side, the integration costs and production ramp-up related stuff is really probably the biggest headwind that they face, but you also have to remember that the growth in dollars between our larger fiberglass product and the rest of the portfolio was pretty balanced. So, the leverage that they produced for the quarter isn't necessarily outside the boundaries of what you would expect when you have got balance between those two things.

Okay. That's very helpful.

Dusty, maybe just the last question here on the capital strategy. Maybe walk us through your change in philosophy here the last couple of years in terms of finally announcing this buyback? Then, other potential uses of cash? It seems $200 million is only a portion of the cash you're going to have available to you guys over the next couple of years. Maybe talk about the pension? What is the payback on paying down, I don't know, every $50 million of that liability in terms of the pension expense? How you guys are thinking about making returns in terms of some of the acquisitions that you are making -- should they be similar to what we have seen with Whale and not Bell?

I'll start off and let Bill address the pension.

I'd been pretty public, it would be over my dead body that we do a share repurchase program, and I haven't been murdered and I'm still here. Our share repurchase reflects two or three things that I think are really important for those of you who cover us and our shareholders. We have gotten progressively stronger now, quarter by quarter, since the recession started in 2008. My personal position on the share repurchase program was, frankly, to keep the wolves away from the door looking for a share repurchase program; to give us time to really get our growth initiatives solidified in the Company, get the spending ramped up that we need to do in order to drive the growth initiatives, and to begin to see the benefit of all that.

We knew it would cost us a lot of money. We knew it would require internal change. If you look back, and I am sure you have, James, for on our trailing four-quarter basis through the second quarter of this year, we didn't report much income gains. We did a good job of generating cash, but we knew that we had to get through this time period, and we knew as early as 2009, 2010, that these days would come when we had to make a big investment and then bet on, again, the results in the investment. All that is playing out, really well, frankly, in accordance with our plans. I couldn't be more proud of our folks who start from product development all the way through the sales force.

Then, as we look forward for where we can take the Company, and the last thing we set our goal now is to become boring. As we look at really nice top-line growth, then we have given our judgment as to what it will be through 2016, with what, in my judgment, is really nice leverage when one remembers how we're continuing to accelerate spending on growth initiatives and products. So as I look at the stock price today, frankly, we have begun to reach the conclusions it's a good investment for us to be buying our stock and there's a return that's a darn good return. So, it's a good allocation of our capital, as we look at where we stand today versus where we are going in the future.

Of course, I have changed in the external statements, but I am not being disingenuous when I tell you we haven't really changed about how we have been thinking about when we were going to do share buybacks and how we wanted the Company to be positioned before we did it.

I'll ask Bill, because he's been the architect of our entire pension strategy, and it's been wonderfully executed in a very low interest rate environment, which makes it difficult to deal with these long-tailed pensions that we have, talk about that and the sort of returns we're looking for on these acquisitions.

James, on the pension side, our big strategy is still pretty consistent. Of the $75 million we're putting in this year, about $50 million of it is what we are required to put in under ERISA. We continue to have an annual funding obligation that we need to fund. The incremental $25 million is related to this lump-sum buy-out strategy, which allows us to take care of these liabilities at an attractive rate before they have the ability to grow over time. We feel that the returns on that stack up pretty well against other things in our list of capital structure opportunity, share repurchases, acquisitions, et cetera, by retiring debt at a discount to what we think the ultimate cost is going to be to the Company.

Every dollar that we put in, you have to remember, that we get a tax deduction, and we get to earn money at a kind of a tax-sheltered rate, which really helps the returns, especially when you compare it to just holding cash, where it's really tough to make any sort of return on cash investments in this environment.

Then, on the acquisition side, we're certainly focused there on trying to get returns that are well above what our weighted average cost of capital is. I would peg that as mid to high teens with synergies contributing something to get you to the high teens, possibly into the low 20%s is what the targets would be.

That is the way we're looking at those two different uses of capital.

Then, James, to come back then to what I view as the over-arching part of your question, and that is -- okay, you're doing a $200 million share repurchase. You said you want to have $300 million to $400 million. We say, stay to the high side of that, cash on hand at year end to help us through any downturns that may come. It's easy for everybody to do the math and say, well, there's still additional cash. What I'll say to that is, is the fact that we're not tagging that for anything else ought to be an indication that we think we have got lots of growth potential going forward.

We're looking at not only growth in our businesses that we operate today and the way we operate them, but we are working very hard on growth adjacencies and we want to make sure that we've got the powder to go do those when we want them, on our terms, on the timing that we want to do them. While we're not afraid to go to that market for a great adjacency move, either organically or through acquisitions, our view is, right now we are going to be able to do many things with the available cash that we're going to have and still have lots of borrowing capacity for the rainy days or the big one that may come along.

So we're pretty excited. In the world is, our company is moving to where we had hoped we would beginning in 2009 and it's playing out nicely. We are really focused on growth, and we are pretty excited about what the opportunities are going to be.

That's really helpful. Thanks for all the great color, Dusty.

Thank you, and thanks for the question.

Thank you; our next question comes from Mike Swartz from SunTrust. Please go ahead. Your line is open.

Hey, good morning, guys.

Hello, Mike.

Just wanted to touch base on boat ASPs for the quarter. It looks like, just doing the math, they were up 15%. I think they were up mid single digit last quarter.

Two questions -- one, how did Sea Ray contribute to that ASP mix number this quarter? And then, is that the type of growth that we should expect over the next two, three, four quarters?

Certainly expect it for the remainder of the year, on a quarter-over-quarter basis. Then as we look at our production and retail/wholesale mix, it's a little harder in 2015. We can begin to scope that, but I think it will be up in 2015 versus 2014. The percentage that you're seeing right now ought to be good through the remainder of this year.

The big driver of that has been in fiberglass boats, and for us that's Sea Ray, Meridian, Bayliner, but you can never forget Boston Whaler, also, and all that we're doing in that brand. So, Sea Ray is the largest piece of that. Sea Ray would be the biggest driver of it, but it is happening also in our other brands.

Okay. Great. Thanks a lot for the color there.

And I should add, because I really don't want to minimize. The work that is being done in our aluminum boat businesses in share, new products, is also beginning to show up in AUP quite nicely here in this quarter and I think it will continue also.

Thanks, Dusty.

Then just touching on -- I know currency has been a headwind for a number of folks with international operations. Could you just talk about -- maybe this is for Bill -- just the incremental change in FX from when you gave guidance in July to where we stand today? And then maybe how you think of that in 2015?

Maybe modestly unfavorable to where we gave guidance in July, but nothing that created significant headwinds for us in the quarter. Then, as we look into the fourth quarter of this year, the headwinds get to be a little bit stronger.

Okay. Then, any commentary on 2015 with where we stand today?

I would say it's going to be a headwind. Hard to quantify, as I sit here today. Just too much can happen between now and when we get into there. You've got to remember too, Michael, that we, from an earnings perspective, do quite a bit of hedging out on a forward 12-month basis, which minimizes our variability quite a bit as we go forward.

I would assume some of the local manufacturing in Europe also helps to create that natural hedge?

That helps and there's a fair amount of our international sales, Michael, that gets done in dollars and the market pricing happens in dollars. It doesn't have the same sort of currency risk as some of our other business does.

Okay, great, thank you.

Thank you.

Thank you. Our next question comes from Jimmy Baker from B. Riley and Company. Please go ahead.

Good morning, guys. Nice execution here during the ramp up.

Thanks, Jimmy.

Just a follow up here on the boat group.

There you are really benefiting from higher wholesale shipments of sterndrive and inboard in this higher-priced fiberglass products, and yet despite the industry being down in that category, your dealer pipeline inventory is actually down in that category. I know you don't break out your retail performance by boat category, but it's pretty obvious you're gaining a nice chunk of share there on a higher priced category.

Can you help us quantify or order of magnitude how you are thinking about the opportunity for share gains through the 2015 selling season? The follow on to that is, is the sterndrive/inboard pipeline declining intentionally at this point? Or, if you are able to keep up with demand, would you prefer for that to be flattish going forward?

Let me do the last part first.

It is declining intentionally, and as we see a lot of the new product, Jimmy, the high priced product, our goal is to work with the dealer network so that their borrowings, et cetera, to keep product on the showroom floor are as low as possible. We're working with the dealer network to try to retail as much product as possible without having to do stockings. So that's the big stuff. It's working well.

Then, we have just the practical side of this thing. We've got a lot of big products that's, frankly, demand at retail is so big that we're not going to be able to build any to stock anyway for a while. Then, for those segments that continue to be in decline, it's important to us that we work with the dealer network to keep them stocked appropriately for what the market looks like and where we think it is going. So the whole fiberglass stocking issue is being done, number one, to help the dealers; number two, with on eye on the market; and number three, frankly, we're being forced there a bit by just real extreme retail demand.

I think the only thing I would add to that, Dusty, is that the decline in year over year is more about the actions that we took in the first half of the year versus the activity in the quarter, which was pretty balanced.

That's helpful.

Then, just any commentary about opportunity for share gains into 2015 in some of the higher ASP categories? Maybe you could just talk a little bit about how your boat group order book stands today in those categories versus your expectations or maybe in terms of weeks to fill or change in year over year?

Well, I think just real simple arithmetic as we do it, Jimmy, says we will be gaining share in the larger categories of fiberglass and that would be both in outboard and inboard. We talked about this a lot. We've been a long time without making any boats over 50 feet. Now, we've got a great product line-up there, and they'll just be beginning to get into the retail world. I think we're going to have good share during the year.

As we look at our Boston Whaler brand, we've had a lot of nice larger product coming. We have got more -- Fort Lauderdale boat show next week will be a great showplace for some product there. So I think, again, we'll continue to take share there. We'll, in my judgment, continuing to take share in pontoons. Maybe continue is a bad word. We ought to be able to get more share for pontoons in 2015 than we have been able to get in 2014 as we ramped up our new plant. I think we have a lot more production capability in working with our suppliers, et cetera, than we had before.

I think our guys are doing a good job on share. Third quarter was a nice share quarter for us, but we needed it. The reason we needed it is because we hadn't had enough new product coming, so now it's all coming and we're going to see the benefit from it.

That's very helpful.

Just lastly, on the engine side of Mercury. When we're our talking to dealers, we have been hearing they are starting to see some real additional success with the re-powering promotions. Could you just maybe talk a little bit about how those margins compare to your engine sales to OEMs and maybe what your market share is of the re-power market versus your share with the OEMs?

Re-power has been a focus, and the Mercury team is doing a great job at it. Margins on re-power would be comparable to margins throughout the business. I won't pick just OEMs, I'll just pick throughout the business. As we look at Mercury, our share opportunities are in re-power, saltwater, commercial, and in some international locations. The Mercury folks, as they always do, when they get focused on something, they make things happen. They've begun to really get focused in those areas, and I think we'll continue to see share growth, Jimmy, in all those areas.

Great. Thanks very much for the color.

You're welcome. Thank you.

Thank you. The next question comes from Greg Badishkanian from Citi Research. Please go ahead.

Sure. Great, thanks.

Two questions. First is, Canada and the US had colder and leaner winters and springs this year. So, I'm just wondering, are those lost sales or do you think some of that might be pent up for 2015?

Well, certainly they're lost today. So any that we didn't get made up are gone. My judgement is as follows: the US has played out almost as exactly as we thought it would. In our prepared comments we said on year to date, market's up about 4.5%; of trailing 12 months it's up 4.7%. Overall, Greg, that's generally right where we thought it would be. I don't know whether it's all been made up, but it's right where we thought it would be.

Canada, different issue. It was longer, colder, wetter, and then when we throw on currency exchange there and the fact that it froze -- bad word, caused people to stop and think before they bought boats. We clearly did not get that made up there. My hope is that's pent-up demand that we can uncork in 2015.

Yes. Okay. That's helpful, thank you.

Then generally speaking, dealer inventory levels -- how do you think that is looking right now? And not just your inventories but also your competitors', this year maybe versus last year, and just how it's developed throughout the year?

Good question. I think the industry is doing a magnificent job of managing inventory levels. We're in the floor plan business for our brands, but just naturally, as you do that, you get to see what the competing dealers, and even in some of our own dealers who aren't exclusive, we get to see what levels are in those dealerships. They're being really well managed, and they're very healthy and people are doing a good job on a total basis of keeping retail and the wholesale well in line. It's just great.

Good. Thanks and nice job in the quarter.

Thanks, Greg.

Thank you, the next question comes from Tim Conder from Wells Fargo. Please go ahead.

Dusty, also to everyone at Brunswick, congrats on the ongoing good execution.

Thank you, Tim.

A couple of questions, sir, here.

You talked a little bit in one of the previous responses about Mercury outlook here. Broadly, inclusive of the OEM area, would you expect to also gain share in OEMs looking into 2015? Again, I know there's been some new competition with product moving into that OEM area. Did you feel any major pressure from that at this point?

I'll always feel pressure. We got great competitors in our engine business, and that is what makes the whole engine segment in the entire marine business a really great segment. Great competitors make for a great segment.

My judgment today is, yes, we will gain some share. That's going to be driven by the 75, 90, 115 getting into the marketplace, Tim. That is a horsepower category that has been growing. There's lots of boats that use those type engines, and I think our offering is significantly better than what we have had out there in the past, and therefore, I think we'll take a little share.

Okay. Then, just to maybe put this to rest here, the boat production ramp-up issues -- do you believe that those are largely behind now? And should we then, therefore, see in, especially in the larger boats here, your wholesale pretty close to approximate retail, given the basically just people waiting for you to deliver the boat?

First, and please don't be offended when I say this. We haven't had a ramp-up issue.

It's a good issue. It's a good issue problem. (laughter)

Yes. It's a high-class issue, in that demand is exceeding our ability to make the boats right now. And I think that is probably what you mean, Tim. In round numbers, in our boat business, we sell 35,000 boats. As we're looking up as to the entire ramp-up and integration, I think we'd make this one boat (technical issues). We'll take that all day.

I am sorry, Dusty. You were cutting out there on your response there.

As we look across our boat businesses, as we talk about ramp-up and integration, in round numbers, we're going to sell 35,000 boats this year. And I think we're going to miss one boat versus our plans. That is not bad. We'll take that all day.

Now, I think we'll end the year, across our entire boat business, with wholesale and retail well in line. Our goal next year will also be to run the business on that basis. I think Jimmy had asked earlier -- and Jimmy, I apologize to you know right now for not answering the question -- we have got a bunch of boats that are sold out in the fourth quarter next year. So we've just got to sit there and make them, and if demand were to continue to ramp up, we have to make decisions about whether we can make more. But right now, we're sticking with our plans, and our fellows' -- the men and women who work in our operations -- ability to maintain -- are doing a magnificent job under a lot of pressure with real hot boats.

So it's a high-class problem in that we've got some consumers who are waiting awhile. But in my judgment, there's nothing in the world wrong with having product demand be a little greater than our ability to make the product.

Okay. Then maybe question for Bill specifically -- just can you quantify the expansion ramp-up cost that we're seeing here, Bill, in 2014?

Tim, I guess if you look at the leverage performance of the boat group, it's pretty much in line with where you'd expect the long term to be, with favorable mix benefits offsetting that. I think if you try to play those two off of each other, you get a feel for what the margin impact of one versus the other might be.

Okay. I think you alluded to that before, but I just wanted to revisit that.

Gentlemen, as it relates to the share repurchase authorization and then folding this into the high end, that $3.50, $4, roughly of 2016 -- if everything goes well, you reach Nirvana by 2016. The $200 million share repurchase authorization -- is that a fixed number meaning, yes, we're going to spend $200 million? Obviously, that's what is authorized, but are you for sure going to spend that? Or is that more of a fungible bucket if you get some attractive acquisitions? And along that share repo, are you looking at it more steady level-load type of an approach? Or would you be more opportunistic if you had to play one end of that spectrum?

I would say it's both, Tim, that we do want to orchestrate this in a steady level-load sort of plan, but as we get additional opportunities presented to us, we might call an audible.

Okay.

I think our plan, Tim, is to spend the money.

Yes, our plan is to spend the money.

With the $200 million towards share repo?

Correct.

Okay. Then, as that plays into the high-end opportunity cost here, I think you said it before, acquisitions are your top priority. But how much acquisitions, pensions, share repo do you need to get to that high-end opportunistic end? Or is that just really a function of the boat mix?

It's the market. First, let me come back. Our first priority is not acquisition. Our first priority, Tim, and I perhaps wasn't clear earlier, is growth. It's both organic and acquisitive. We've got a lots of spending to do in organic growth, and we've said we also want to have room to do acquisitive growth. Then, thirdly, we also try to leave ourselves room to do adjacency growth, which can be either organic or acquisitive.

In terms of hitting the top end, this $3.50 to $4 -- that, Tim, is always going to be driven by the market, in the size of the marine market. In order for us to get there, it's got to be above the range that we're planning on, which is the midpoints probably 180,000 to 185,000 units. For us to go to the larger, it's going to need to be 190,000 to 195,000 units.

Okay. Thank you, gentlemen.

With a change in mix.

Okay, thank you.

Thank you. The next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.

Good morning. Regarding your comment on working with dealers to trim the pipeline, Bill mentioned that activity was balanced in the quarter. Does that mean promotions, reserves, things like that were not impacted either way on your results?

That's correct.

Okay. Yamaha has announced a push in the freshwater on their outboard engines. Should we anticipate a change in how you go to market there? Should we anticipate additional discounting? Or what is your outlook on the freshwater outboard market with that new push by Yamaha?

First, for every action there is an equal and opposite reaction, so when we say we're going to saltwater, Yamaha is going to go to freshwater, absolutely. No, I do not anticipate there'll be any change in the way we go to market or additional discounting. I think we're both going to be in the respective segment talking about product. Then, more importantly, it's going to be the differentiation of service and the ability to take care of the dealer, is going to be the primary driver here.

All right. Thank you very much.

You're welcome.

Thank. Our next question comes from Craig Kennison from Robert W. Baird. Please go ahead.

Good morning. Thanks for taking my question.

I'll shift gears to fitness, just to give you an opportunity to talk about that. I'm curious about how much --?

So I'll hug you when we see you. Thank you.

(laughter) I'm wondering if you are all standing around the table or if you're sitting down?

Right now, we are sitting, but we've just finished a Board meetings in which we stood, many of us, the entire time.

So, to that --

As we sit here, because the speakerphone doesn't sound very good when we stand up.

That makes sense. So maybe to that end, I would be interested in, first, about how much are you spending or did you spend in 2014 as part of these pilots? Two, can you give us any color on how many pilots you have and how they're progressing as you work on that new opportunity? Thanks.

We're spending high single-digit millions. We'll be making the decision how much we'll be doing in 2015. Again, our view is that we won't begin to see the impact of all this work until 2016, so it will be a continuing drag in our Life Fitness results, in terms of margins in 2015. But we're really committed to it.

I don't really want to get into the number of pilots, but it's significant. With all pilots, we have the view that if every pilot is successful, we've failed, because we've not stretched the business model. We need pilots not to work as well as to be very successful. As we measure -- and one element of success, though, across all pilots is, where we go is the participation rate in the location that we go in. We judge that, as most of the firms have a wellness program, then, we go and run our pilots, then we look at what's the increased participation rate by employees with our offering versus the wellness program, and it's fundamentally doubled. That one statistic, Craig, keeps telling us we're really into something here, now we've just got to get it dialed right.

Excellent. Thank you.

You're welcome.

Thank you. We have a question from Joe Hovorka from Raymond James. Please go ahead.

Thanks, guys. A couple quick questions.

I wanted to go to the incremental margins in the boat business. I think you said that there was integration costs, production ramp up, which makes sense. Then you said that I think the product between segments grew pretty well balanced, but you had a 15% ASP growth. I just want to foot those two statements, because it seems like that would suggest that you had a shift to the larger product?

Secondly, I wanted to confirm that Sea Ray does have, or I should say all of the bigger product, but specifically Sea Ray, should have the highest or among the highest incremental margins in the boat group, both because of structurally where they are at, and also given that they're closer to the bottom than the top versus the aluminum? I have one follow-up question after that.

Joe, I thinks it's the, on a percentage basis, bigger product did grow faster than the rest of the portfolio, but when you look at it on a dollar basis, on a dollar basis, they both grew about the same. So you saw some growth, and ASPs not only increased because of the shift in mix, but it also increased within each segment of the boat business. You've got two factors at play there.

Okay. As far as the incremental margins at Sea Ray versus the rest of the boat group, am I correct in assuming that they are among the highest?

Yes. They are above average, but you've got to remember that at the heart, that the sweet spot is that 31- to 40-foot segment. Everything above 50 still has very attractive margins on a dollar basis, but they start to trail off a bit.

Sure. Then as we look into the fourth quarter, I think you said you'd have a modest loss in boats. Do we start to see those incremental margins improve in the fourth quarter and then get much better in 2015? Is that the way you're thinking about it? Will the ramp up and the integration costs be behind us by the time we get to the fourth quarter?

Let me give you just a bit different perspective. We're going to continue, at the product introduction pace we have coming, Joe, have integration, ramp-up, activities that we've got to manage for a pretty long time in this business. As an example, and I'm not -- for people who follow the industry closely, I'm not divulging any secrets -- we're introducing a new 590 -- it's a 59-foot boat -- at the Fort Lauderdale boat show next week. That boat has got to be integrated now into a production line that is doing, amongst others, the 51 and 65. We've said the 65, which was, again to integrate in, say, mid year, late spring, we won't be through real ramp up until the end of this year. That 59 -- we won't even start the integration on that until spring of this year, and that's going to be something that we are going to have to manage.

As we look at other plants, I can tell you there's not a plant in our boat business where we don't have lots of new products coming to the market through our product plan as far out as we can see. As we've always said, this requires that when we move it from engineering to production -- the example I always give is, if you have ever built a house, the builder can't build what the architect provides. There's always a few things that aren't just perfect. That's a bit true in the boat business.

We have to get the supply chain ramped up with this. The employees have to work through the best way to build the product and teach themselves. All of that takes time and it is a bit inefficient, but that is what it is. As we look at leverage on the boat business going forward, it's a little below be between 20% right now. It will be between 20% and 25%. I think as you think about it for the future, think for boat business more low end of that range versus some of our other businesses.

Okay, thanks, guys.

Thank you.

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

Thank you, ma'am.

I apologize for the length of this call. It's the verbosity of me answering the questions. Thank all of you for your interest. Thanks for the kind words that many of you gave us, and we'll make sure that our people out there doing it understand that you recognize what they have done. Thanks here for everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.