賓士域 (BC) 2014 Q4 法說會逐字稿

Good morning, and welcome to Brunswick Corporation 2014 fourth-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 - 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. Also with us today is Mark Schwabero, President and Chief Operating Officer.

Before we begin with our prepared remarks, I would like to remind you 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 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 the supplemental information sections of the consolidated financial statements accompanying today's results. I would also like to remind you that the figures in this presentation reflect continuing operations only, unless otherwise noted.

On July 17, 2014, 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, 2014 the sale of the retail bowling business was completed. As a result, the historical and future results of these businesses are reported as discontinued operations, and the historical and future results of the billiards business, which remains with the Company, are reflected in the Company's fitness segment.

Therefore, for all periods in this presentation, all figures and outlook statements incorporate these changes, and reflect continuing operations only, unless otherwise noted. I would now like to turn the call over to Dusty.

Thanks, Bruce, and good morning everyone. I'll start with an overview of our full-year results. Revenue in 2014 increased 7%.

We experienced growth in outboard boats and engines, marine parts and accessories, fitness equipment, and fiberglass sterndrive inboard boats which was partially offset by a decline in sterndrive inboard engines. Our gross margin increased by 60 basis points compared to the prior year, driven by volume leverage, favorable warranty comparisons and new products, partially offset by costs associated with production and new product ramp-ups.

Operating expenses increased by 4%, as we continue to invest in numerous strategic initiatives at increasing levels. 2014 operating expense was approximately 17.6% of sales, and that was in line with our guidance. Adjusted operating earnings increased by 21% versus last year.

Our net interest expense was reduced by $11.8 million. Adjusted pretax earnings increased by 32%, which is slightly above our guidance range. Diluted EPS as adjusted of $2.42 reflected a $0.06 benefit from the recently extended US R&D credit. Excluding the benefit of the credit, EPS as adjusted was $2.36, $0.01 above the high end of our guidance.

Our 2014 revenue performance benefited from recent investments in growth initiatives, with several new products being introduced into the marketplace, along with increases in production rates and capacity. Sales growth also reflects parts and accessories acquisitions made during the year. The boat and fitness segments reported top line improvements of 10% and 7% respectively. Mercury sales were up 5%.

From a geographic perspective, consolidated US sales increased by 8%. Sales to Europe increased by 14%, due mostly to strong performance by our marine segments, as well as incremental revenues from acquisitions. Rest of world sales declined by 1% versus the prior-year period due to weakness in sales of both boats and engines, mostly offset by gains in engine parts and accessories, and fitness. In summary then, consolidated sales outside the United States increased by 4% for the full year.

For the full-year adjusted operating earnings were $360.6 million, an increase of $62.3 million compared to 2013. Engine and boat segments each contributed about $25 million to this increase. Our operating margin, excluding charges, increased by 110 basis points to 9.4%. Operating leverage for the full year was 26%.

As we stated in our November 2013 investor day, we expected leverage to exceed our three-year target of 20% to 25% in 2014. The key contributor to our 2014 leverage was the benefit achieved from favorable warranty experience, and related adjustments. In 2014, adjusted pretax earnings increased by $82.1 million or 32%. About three-quarters of the improvement was derived from the increase in operating earnings.

Diluted EPS from continuing operations, as adjusted for the full year, equaled $2.42 per share. This compares to net earnings as adjusted of $2.47 per share in the prior year. If we apply a 32.5% tax rate to 2013, our 2014 EPS as adjusted would reflect a 30% growth rate.

All three of our segments reported strong top line growth in the fourth quarter. Sales in our combined marine segments increased by 15%, while our fitness segment increased by 8%. From a geographic perspective, consolidated US sales increased by 18%.

Sales to Europe increased by 27%, due to strong growth in all three segments. Excluding the impact of the Whale acquisition sales to Europe increased by 22%.

Rest-of-world sales decreased by 2% versus the prior-year period. Canadian sales of our marine businesses were the largest contributor to the quarterly decline. In summary then, combined sales outside the United States increased by 7%.

Adjusted operating earnings were $42.7 million for the quarter, an increase of $28.8 million compared to 2013. Operating margins, excluding charges, increased by 280 basis points to 4.5%. The increase in our operating margin reflects the impact of strong sales growth.

Operating earnings includes the effect of an increase in operating expenses, due to the funding of our numerous strategic initiatives. Diluted EPS from continuing operations as adjusted for the quarter equaled $0.33 per share, reflecting a 26% increase. Bill will provide more detail on the non-cash charges that were made during the quarter related to pensions and an equity investment.

I'll now provide our perspective on the global and marine market. The US market in 2014 performed slightly better than our initial expectations. Based on preliminary SSI data, the US powerboat industry grew approximately 5% in 2014. This follows a 3.5% gain in 2013.

As a result, the US powerboat industry now approximates 166,000 units. If we apply 2014's growth rate to 2015 and 2016, the US market will be above the high end of our investor day 2016 base case of 175,000 to 180,000 units.

Although the US marine market is slightly ahead of our base case assumptions, due to weakness in various non-US markets, 2014 global marine retail unit growth was slightly below the low-end of our annual growth expectations of 3% to 5%. Given our assumptions of a continuation of a sub-3% global GDP growth, we anticipate 2015 US industry growth rates to be comparable with 2014. Our plan reflects the rest-of-world's markets being flat.

I'll now provide our view on marine markets outside the United States. Although we are experiencing excellent top line growth in Europe due to factors that Bill will elaborate on a little later, we believe the majority of the European marine marketplace remains very challenging.

We believe overall retail demand was about flat, but this varies by country and region. There appeared to be some modest recovery in southern Europe from a very low base, while northern and central Europe were flat to down slightly. Eastern Europe, particularly Russia, was down significantly.

In 2015, we're planning for Europe to be flat, with Eastern European markets remaining depressed. We're closely watching ECB monetary policy, elections, currency, and instability in Eastern Europe.

Turning to Canada, an unusually cold and wet spring led to a late start to the boating season, and currency variability caused some consumers to delay or defer purchases. We believe retail demand in Canada was down mid to high single digits in 2014. In 2015, we're planning for that market to be flat reflecting normal weather patterns, but continued currency disruption.

In South America, weaker than expected economic conditions were the primary factor that caused lower market demand. We believe this region was down mid to high single digits, with Brazil down more significantly. In 2015, we're planning for these markets to be about flat, with Brazil starting to stabilize. Economic growth inflation and currency will be important drivers.

Finally in Asia-Pacific, we believe the market was flat to up slightly, and are planning for low single-digit growth in 2015. In summary, we're planning for markets of 2015 to be flat in most non-US markets.

Now, I'll turn the call over to Bill for a closer look at our segment results and our financials.

Thanks, Dusty. I'll start with the marine engine segment, where sales were up 10% in the quarter. From a geographic perspective sales in the US were up 13%, reflecting an increase in outboard engines and parts and accessories, which was partially offset by the impact of lower sterndrive inboard engine revenues.

For the full year, US sales were up 5%. Sales to Mercury's European customers increased by approximately 31% for the quarter, as growth was experienced in all product categories. Growth in parts and accessories benefited from the recent Whale acquisition, and growth initiatives, while stronger outboard performance included benefits from new products and improved conditions in certain countries.

For the full year, sales to Europe were up 14%. Rest of the world sales decreased by 1%, as these regions benefited from gains in parts and accessories, while engine revenues were down compared to the prior year. For the full year, sales to rest of the world were also down 1%.

On a product category basis, the outboard engine business reported solid overall sales growth in the fourth 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 and 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. Sterndrive engine sales, however, continue to be affected by unfavorable global retail demand trends. Diesel engine sales were up modestly during 2014.

Mercury's parts and accessories business delivered strong sales growth during the quarter, with gains in most major markets. Revenue benefited from recent acquisitions, new product launches, and market share gains. The acquisitions of Whale and Bell Recreational Products Group accounted for approximately $13 million of the increase, or 3 percentage points of Mercury's overall revenue growth rate in the quarter. We again reported record sales in the fourth quarter at Land 'N' Sea and Attwood.

Mercury's operating earnings increased by 75% compared to last year's fourth quarter. Operating margins were 6.8%, 260 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.

For the full year, the engine segment's operating margin was 14.1%, an increase of 50 basis points versus the prior year. Mercury's full-year operating earnings exceeded $300 million for the first time in its 75-year history.

In our boat segment, fourth-quarter revenues increased by 23%. This includes strong growth in sales of outboard boats as well as in fiberglass sterndrive inboard boats. In the US, which represented over two-thirds of the segment, sales increased by 37%. For the full year, US sales were up 15%.

In the fourth quarter, European sales increased by approximately $5 million or 31% versus the prior year. This performance resulted from the introduction of new products, including larger higher-priced outboard products by our European outboard boat brands. For the full year, European sales were up 32%.

We expect our European sales growth to moderate in 2015, anticipating a growth rate to be modestly above our market assumptions. Rest of the world sales decreased by 5% in the quarter, which reflected the weaker demand in Canada and South America referred to by Dusty earlier in the call. For 2014, rest of the world sales decreased by 7%.

In the fourth quarter, Brunswick's global retail unit sales increased by 14%, compared to prior year. Global wholesale unit shipments increased by 6%.

This compares to the boat group dollar sales increase of 23%, 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 full year, global retail unit sales increased by 2% compared to the prior year, while global wholesale unit shipments were up 1%.

Regarding our pipelines, dealers ended the year with 35 weeks of boats on hand measured on a trailing 12-month retail basis, which is comparable to the prior year level. Pipelines for aluminum and fiberglass outboard products are up compared to last year, due to an expanded distribution network and 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 growth expectations in the various boat categories, and we continue to be comfortable with these overall levels.

The boat segment's fourth quarter adjusted operating earnings improved by $12.2 million or 76%, when compared to the prior year. This improvement resulted from higher sales, including several new product introductions.

Operating performance in the quarter did include increasing costs associated with new product integrations, capacity expansions, and production ramp-up. The segment's year-over-year earnings improvement also reflected the absence of costs related to pipeline reduction of large fiberglass boats, completed in Q4 of 2013. For the full year, the segment's operating margin, excluding charges, was 1.6%, a 220 basis point improvement versus 2013.

Sales at Life Fitness increased by 8% for the quarter, resulting from growth in the US to health clubs, hospitality, education, and local and federal government customers, as well as modest sales growth in international markets, particularly Europe. For the full year, US sales were up 9%, while European and rest of the world sales were up 4% and 7% respectively. The segment continued to benefit from new product introductions in all regions, with this quarter representing its ninth consecutive quarter of year-over-year revenue growth.

Segment operating earnings in the quarter increased 11%, as the impact from higher sales was partially offset by the continued increases in growth initiative investments. For the year, the segment's operating margin finished at 15%, which is comparable to last year's margin.

Moving now to foreign exchange. In the fourth quarter, foreign currency had a higher-than-expected unfavorable impact on changes in total consolidated sales of slightly under 2%, and operating earnings of approximately $3 million.

For the full year 2014 versus 2013 comparison, exchange rates had a minimal impact on overall sales and operating earnings. We are, however, expecting a more significant impact on our sales and earnings in 2015.

On the revenue side, just over approximately 20% of our consolidated sales is transacted in a currency other than the dollar. The unfavorable translation impact on these sales caused by changes in exchange rates is estimated to be approximately 2.5% of consolidated sales.

Changes in currency will also lower operating earnings by approximately 7%, or $25 million. This amount considers the impact of currency translation on both sales and costs transacted in the currency other than the dollar, as well as the impact of hedges. The sales and operating earnings impacts reflect exchange rates in line with current levels, and reflects significant changes in the last couple of months.

During the fourth quarter of 2014, our GAAP earnings also reflected two non-cash charges totaling approximately $48 million. In the fourth quarter, we reported a $27.9 million charge pertaining to lump-sum settlement payments made to certain pension plan participants. This item was one we discussed on previous calls, but had not quantified. We are planning a second lump-sum payout in 2015, and would expect a comparable charge in Q4, which would not be included in our as-adjusted EPS reported earnings.

The second item is a non-recurring impairment charge of $20.2 million pertaining to an impairment of our minority investment in the European-based boat business, reflecting the continued performance challenges faced by that business.

Moving on to our tax provision. Our effective book tax rate as adjusted was 22.3% and 32.5% for the quarter and full year respectively. Our effective book tax rate for 2014 now includes the benefit from the extension of the US R&D tax credit, which lowered the rate by approximately 1.5% for the full year.

Our 2015 guidance, however, does not assume that this credit will extend into 2015. Therefore, our as-adjusted effective tax rate for 2015 is 34%. Our estimated effective cash tax rate for 2015 reflects a mid-teen percent level.

Turning to a review of our full-year cash flow statement. Cash provided by continuing operation activities was $235.3 million, an increase of $67.3 million versus the prior year. Net increases in our primary working capital accounts totaled $67 million.

Excluding the impact of acquisitions, the biggest changes occurred in inventory, which increased by $57 million, accounts and notes receivable, which increased by $24 million, accounts payable increased by $13 million, and accrued expenses increased by $6 million.

Excess tax benefits from share-based compensation activity adversely affected our cash from operations in 2013 by about $37 million, and $8 million in 2014. This item resulted primarily from stock options exercised in both periods, and is derived from the difference between the expense recorded for book purposes and the expense reflected in the Company's Tax Return. GAAP requires that these excess tax benefits be reclassified into financing activities, and not included in operating cash flow.

Normally, these benefits would lower taxes paid, and the reclassification would have no impact on free cash flow. However, because of the Company's tax position, these tax benefits did not materially benefit our taxes paid in either period. Consequently, this activity had a negative impact on the free cash flow in both 2013 and 2014.

Regarding our pension, we ended 2014 with an unfunded obligation of $310 million, representing a $55 million increase from prior-year levels. The main drivers for this increase are the adoption of new mortality tables, reflecting longer life expectancies and lower discount rates, which more than offset contributions and favorable investment experience.

For 2015, our plan reflects $70 million to $75 million of cash contributions, which includes an estimated amount that will be used to fund the second part of our lump-sum buyouts. A significant portion of the full-year contributions will be funded in the first quarter, to maximize return and plan expense benefits. Although our unplanned obligation increased, our pension expense in 2015 is expected to be lower by $2 million, due primarily to actions taken to fund and derisk our pension plans.

Full-year capital spending was in line with the prior year at approximately $125 million, which included investments in new products in our marine and fitness businesses, as well as capacity expansion projects. Total year-to-date free cash flow amounted to $116 million, which is twice the amount reported in the prior year. 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.

At year-end, cash and marketable securities totaled $636 million. The increase of $267 million from year-end 2013 reflects the net proceeds received from the sale of the retail bowling business, and free cash flow from continuing operations, partially offset by $42 million of spending for both acquisitions and dividends, along with share repurchases of approximately $20 million.

Let me conclude with some comments on certain items that will impact our P&L and cash flow for 2015. Our estimate for depreciation and amortization is approximately $90 million.

We expect our 2015 pension expense to be approximately $13 million. Net interest expense is expected to be about $26 million. Combined equity earnings and other income are anticipated to be comparable to prior year.

And we expect our diluted shares outstanding to be approximately 94 million to 95 million. The reduction in average shares outstanding reflects the execution against our $200 million share repurchase program, partially offset by stock compensation plan activity. We expect to systematically complete this share repurchase program over approximately a two-year period.

On the cash flow side, the Company plans to make cash contributions to its defined benefit pension plans of approximately $70 million to $75 million in 2015, as described earlier. Our current plan anticipates working capital changes to result in a modest usage of cash of $30 million to $50 million, and capital expenditures of approximately 4% of sales, 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 goals and a modest usage of cash for working capital, we plan to generate strong free cash flow for the full year in the range of $150 million to $170 million. I'll now turn the call back to Dusty to continue our outlook comments.

Thank you, Bill. Our operating plans and assumptions for 2015 remain fairly consistent with those we communicated at our 2013 investor day meeting. We continue to target 2015 to be another year of strong earnings growth, with outstanding cash flow generation.

Our plan reflects approximately 6% to 8% sales growth, which includes benefit from the successes of our new products, and the continuation of the growth demonstrated in the US in 2014, partially offset by weaknesses in certain international markets, as well as the unfavorable impact from foreign exchange. Our guidance does not include any additional acquisitions made in 2015.

We anticipate a slight improvement in gross margins, which assumes an absence of favorable warranty adjustments achieved in 2014, and our ongoing focus on managing cost of goods sold through initiatives such as Lean Six Sigma and supply chain and manufacturing efficiencies. As a result of ongoing growth investments, full-year operating expenses will increase, but as a percentage of sales are expected to be lower than 2014 levels, approximately 17% to 17.2%. As a result, our pretax earnings should contain to demonstrate strong growth of 15% to 20%.

Our 2015 EPS as adjusted is projected to be in the range of $2.70 to $2.85. Another look at 2015 first half indicates continued strong top line growth, forecasted in the high single to low double-digit range.

While we're planning for improvements in operating margins for the full year, first-half operating margins will be flat to down, compared to the same period in 2014. This reflects foreign exchange headwinds, the absence of 2014 favorable warranty adjustments, and continued increases in investments to support our strategic objectives, where the growth rate of these investments is heavily weighted to the first half of 2015.

In addition to these items, our product success has introduced additional cost and inefficiencies in the first half, as we open and expand plant capacity to meet demand, continue to introduce a significant number of new products into production in each of our segments, and ramp up production as our sales continued to experience significant growth. These costs and inefficiencies will abate in the second half, and our second-half operating margins will improve significantly. We remain committed to deploying our resources to address the headwinds through additional manufacturing initiatives using Lean Six Sigma and commodity cost opportunities.

The 2015 financial targets for our operating segments also remain fairly consistent with our three-year plan. Our overall plan reflects continued revenue and operating earnings growth in our marine engine segment.

Specifically, we're planning for revenue growth in the mid single-digit range, with a modest improvement in our operating margins despite currency headwinds and the continued negative impact on operating leverage from acquisitions. We'll continue to make significant investments in Mercury.

Looking at our boat segment, our plan assumes that we continue to successfully execute our large fiberglass boat strategy, which is a key part of in an increasing number of new projects that will be shipped into the market. Our plan also reflects solid growth in outboard boats under 28 feet throughout the year, and therefore influences our overall average sales price. As a result, increases in average sales prices will be at lower rates of growth versus 2014.

We are targeting 2015 annual revenue growth in the low double-digit range, with year-over-year improvement in this segment's operating margin, comparable to 2014.

In our fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. In 2015, we continue to target revenue growth in mid single to high single-digit range. We'll continue to make significant investments in Life Fitness, aggressively leverage 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. And although Life Fitness's margins could decline slightly in 2015 as a result of these investments, our plan continues to reflect very healthy margins in this business.

Our capital strategy for 2015 remains consistent, with what we described to you on our last call. Over the next two years, we plan to maintain strong cash and liquidity positions, deploy capital to strengthen our marine and fitness segments. We will do this both organically by continued investment through capital expenditures, R&D, and SG&A.

This commitment is an important foundation in our effort to drive an aggressive pace of new product introduction, which is imperative in our overall goal to grow revenue and market share. We will also be actively pursuing acquisition opportunities with an initial focus on Mercury's parts and accessories businesses.

We will 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 the fitness equipment and health and wellness sectors, as well as evaluating 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. Thank you, and now, we'll be happy to take your questions.

(Operator Instructions)

James Hardiman.

Dusty, a few months back, as you gave preliminary thoughts on 2015, it seemed like you thought it was going to be more in the 5% to 7% range from a top-line perspective. It's 6% to 8% now and I guess if you layer on currency, you're looking more like 8.5% to 10.5%, sort of ex-currency revenue growth. I guess the question -- well, I guess the statement is, it sounds like you've gotten a little bit more bullish.

I guess the question is why? Obviously we've seen some good industry numbers to finish the year. Is that what's driving the better outlook, or is it more internally some of the progress that some of your particular products have made over the last few months here?

Good morning, James. It's more internally in the success of our products, and our ability to take some share and continuing, in our view, in certain of our segments, to really be a market leader. Our view in 2015 for the US market, which is the strongest market obviously around the world, is about the same as the growth we've seen in the market in 2014. So our, if you will, more upbeat mood is around our ability to continue to put new product into the marketplace and meet success.

Got it. And along those lines, obviously it's taken a little bit of time for supply to catch up with demand. It doesn't seem like we're there yet certainly with the high-end Sea Ray offering. What gives you confidence, or do you believe at all that the demand is actually waiting for that product to be available, rather than going elsewhere to a competitor?

Well, we're sold out as we keep saying, in certain of these new products, the larger products, 65 is an example, for about a year. I can't honestly tell you that there aren't other buyers who would like the product who said I'm not going to wait that long, and go somewhere else. But that's a part of our increasing capacity.

We've announced, for instance at Sea Ray, that we're opening a Sykes Creek plant, that lets us really begin to do two things. Increase the output of our outclass models, but as importantly from an earnings perspective, begin to remove inefficiencies and costs from the system that we are incurring through the enormous demand we have, and trying to get it through the existing footprint.

We're also doing this, and I think it's important for us to talk about, in all of our other businesses. We have announced and you may have seen, I guess it's been two, three weeks ago, we opened a significant capacity expansion at Boston Whaler. We need to do that for both big product, but also for demand for existing product.

We're undertaking a significant expansion of our manufacturing location at Life Fitness in Hungary. We've had to pick up line rates in all of our lines, in Life Fitness for all the new products we've been bringing to the market. In fact, that's another place we're playing hard to the market, and that's a part of, and I can keep going and it's true in all of our businesses including Mercury and our aluminum boat businesses, et cetera.

So what we're doing is we're working hard to meet demand. We're going through inefficiencies, and having additional cost as we expand capacity, bring new product in line, and open new plants. And that's to be expected.

So I would laughingly say around here, we call this a problem, and it's a bit of a drain on first-half margins. But it's a real high-class problem, and one we are happy to have. And one we will get taken care of in the first half, and we'll see a significant improvement in margins as we go through the second half.

Got it. And last question for me on the ASP front, the number was 17% in the fourth quarter, I think it was 15% in 3Q. I guess firstly, do you have a number for what that was for the full year, and then how do we think that trends? You basically said it's going to be less of a benefit in 2015 than it was in 2014, I guess that's not a huge surprise. But how should we think about the magnitude of ASPs in 2015 and the cadence of that? I'm assuming first half much better than second half?

We think the cadence will be about half in 2015 versus 2014.

And what was the 2014 number?

It was in the range of 10%, we may not be quite half.

It is going to be slightly below half, James.

Okay, so it was 10% in 2014, so we're thinking about 4% or 5% in 2015 is how we should think about that?

Inventory. And a little bit more heavily weighted to the first quarter, but not significantly.

Good stuff. Good luck.

David MacGregor.

Thanks for taking the question. I guess I wanted to start by asking about the engines business, and you put up a 14.1% margin for 2014, so you are at the lower end of the target range you established for 2016, which was the 14% to 15%. And I realize you're making a lot of investments and there's a lot of moving parts in there right now, but I guess I'm wondering if beyond 2015, so I guess I'm asking the question more on a longer-term basis.

But, do you foresee a point where the margins get substantially better than that, based on the returns on all these investments? Or do you hold it at that level and accelerate the level of reinvestment back into the business?

It would be the latter.

Okay. Let me ask you a second question on the parts and accessories business. You've got a strong dollar right now. Can you talk about the extent to which that may accelerate acquisition opportunities for you, or acquisition plans?

Let's talk about the dollar in general. The dollar is something that's outside our control. We've got our sleeves rolled up, trying to do everything that's within our control.

We know the acquisitions we're working on. We know the people we are in discussions with, obviously. If some great deal would happen to pop in here, we might jump on it, but right now we're just pursuing our strategy and working with the people that we've got in our queue.

How should we think about longer-term organic growth in the parts and accessories business then? Setting aside acquisitions?

Think of it at sort of mid-single digits.

Okay last question is just, with respect to the fitness business, let me ask you a question there. What's achievable in 2015 in terms of incremental revenue and profit from the products you launched mid-2014?

On revenue?

Yes, and the margin lines as well, if you can address that?

Let's go at the margin. My judgment is the margin for fitness could be a bit below in 2015 what they were in 2014, because we're continuing to make significant investments in that business, not only around product related to the fitness category, where we play really well. We're having to make significant investments in capacity, in people, in order to continue to grow the business at the rate we are growing it.

We're continuing to invest in adjacencies, some of which we've talked about. And we're doing a big plant expansion over in Hungary. So this is the year of very heavy investment, and I just don't think we can expect that business to improve operating margins in light of all that.

Okay. Thank you very much.

Mike Swartz.

You gave a lot of color on your expectations of the marine market by geography, and maybe I missed it, but could you maybe lay out your thoughts around sterndrive versus outboard, for the year ahead?

There will be more growth in outboard than sterndrive.

But do you expect sterndrive as an industry to grow in 2015?

No.

Okay.

I don't think it will. I would be happy if it was flat.

And then, maybe on your input cost basket as well, that's something that's been a hot topic lately, particularly with the pullback in crude. How should we think about that playing out, I know there's more to your cost basket than just resins and oil-related inputs, but from a very high level, if or when should we start seeing benefits of that?

Complicated answer to a simple question. Crude plastics, all that derived from that, are a little less than 3% of our input costs, so that's where we start.

We have a very complicated, for a company our size, supply chain, that's very global. And as we work our way through the complexity of our supply chain, my judgment is we will have, without additional work that we're going to be undertaking, a net positive from commodity costs, but it will not be significant. It will be under -- I don't know. Pick a number, 10 basis points to 20 basis points, something like that.

Okay, great.

Another thing everybody has to understand, you read a lot about it, and it's one of those pains you have got to deal with when you run a business like ours, is all that's happening out on the West Coast is causing real inefficiency for those of us who source and build in Asia.

Thanks for the color, Dusty.

Tim Conder.

Dusty, congrats to you, Bill, and everyone -- Mark and Bruce, for a great year. A few things here though. With Sykes Creek ramping and the investments you are making, especially there on the larger boats, do you anticipate at this point getting close to approximating, meeting demand on those types of products by year-end 2015, or will that really stretch more into 2016 at this point?

Tim, the [booger] in that is what is meeting demand. We're never going to be able to have someone walk up and say I'd like to buy a 65, and us hand them one. So from my perspective, we want a nice backlog on these L-class and even sport yacht product. And our goal is to reduce the length of the backlog some, but we're always going to have a backlog as long as we have a hot product.

Let me rephrase it then. Do you anticipate getting to the desired level of wait-time backlog by year-end 2015, or will that really stretch into 2016 as you ramp that up?

I think realistically, it's going to go into 2016.

Okay, I apologize for not phrasing that correctly.

That's okay, it's a fair question.

And then, Bill, regarding the FX, could you give us any color on your hedges, and maybe your net exposure? It sounds like again with the Hungary expansion, you're building a little bit more natural hedge there as you progress through 2015, but your exposure on the net basis and the percent of that, that you are hedged, and maybe at what levels?

Tim, we provided in the materials our view or what our exposure is on the sales side, which is about 20% of overall sales. Cut that in half is what our net risk is, after you layer in manufacturing costs and operating costs in those local markets. And then our hedges are about 50% of that number. And our hedge policy is very much 50% of a forward-12-month activity, and every quarter we layer in new hedges to keep 50% hedged of the next 12 months.

Okay, I guess, maybe another way to ask the question is, of your main currency exposures, any type of sensitivity that you can give with the hedges, that hedging policy that you have --?

I think the best way to look at it is to look at our mix of international sales, and the risks match up pretty well against the mix of international sales.

Okay.

If Europe is 34% of our international sales, it ends up the risk ends up to European base currencies, right in that ballpark.

Okay. And last question on your incremental margins here. As you already indicated, do you expect -- it appears that 2015's going to be a little bit lower due to the investments you are making, for good reasons obviously, but then, should we see that reaccelerate in 2016, given that we should be past several of these investment humps here with Sykes Creek, with Life Fitness and so forth?

Probably not, Tim. We have got a bunch more investments we are not talking about yet that we want to make 2016 and beyond. And I think one we get to our investor day late this year, we'll need to lay out for the next three-year period all the investments that we intend to make.

We've got a significant growth plans here in the Company, and we know we need to continue to invest in order to drive it. We also have an obligation to our shareholders to keep growing EPS and cash flow. So, we've got our sleeves rolled up, and we're really confident we're going to be able to get it done, but we'll need to start sharing more of that later this year.

So kind of keeping in that 20% to 25% would be a reasonable thinking?

Yes, Tim. Yes it would

Great. Thank you, gentlemen.

Greg Badishkanian.

Maybe just in terms of inventory levels overall for the industry, and your competition what you are seeing there, if there's any overhang? And with the weaker other currencies, relative to the US dollar, just any changes in the competitive environment that you think you might see, and maybe you're not seeing it right now?

Inventories in my judgment industry-wide are in excellent shape. We get to see through our joint venture at least through all of our dealer network, what the dealer inventories look like. They are really in great shape, and the industry continues to do a great job in managing that.

In terms of competitive impact, hard to say right now, but I will say this. We're blessed with some really great competitors. They make us better, as we watch them and most of them are very focused on margin and earnings, and this would be a good time for them to continue to do that with the currencies in the state they are in.

Good. Thank you.

Jimmy Baker.

Nice finish to a great year. So just given the tailwind to boat usage, can you just talk about the sensitivity of Mercury's P&A business to lower fuel prices, and how we should be thinking about that tailwind, relative to let's say, other growth drivers like share gains and SKU expansion?

We've always said that we've not been able to closely correlate lower fuel prices to boat sales. We think that's more driven by the fuel prices having an impact on the overall economy, and if that improves it, then we get increased boat sales. On the other hand, we do see increased usage with low fuel prices, and that drives increases in our P&A business.

And then, Dusty, you -- well I don't want to say you, but your former boat group president previously indicated you could handle a yacht market 2.5 times 2012 levels out of the Palm Coast facility. But then fast-forward to today, it's little changed from those levels, and you are reactivating Sykes Creek.

Can you explain if share gains drove the delta there? Or if I could ask it more directly, how would you characterize the current throughput and cost performance of Palm Coast relative to your expectations, when you decided to shutter Sykes Creek?

Throughput is generally on our expectations. Cost is a fair bit above our expectations. I think what we didn't take into account well enough, Jimmy, was the model mix that we began to put through that facility, and the complexity that it brought. And as a result we have a real need for Sykes Creek.

And I think if we are also honest with ourselves, we didn't quite anticipate the demand being at the level as it is. It's a great problem to have, but it's something we have got to deal with here in the first half, and that's why we signal -- it won't have an impact on margins in the first half, but we'll see great margin improvement in the second half, this is operating margins.

Fair enough. High-class problems. Thanks a lot for the time.

I want to say something for our Palm Coast employees. They have been super men and women. The amount of overtime they are putting in for us, and the really difficult time they are working through just because we've got great boats, is incredibly appreciated by guys like me who get to sit in an office every day. They are really working hard down there.

Rommel Dionisio.

Dusty, I noticed in your comments that you talk about potential acquisitions with regards to fitness and engines. With the variety of different competitors in the boat segment having been bought up by private equity years ago, I would think there might be some brands up for sale. Is there a particular reason why you didn't include that in the mix, or do you maybe just find that internally developing new designs, whether it be the L series for Sea Ray or Boston Whaler 420s is the way to go here with your boat business going forward?

We're really happy with our boat portfolio and our ability to grow it, and our ability to handle new products, new product introductions, et cetera. And we see as we look at in the engine segment and the fitness segment as we talk about acquisitions, acquisitions that bring significantly more synergies and real ability to grow later. That's why we are focused there. It's not that the boat business is not a good place, we just think the synergistic opportunities and growth opportunities around acquisitions, around engines and fitness, is significantly higher.

Okay, fair enough. Thank you, Dusty.

Joseph Spak.

This is [Rita Veray] filling in for Joseph Spak. Just a quick question on capacity and other segments. Can you just remind us of what it is, and more [content aluminum] segments, and also progress in those penetrated areas? And a follow-up question would be a housekeeping one, which is can you remind us what your warranty adjustments experienced in 2014?

Bill, do you want to do the last one?

I'll do the warranty adjustments. It's in the neighborhood of about 20 to 30 basis points of favorability year over year.

Thank you.

When we talk about capacity, we completed a significant expansion around pontoons the year before last. Last year, around our northern aluminum fish boats, which would be Crestliner and Lund product. We just opened a capacity expansion at Boston Whaler, and we're in the process of expanding capacity for large boats with Sea Ray.

We are in the midst at Mercury of a three-year capacity expansion plan, and we said we would be spending $20 million to $25 million-thereabout a year in capacity expansion, and that process continues to go on. It will not be completed until next year. At fitness, we've said we are expanding capacity in our Hungary facility, and we're also trying to get the effect of capacity expansion through putting new better of equipment in many of our fitness facilities, changing layouts, et cetera, as a way to get more capacity.

So as we look around the Company, again it's a great problem to have, and it's a problem we get paid to deal with. We've introduced so much great product, we just need to be making more of it, and we have got our sleeves rolled up to do that.

Thank you very much.

If I can add on the warranty question, the impact I gave was 2014 versus 2013. It's slightly more than that going into 2015. So the 20 to 30 is slightly higher than that, 2015 versus 2014.

Thank you so much.

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

Thanks, everybody for joining us. We took a lot of your time today, and I know many of you who are on the sell side had a very, very busy day, and we were just in line with others. So thanks for taking the time to be on the call with us.

We'll be seeing many of you at boat shows and investor events that start coming at us hot and heavy following this, and as always, we appreciate your questions and interest. Thank you.

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