賓士域 (BC) 2015 Q1 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2015 first-quarter earnings conference call.

(Operator Instructions)

Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Bruce Byots, Vice President, Investor Relations.

Good morning and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO, Mark Schwabero, President and Chief Operating Officer, 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 also like to remind you that the figures in this presentation reflect continuing operations only unless otherwise noted. I would now like to turn the call over to Dusty.

Thanks, Bruce. Good morning, everyone. Our goal in 2015 is to continue to enhance and expand the growth we have been demonstrating now for several quarters. As we finish the first quarter and are working our way through the second quarter, we are bullish about this goal. Our key end markets continue to be resilient. The US market provides us and a solid platform from which to continue the growth of our businesses. Our recently launched new engines, boats, and fitness equipment are beginning to generate market share gains around the world. Mark and I will provide insights into how our current product line update is enabling us to generate above-market growth rates.

As the year is unfolding, the challenges of the increasingly volatile global economic landscape and the intensifying headwinds of foreign occur present risk, but they also offer opportunities for Brunswick to leverage our fundamental advantages into the marketplace. Great people, technology, innovation, leading brand position, product quality, and the unraveled breadth and strength of our distribution networks. So while we manage these risks, we're focused on taking advantage of the opportunities we have created and are increasingly confident we will achieve the 2015 growth goals embedded in our guidance for the year, pre-tax earnings growth of 15% to 20%.

Let's now talk about the first-quarter results. To more accurately reflect the operating and marketing fundamentals of our operating segments, we will present net sales on a constant currency basis, excluding currency changes. Reported revenue in the quarter increased 10%. On a constant currency basis, revenue increased by 14%. This is in line with our first-half sales growth guidance of high-single to low-double-digit percents. We experienced growth in all the major product categories. The highest growth rates were reported by marine parts and accessories and fiberglass sterndrive/inboard boats.

As expected, our gross margins decrease by 90 basis points compared to the prior year. Operating expenses increased by 5%. Operating expenses were 17.3% of sales. Operating earnings increased by 8% versus prior year. Again, as expected, operating margins were down 20 basis points to 9%. Continuing down the P&L, pre-tax earnings increased by 13%. Finally, diluted EPS was $0.59, reflecting a $0.07 increase over the prior year.

As we detailed on our January call, although our full-year plan reflects improvements in operating margins, first-half operating margins are expected to be flat to slightly down compared to the same period in 2014, with the key drivers being foreign exchange headwinds, the absence of 2014 favorable warranty adjustments and continued increases in investments to support our strategic objectives, for the growth rate of these investments is heavily weighted to the first half of 2015. In addition to these items, our new product launch successes are introducing additional costs and inefficiencies in the first half as we open and expand frank 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 continue to experience significant growth.

The strong sales performance represents a third consecutive quarter of double-digit growth rates, reflecting solid market demand and contributions from recent investments in new product launches throughout our organization. On a constant currency basis, sales in our marine segments increased by 16%, while our fitness segment increased by 6%. From a geographic perspective, consolidated US sales increased by 17%. On a constant currency basis, sales to Europe increased by 16%. Rest-of-world sales increased by 4%. In summary, combined sales outside the United States increased by 9%.

Operating earnings were $88.7 billion (sic -- see press release "$88.7 million") for the quarter, an increase of $6.8 million compared to 2014. Operating margins decreased by 20 basis points to 9% due to the factors I described earlier. Pre-tax earnings increased by $9.8 million, or 13%, as we also benefited from lower net interest expense and higher other income. Diluted EPS from continuing operations for the quarter equaled $0.59 per share, reflecting a $0.07 increase.

Now I want to take just a couple of minutes and provide our perspective on the global marine market. First, a quick update on how the US market performed in 2014. The US power boat industry grew to approximately 167,000 units, or about 5.5%, in 2014. In the first quarter of 2015, the US power boat segment, with preliminary numbers, grew approximately 7% as, once again, outboard boats led the way. March, which comprises about 9% to 10% of the year retail on average, demonstrated comparable growth rates. We need to keep in mind that in the first quarter of 2014, the US experienced fairly widespread adverse weather conditions. Given our assumption of a continuation of sub-3% annual GDP growth rate, we anticipate the 2015 US industry growth rates to be comparable with 2014 rates.

Let's now look at marine markets outside of the United States, and we'll start with Europe. Overall unit retail demand for boats and engines improved in the first quarter compared to a year ago. Scandinavia and Southern Europe were particularly strong, while Eastern Europe was weak. The retail market in Russia has dropped significantly, more than 50%, due to slowing economic conditions and the weakening of the ruble. DCB monetary actions, in our view, should continue to help retail market demand in Europe, and because most Brunswick marine product in Europe is priced to local currency, the strengthening of the US dollar hasn't affected retail demand. However, the negative effects of translation are lowering margins on product not manufactured in the region. For the full year, we are planning for overall demand in Europe to be flat to slightly up.

In Canada, first-quarter retail was down sharply, reflecting weakness in March. We anticipate that retail (inaudible) market in the second quarter and third quarter will likely remain difficult and down versus a year ago, as consumers react to the price impact of the strong dollar level, which is making product more expensive in Canadian dollars. Overall, we believe the Canadian market will be down for the full year.

In South America, especially Brazil, retail boat demand is down over 20% over the last six months compared to the same period a year earlier. The weakening real has severely limited demand for boats being imported into Brazil from the US or Europe. As a result, our boats manufactured in Brazil have picked up market share due to our local manufacturing presence, but we are still challenged for sales due to an overall weak retail boat market and declines in sales of boats that we import into the region. For the full year, we are planning for the overall South American market to be down. Finally, as we look at the Asia-Pacific, first-quarter retail markets in the region were flat to slightly down with last year. Our plan reflects a flat to slightly down market for 2015.

So if we summarize all that, for the reasons I just have been describing, global market demand for the year is expected to increase in the 3% to 5% range, which is consistent with the assumption used in our multi-year plan. During the first quarter, markets performed more towards the higher end of that range. With that, I'll now turn the call over to Mark for a closer look at our segment results.

Thanks, Dusty. I will start with the marine engine segment, where first-quarter sales on a constant currency basis increased by 16%. Overall, acquisitions contributed 4% to the segment's year-over-year growth. From a geographic perspective, sales in the US were up 19%, reflecting an increase in all major product categories. Excluding 2014 acquisitions, the US sales increased approximately 14%.

Sales to Mercury's European customers, excluding currency changes, increased by 21%, which included a 9% benefit from an acquisition completed in 2014. Excluding Russia, revenues were up in all categories. Rest-of-world sales on a constant currency basis increased by 5%, as these regions benefited from gains in outboard engines, as well as parts and accessories and this growth was partially offset by lower sterndrive/inboard sales.

On a product category basis, the outboard engine business reported solid overall sales growth in the quarter, which included benefits for Mercury's 7590 and 115-horsepower four strokes, which were introduced in 2014, as well as the new 350- and 400-horsepower Verado engines launched in Q1 of 2015, which fortifies our position in targeted growth segments. These new engines have been well received by the OEMs and by consumers, particularly in larger offshore boats and have led to market share increases within these horsepower categories, including gains in the targeted saltwater and re-power markets. Our outlook for the US outboard engine business continues to reflect favorable retail demand. Europe and rest-of-world markets all demonstrated year-over-year growth, with the exception of the high-volume, small-horsepower engine market in Russia due to the weak retail demand mentioned earlier.

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 and consumers as well. Sterndrive engine sales continued to be affected by unfavorable global retail demand trends. However, the category did experience modest growth. Diesel engine unit sales were up modestly during the first quarter.

Mercury's parts and accessories businesses, excluding the impact of currency and acquisitions, delivered strong sales growth during the quarter, with gains in most major markets. Revenue benefited from new product launches and market share gains. This includes product successes such as Attwood's portable and integrated fuel systems as well as their new LED and underwater lighting system products, Whale's new and award-winning range of intelligent pump control system, MotorGuide's new trolling motors, the joystick piloting system for outboard engines, a refreshed helm suite with new controls and features, the awarding-winning ECO Enertia prop, and Quicksilver, a leader in lubricants for not only marine, but for motorcycles, ATVs, and snowmobiles.

In addition, the continued sales records achieved by our distribution business portfolio, which includes land and sea, Kellogg Marine, diversified product, and the recently acquired Bell Recreational Product businesses, demonstrate their ability to deliver on superior product availability, on-time delivery, and the product category expansions. In addition, favorable weather conditions, combined with lower fuel cost, have provided some improved market conditions in the United States. Lastly, earlier this week we announced the completion of our third P&A acquisition. We acquired BLA, Australia's largest provider of marine products, strengthening our presence in that region.

Mercury's operating earnings increased by 20% compared to last year's first quarter. Operating margins were at 13.2%,100 basis points higher than the prior-year quarter. The improvement in operating earnings reflected the higher sales, including a favorable product mix benefit from parts and accessory growth and our recently launched outboard products. Partially offsetting these positive factors were the unfavorable effects of foreign exchange and increased investments for long-term growth.

Turning to our boat segment, our first-quarter revenues on a constant currency basis increased by 15%, with strong growth in the fiberglass sterndrive/inboard boats and solid gains in outboard boats. Both brands made progress during the quarter in gaining share. This occurred not only in the US market, but also in key regions, including Europe, Brazil, and Canada.

Our share gains reflect the advancements made by our various product development teams, both in terms of shortening the average age of our boat models as well as bringing fresh new concepts into the marketplace. This has been demonstrated across our brands and categories, including such things as Boston Whaler's Dauntless family of boats and the 320 Advantage, Sea Ray's 19-foot SPX, and the L Series yachts, Lund 1750 Rebel XS, and the Harris dual console pontoon. In the US, which represents over two-thirds of this segment, sales increased 21%.

In the quarter, European sales on a constant currency basis increased by 21% versus the prior year. This performance resulted from the introduction of new products, including larger, higher-priced products by our European-manufactured outboard boat brands. Rest-of-world sales on a constant currency basis decreased by 3%, which reflected the weaker demand in Canada which was down 12% on a constant currency basis due to the conditions described by Dusty earlier in the call.

In the first quarter, Brunswick's global retail unit sales increased by 12% compared to the prior year, reflecting more favorable US weather conditions as well as the market share gains. Global wholesale unit shipments increased by 4%, and this compares to the boat group dollar sales increase of 12%, as this segment also benefited from higher average selling prices due to a favorable shift in mix across most of our boat lines. For the remainder of the year, and particularly in the second half, wholesale unit growth will be a bigger contributor to sales increases than the average sales price growth.

Regarding our pipelines, dealers ended the quarter with 40 weeks of boats on hand measured on a trailing 12-month retail basis, which is comparable to the prior-year level. Specifically, pipelines for aluminum products are up compared to last year due to an expanded distribution network and new product introductions. Fiberglass, sterndrive and inboard pipelines are flat versus the prior year, while fiberglass outboard pipelines are down slightly. Our plan assumes that the wholesale unit growth rate for the full year will be consistent with our retail unit growth rate. In addition, the 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 first-quarter operating earnings declined by $700,000 when compared to the prior year. Operating performance in the quarter included planned cost increases associated with new product introductions, capacity expansions and production ramp up, partially offset by higher sales, including several new product introductions. In addition, foreign exchange had an unfavorable impact on our first-quarter earnings.

On a constant currency basis, sales at life fitness increased by 6% for the quarter. Growth resulted from higher sales to US health clubs and hospitality customers, as well as sales gains in international markets, particularly certain developing regions. Partially offsetting this growth was lower sales to local and federal governments. The segment continued to benefit from new product introductions in all regions, with this quarter representing its tenth consecutive quarter of year-over-year revenue growth.

Life fitness continues to develop new products and services that drive market share growth in their commercial, cardio, and strength categories. Recent examples that have led to their share gains include the Explore Console for the Elevation series, the PowerMill Climber, the FlexStrider, the E Series Cross-Trainers, and the multi-purpose synergy family of training systems. Segment operating earnings in the quarter decreased 13% as the impact from higher sales was more than offset by the absence of a favorable warranty adjustment in 2014 and an unfavorable impact from foreign exchange. In addition, life fitness incurred cost associated with the planned capacity expansion activities and new product introductions. And now I'll turn the call over to Bill for some additional comments on the financials, starting with the consolidated perspective on how foreign exchange affected our results.

Thanks, Mark. I would like to start with discussing the that impact foreign currency is having on our sales comparisons. As a reminder, approximately 20% of our sales are transacted into currency other than the US dollar. Our most material exposures include sales in euros, Canadian dollars, Brazil real, and Australian dollars. In the first quarter, consolidated sales comparisons were negatively affected by almost 4%, which was higher than our previous guidance due to further strengthening of the dollar. For the full year, we are estimating a similar impact on year-over-year comparisons.

The impact on operating earnings in the first quarter is approximately $10 million, which was also higher than expected. For the full year, we are now estimating that operating earnings comparisons will be negatively affected by $30 million to $35 million, or 8% to 9%. This estimate includes the impact of translation on all sales and costs transacted in a currency other than the US dollar, benefits from hedging activities of $11 million, and offsetting price actions in certain international markets. Additionally, estimates for the full year assume that rates remain consistent with current rates for the remainder of the year.

Regarding our tax provision, our effective book tax rate as adjusted was 34% for the quarter. Our effective book tax rate for the full-year 2015 guidance is also 34%, which excludes any benefit from the extension of the US R&D tax credit, which would lower the rate by approximately 1.5% for the year. Our estimated effective cash tax rate for 2015 reflects a low-double-digit percent level.

Turning to a review of our cash flow statement, cash used for operating activities was $125.9 million, a slight change of $1.8 million versus the prior year. As planned, pension contributions were approximately $61 million in the quarter, an increase versus the prior year due to the timing of our 2015 pension contributions. Normal seasonal changes in working capital balances resulted in a use of cash in our primary working capital accounts and totalled approximately $161 million, which is improved from the prior year. The biggest changes occurred in accounts and notes receivable, which increased by $88 million, accrued expenses, which decreased by $78 million, inventory, which increased by $28 million, and accounts payable increased by $33 million. Given the seasonality of sales in our marine businesses, we anticipate the liquidation of working capital over the balance of the year.

Total free cash flow amounted to a negative $168 million versus a negative $145 million in the prior year, a difference of about $23 million. Capital spending was approximately $34 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 allow us to fund future investments in growth and enhance shareholder returns. Cash and marketable securities totalled $426 million. A decline from year end 2014 reflects a seasonal free cash flow usage of $168 million, as well as cash returned to shareholders through share repurchases and dividends of approximately $20 million and $12 million, respectively.

I would like to 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 pension expense to be approximately $13 million. Any related charges associated with the second phase of the lump sum buyout planned in Q4 are excluded from our adjusted EPS guidance. Net interest expense is expected to be about $26 million. Combined equity earnings and other income are anticipated to be comparable to the prior year.

And, finally, we expect our average diluted shares outstanding for the full year to be approximately 94.5 million. The anticipated reduction in average shares outstanding reflects the continued execution of our $200 million share repurchase program initiated in 2014, with purchases in line with the previous quarters, partially offset by compensation plan activity. Through the end of Q1 we have purchased $40 million under this program for 787,000 shares of stock. We expect to systematically complete the remainder of the current program by the end of 2016.

On the cash flow side, our plan reflects $70 million to $75 million of cash contribution to our pension plan, which includes an amount that will be used to fund the lump sum benefit buyouts in the fourth quarter of 2015. A majority of those contributions have already been funded in Q1 to maximize returns and plan expense benefits. Our current plan anticipates working capital changes to result in modest usage of cash of $20 million to $40 million and capital expenditures of approximately 4% of sales, with a substantial portion directed at growth and profit enhancing projects, including against capacity expansion plans 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 $170 million to $190 million. I would now like it turn the call back to Dusty to continue our outlook comments.

Thank you, Bill. Our overall operating plans and assumptions for 2015 remain consistent with those we communicated on our last call. The first quarter produced results within the range of our initial guidance and expectations. 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 benefits from the successes of our new products and the continuation of solid growth in the United States, partially offset by weaknesses in certain international marine markets. Our guidance does not include any additional acquisitions made in 2015. We have also incorporated our assessment of the impact of changes on foreign exchange reflecting current rates.

For the full year, we anticipate a slight improvement in gross margin levels and solid gains in operating margins. As I mentioned in my opening remarks, our earnings growth will be more heavily weighted to the second half the year, reflecting improved manufacturing efficiencies and cost reductions as well as less severe FX comparisons. Our earnings will benefit from managing cost through initiatives such as Lean Six Sigma, and by implementing programs to improve product cost through supply chain initiatives 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%. For the second half of 2015, we expect the increase in overall operating expenses to be more modest than planned in the first half. As a result, our pre-tax earnings should continue to demonstrate strong growth of 15% to 20%. Finally, with one quarter behind us, we have raised the bottom end of our initial 2015 EPS guidance as adjusted to now reflect a range of $2.75 to $2.85. An early look at the 2015 second quarter indicates continued strong top-line growth, forecasted in the 6% to 8% range and operating margins to be flat compared to the same period in 2014.

If we now look at our segments, our 2015 plan reflects continued revenue and operating earnings growth in our marine engine segment. Specifically, we are planning for revenue growth in the mid-single-digit range, with a solid improvement in operating margins despite currency headwinds and the continued negative impact on operating leverage from acquisitions. In addition, we will continue to make significant investments at Mercury. Our current plan reflects a stable pricing environment for our larger horsepower engine businesses.

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 an increasing number of new products that will be shipped into the market. Our plan also reflects solid growth of outboard boards under 28 feet throughout the year and, therefore, influences our overall average sales price. As a result, increases in the average sales prices will be at lower rates of growth versus 2014. Our current plan reflects a stable pricing environment for our boat businesses. We are targeting 2015 annual revenue growth in the low-double-digit range and we expect margins to be up, with year-over-year improvement in the segment's operating margins to be equal to, or modestly less than, what we achieved in 2014.

In our fitness segment, our plan is based on continued revenue growth and maintaining strong operating margins. In 2015, we are now targeting revenue growth in the low- to mid-single-digit range, reflecting the impact of the stronger US dollar. We will continue to make significant investments in 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 it core business model. We are planning for margins to be flat to slightly up at life fitness for the full year.

Our capital strategy for 2015 remains consistent with what we described to you in our last call. We plan to maintain strong cash flow liquidity positions, deploy capital to strengthen our marine and fitness segments and to actually get our pension derisking planned, as well as return cash to shareholders through a balanced approach that includes dividends and share repurchases.

So to conclude today's call, though we face some challenges in 2015, we are well positioned to continually execute our growth strategy and increase shareholder value. The management team and the 12,000-plus employees who will remain focused on bringing to market a steady cadence of new product introductions aimed at attracting and capturing sales through consumer-friendly features and capabilities, expanding capacity throughout all of our businesses, engine, boat, and fitness, to meet increasing demand, increasing efficiencies and streamlining costs by continuing to operate our businesses as successfully as possible, and identifying and funding the best opportunities we see for growth as well as managing and adjusting Brunswick's product portfolio as necessary. And with that, we will quit talking and turn the call over to you for your questions.

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

(Operator Instructions)

Our first question is from James Hardiman from Wedbush Securities. Your line is open.

Thanks for taking my call, guys. How you doing? Strong quarter, given all the turbulent activity going on in international markets. I guess a question on the guide. On an absolute basis, your sales guidance is unchanged. The midpoint of EPS is $0.025 higher.

When I run through the math of what you have given us on the FX side, it sounds like an incremental 150 basis points of headwinds on the top line and $0.04 to $0.07 roughly on the EPS line from FX. The question there is, what's changed over the past three months, given those incremental headwinds that -- in theory, some stuff must have gotten, better given the constant currency increase in the guide?

Well, the simple answer is, James, we've rolled up our sleeves and said we are going to work our way through this currency impact. We are working on cost. We are working on efficiencies. We are doing a little better in certain markets and with certain products than we thought we would. When you roll all that up, as I began our comments with, we are bullish on our ability to hand over the year that we predicted, 15% to 20% earnings before taxes growth and we just see our way there. We are not very worried about it. We are just going to have to handle all of this stuff.

Got it. And then sort of related question here. I guess, first, is there any way you could split out the global boat unit growth number? I think it was 12%. What did that look like domestically versus Europe and the rest of the world?

I guess, just bigger picture question, if you strip out all the translational impact of currency, sounds like the momentum in the US is great. Sounds like the momentum in Europe is pretty great. Rest of the world, which I guess for you guys is primarily a Canadian issue, is pretty bad. Can you just talk through some of the competitive issues going on in those different markets, some of which may have stemmed from currency and the impact that might have on European or Japanese manufacturers? But maybe walk us through some of the intricacies there so that we can better understand some of that.

First, I'll have Bill do the arithmetic for you.

The international unit demand was flattish for us, with the US markets making up the difference.

Let's look at competition, et cetera. We clearly, just because, as we look at the M&A numbers and we told you what our increase in retail was, we took a lot of share here in the US market. Frankly, we planned to with all the new product introductions we have. Brazil is a place where we are taking share, but as we've said, that overall markets is down. Our advantage that permits us to take share is local manufacturing, so we're taking share in a down market. It's sort of, with apology to my sister, kissing your sister. We are glad to have it, but I am not that excited.

As we look at Europe, we did really well in Europe. And the big reason there is our European boat companies have been introducing lots of new product. They keep winning awards over there every year with their product introductions. They are moving to some bigger product and that business is developing a little momentum along with -- I think we've said Europe will be flat to slightly up, so with our ability to take share and the momentum there, we feel good about that market.

The really, really tough place is Canada. And in general, the Canadian market is heavily supplied by US-based manufacturers. And with a Canadian-US dollar relationship, the price of boats for most Canadians has now gone up, say, 20% in round numbers. What happened is we saw January and February start out actually quite nicely at retail. And that was not a surprise to us, because our view was that at boat shows and other places, in dealerships, that dealers were selling product they had purchased at exchange rates that were different than current exchange rates. Once those boats generally began to sell out, March experienced a significant decline at retail, and in our view, it's going to be a tough place to be for the remainder of this year.

Eventually, what's there at retail is going to get sold out. Eventually, dealers are going to need to replenish and the market will settle down. But for 2015, it's just going to be a difficult place to be. And that's the toughest outside the United States market we are dealing with. Is that helpful as an explanation?

That's very helpful. Just a quick clarification here. The Canadian market, for the most part, boats are bought in US dollars? Is that correct? Versus the European market, where you have the translational risk, but much less of a competitive risk? Is that how I should be thinking about this?

Here is the way to think of it. The Canadian market is supplied by boats manufactured in the US. In general, the European market is supplied by us by boats manufactured in Europe.

Got it. But in terms of the boats that you sell to both of those markets, are they both in the local currencies, or is Canada in US dollars, to your dealers, at least, and then they have to sort of make those adjustments? Is there a difference in sort of how that currency works from your perspective?

James, about two-thirds of the boats that we make, or about 70% of the boats that we sell in Canada, are actually made in the US, because we've got a Princecraft brand that sits in Canada that manufacturers in Canadian dollars and sells in Canadian dollars. Most every other boat that's sold up there is imported from the US. It is a sale that's transacted in Canadian dollars, but dealers are generally buying in US dollars.

Okay. And it doesn't sound like they are then lowering the prices to the consumer in any way that would allow some of that FX headwind not to hit the consumer?

Yes. Actually, protecting sales, they ought to be raising prices.

Correct.

Right. Right. Okay. Good color.

Just to clarify, in Europe about 70% of the boats that we sell in Europe are manufactured in Europe.

Got it. Very helpful. Thanks, guys.

You're welcome.

Our next question comes from Joe Spak from RBC Capital Markets. Your line is open.

Good morning, everyone. Thanks for taking the question. The first one is the comment in your press release about FX being a competitive risk. I realize you put that in last quarter as well, but I think many probably viewed it as sort of a boiler plate risk factor. Now in light of some other events that I think investors have seen, it's probably getting a little bit more focus. Can you talk about what you're seeing, I guess, specifically on then engine side, where we have seen Yamaha already act in other some industries. Honda has a national TV campaign advertising a deal on some marine engines. Maybe specifically how you are planning for that portion?

In the US we are not really seeing anything. And the only impact we're seeing in the difference between the relationship in the yen and other currencies is in some relatively small markets with smaller horsepower engines. And even there, the smaller horsepower engines we put into the markets are produced in Japan in a joint venture we have with Daihatsu. So when you roll that all up in a ball, we are not seeing any significant or material impact on the engine side from the yen producers.

Okay. That's helpful. And then just if I ran some numbers, I just want to make sure in the ballpark here. If I back out the FX impact on boats that you guys talked about and we were to assume, let's just call it a 25% incremental margin, it would have suggested operating income about $3 million higher. Is that roughly the order of magnitude that the plant expansion and production ramps have cost in the quarter? And how do we sort of think about that progressing down over the rest of the year?

I think you are directionally correct and the biggest improvement we will see in the boat business will occur in the second half as these efficiencies go away -- inefficiencies go away, efficiencies begin to take effect. So a way to think about our second half, and why the second half is obviously going to be very strong from an operating margin standpoint, and to order it in rank order, inefficiencies and operating issues will go away in the second half. Currency impact will be less in the second half because we began to see currency changes in Q4 last year. And a lot of the one-time items that were impacting second -- or first half will not reappear in second half. So when you add all that up, the half-to-half improvement is going to be quite significant.

Okay. And then just one quick clarification on the guidance and follow-up to James' question. Is BLA in your guidance now? Because that, by my numbers, would actually cover most of sort of the top-line -- offset most of the top-line impact from the increased FX headwind. Then if you assume a normal P&A margin, most of the EPS impact as well. So is that in there?

The sales are in there. There is no earnings in there.

There is no earnings? Okay. Thanks a lot, guys.

That's because for the year, we are not anticipating a big earnings contribution. You got to remember that this is a distribution business. Distribution margins tend to be relatively low. But this is a business that we feel, combined with our existing presence in Australia, that we are going to do real well with over time.

I want to take just a minute and summarize with BLA where we are on our plan to grow our P&A business by $350 million top line through acquisition. We said that could be up to a three-year process. So we're a little over a year into it. We are at about $110 million, are working at being very relaxed, everybody should. We are working towards our goal of making that. In fact, when we get to our November this year meeting where we talk about our performance 2016, 2017 and 2018, it's highly likely that you will see us increase the amount of sales growth we think we can get through P&A acquisitions. We are incredibly happy with this process, with the results we are going to get from it, and what we think the long-term benefits will be.

Thanks a lot, guys.

Thank you.

Our next question comes from Tim Condor from Wells Fargo Securities. Your line is open.

Thank you. And, gentlemen, congrats on the execution in a tough environment with a lot of cross winds.

Thank you, Tim. We appreciate that.

Just a clarification question on Canada, if I may. Any color you can give us by region? The root of the question comes from any preliminary fallout from demand in Western Canada in particular, from the oil, oil-related businesses, or is this fairly well spread evenly across Canada? Any color there.

We are hearing from some of our industry sources that the saltwater business, actually, in boats is extremely strong. In fact, in some cases the industry, including yourselves, is having some difficulty supplying a sufficient quantity of outboard engines for that. And clearly, if the Japanese were so inclined, they wouldn't want to be giving away margin in that circumstance. Any additional color you can give from that perspective?

Let's first do Canadian regions. The big markets in Canada are Quebec and Ontario. Princecraft is primarily Quebec based. It serves the rest of the market with our other US-based brands. Yes, it a lot tougher out west as oil spending, oil-related spending, has gone down. But Tim, as we measure the overall impact, I would say it's not significantly moving the needle across all of Canada.

So it's really Quebec? Is that what you are saying, Dusty?

Well, more Ontario. Ontario is (technical difficulty). Because we have -- Quebec is served by Princecraft very well.

Okay.

(Technical difficulty) Saltwater is strong. I am not aware, and I will let Mark speak to it, that we are not able to meet demand, except perhaps these 350, 400s came out red hot, and as we ramp up production, we are sort of in that high-class problem sometimes that a few more people want them than we are able to get ramped up for. Mark, do have --

I would add to that we put in metered capacity increases based upon our outlook of the market. I am very pleased with (technical difficulty) the 79 -- [75 91 15]. The 150 we had launched, but capacities in anticipation of that demand, we have gotten a pretty strong response from our 350 and 400 we announced down in Miami. But our capabilities there and our supply lines and stuff are such that the folks up at Mercury are responding to the demands. I don't believe we would be a part of that issue you're talking about, Tim.

Okay. Okay. And then, gentlemen, Bill or whoever wants to take this, as it relates to the capital allocation. Clearly, despite -- you guys gave some caution at the Miami boat show regarding the Europeans potentially using the euro to be more competitive and the currency that's been out there. And then also you gave some caution early March at a conference saying that there wouldn't be a lot of upside. Yet, the fundamentals of the business, excluding currency, have done a little bit better, as you have already talked about, and have increased your guidance in the early part of the year, albeit minorly. But as things still look, in capacity and borrowing rates, why would you maybe not look to forward buy that share repo? Is it related to maybe what you are alluding to on the opportunities on the P&A side?

I just think, Tim, it's an approach where we want a dollar cost average in. We think the right thing for us to do is to buy a set amount every quarter, flex it up and down based upon kind of where valuations are, and it leaves some flexibility that if we do get some investment opportunities, we haven't committed a significant amount of capital of share repurchase. We have got some dry powder to do some other things.

Okay. Okay. Thank you, gentlemen.

Thank you, Tim.

Our next question is from Mike Schwartz from SunTrust. Your line is open.

Good morning, guys. I know this is your favorite subject, but can we talk about the weather for a second? I know one of your largest dealers was talking about having some issues getting product into the New England region where there was a lot of weather issues earlier this year. Did you see any of that? Did it impact wholesale shipments into some of those shipments we should start to see, I guess, in the second quarter?

No. Yes, we obviously saw some of it, but I don't think it was material enough that it's going to see any big swing in the first or second quarter. Frankly, the biggest impact -- I hate that word, frankly -- should say actually, the biggest impact was in our P&A business up there, which is very strong. Kellogg is our distribution-based business up there and it was pretty miserable through the winter there. They are based in the Boston area. Pretty miserable is really an understatement. It was actually quite miserable. And that is starting to come back nicely. But that's the only -- the biggest impact we would have seen, Mike.

Okay. Thanks, Dusty. An then just on the fitness side, I know that you kind of laid out that the government part of the business was a little weak in the first quarter. Is that something we should expect going forward or was this something just kind of tied to the first quarter?

Boy, if I knew how the government was going allocate money, I would be a lot smarter than I am right now, Mike. Frankly -- or actually, as we're thinking about it, we don't see them doing a lot more in the second quarter than they did in the first quarter. If there is going to be any opportunity, it will be in Q3. We tried to make our best view as to what they would do for the remainder of the year in our guidance about how the fitness business is going to perform.

Okay. That's great. I'll leave it at that. Thank you.

You are welcome. Thank you.

Our next question is from David MacGregor from Longbow Research. Your line is open.

Yes, good morning, everyone. Thank you for taking the questions.

Hi, David.

Just a quick question on the free cash flow. You bumped up the guidance by $20 million. Is that just working capital, or what else might be happening there?

It's working capital and taxes paid. Taxes paid are going to be a little bit lower than what we thought three months ago. And we've got a little bit more visibility in the working capital and we feel comfortable that we can decrease the amount of working capital usage.

Okay. Thanks. And then just on the parts and accessories business you talked, Dusty, about the growth initiative, a three-year plan. You are one year into it. Sounds like it's going well. What should we expect in terms of margin progression as you build that out over the next couple of years? Do international acquisitions, do they bring an accretive or dilute effect to the percentage margins in that business?

Overall, these acquisitions will be dilute P&A margins, because in the pecking order, David, and we try to talk about this as often as we can, Mercury branded parts are our highest margin. We then have all of the boat parts we kind of take through our Attwood business, or other types of parts and accessories. And then the lowest margin are in the distribution business. So two of the three that we've acquired are actually in the distribution business. When we do parts manufacturers, that will fall in line with average Mercury margins but will be a bit dilutive to overall P&A margins. But, the rate of return on these investments is really, really good and the competitive position it puts us in is we love, so we are quite comfortable having a little margin dilution in order to continue this activity.

Okay. Great. Thanks very much.

You are welcome.

Our next question is from Jimmy Baker from B. Riley & Company. Your line is open.

Hi. Good morning. Thanks for taking my questions.

No problem, Jimmy.

First, on the boat side, great performance at retail, up 12% versus wholesale up 4%. Can you help us understand why that didn't translate to a decrease in weeks of channel inventory? I realize that's a trailing 12-month metric, but in each of the last three quarters of 2014, your retail performance was also in line or often quite stronger than your wholesale shipments. Can you help us with the math there? Is there something that's distorting that or something else that we need to consider, like dealer turnover?

No. It's not affected by dealer turn over. Here is what will be my simplistic explanation of in general what I think is going on in the boat market, and it would be financing, pipelines, everything. That is wholesale financing. We have been really increasing the rate of new products and generally everybody knows when the model year ends and dealers are getting very good at wanting the model year to end with very few birthday boats sitting their lot. So what's happening is, as we go through the -- moving into the selling season and into the selling season, wholesale does not match retail, as they really pull their pipelines down. So that's sort of first and second quarter.

Then we finish the heart of the retail selling season, do a model year change, and then with lots of new models coming out, dealers then begin, in Q3 and Q4, to begin to get themselves ready for the next selling season, make decisions about new product, et cetera. So what's happening is -- and it's clearly setting up this year. It happened a bit last year and I'll work at it at two levels. Strong second half versus first half, even though the prime selling season in marine is first half.

And then secondly, as we watch pipelines, pipelines in my view is -- are going to get really low here in our second quarter, because retail is quite strong, dealers will sell through, and then everybody is going to need to take a breath and start replenishing to get ready for next year. So we were careful in our prepared remarks that say wholesale growth will equal retail growth over the year. It's just not going to look that way in the first and second quarter and then it will flip around in Q3 and Q4, Jimmy. Is that helpful?

Yes, that's actually very helpful. Appreciate it. So then separately, you highlighted your sterndrive engine business was up in the quarter and your sterndrive engine competitor posted fairly strong Q1 gains in all geographies, particular strength in North America. Yet, we all see the SSI data. You noted that global retail trends in the sterndrive segment remain unfavorable. Can you just flip those two for us, why we are seeing those wholesale gains there when retail continues to deteriorate?

Well, actually, in where a lot of sterndrives go, I think if you look at -- well, you might have two sterndrives, as an example. As you look at -- and I don't know, let me find the slide real quick, Jimmy. If you are up on your screen, you can flip back to it. It's our slide 9. We are seeing some the bigger sterndrive models will be actually be up in Qs 2, 3, and 4 last year, Q1 this year, and those pull a lot of sterndrives through. I think that's what you are generally seeing and why we're all saying the sterndrive markets get a little better. Those are obviously higher-dollar sterndrives than the smaller ones.

I would also point out that Sea Ray's introduction of the new SBX models, which have a fairly high sterndrive component to them, there has been a fair amount of wholesale activity. Those things are just starting to flow through the retail results, Jimmy. So at least from our engine perspective, that's helpful. It's certainly not competitive, but for us it's helpful.

Okay. Great. And just last if I could slip one in on fitness. The margins were down a bit in the quarter, but you actually took up your margin guidance language for that segment for the year. Can you just help us understand, I guess, first how the first quarter compared with your prior expectations for that business and then, secondly, what you're seeing there that has given you a little bit more confidence in the profitability of the fitness segment despite the currency headwinds?

Jimmy, we can sum up the first-quarter margin impact as all driven by the year-to-year comparison. Last year we had big warranty improvements, which were significant dollars in the first quarter, not repeat in first quarter this year. That is fundamentally the whole story. As we go through the rest of the year, you kind of get a sense that we think margins will be generally improving with all the new products we have as we make up for this tough first quarter. But first quarter was all driven by the lack of all the warranty gains we got in first quarter of 2014.

Very helpful. Thanks very much for the time.

You are welcome. Thank you, Jimmy.

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

Thank you everybody for joining us today. I know for many of the analyst who cover us this is a very difficult scheduling next couple of days. We tried to adjust the call timing to accommodate as many of you as possible. As always, thanks for the great questions. We're out on the road a lot for the next month and I'm sure we will be seeing many of you in the coming days and weeks. So thanks very much.

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