賓士域 (BC) 2016 Q4 法說會逐字稿

Good morning and welcome to Brunswick Corporation's 2016 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 Phillip Haan, Vice President, Investor Relations.

Good morning and thank you for joining us. On the call this morning are Mark Schwabero, Brunswick's Chairman and CEO, and Bill Metzger, the CFO.

Before we begin 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 will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation, as well as in the reconciliation 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 Mark.

Thank you, Phil, and good morning, everyone.

Our 2016 results reflect the continued successful execution of our growth strategy. Our emphasis on product leadership was evident as we saw the benefits from share gains in our businesses. 2016 was the final year of the three-year plan we laid out in November 2013, and despite several challenges over that three-year period, including the unplanned bowling divestiture, currency headwinds, and minimal contributions from international marine markets, we grew EPS as suggested to an all-time record of $3.48, which exceeded the range of $3 to $3.40 that we outlined in that 2013 plan.

We believe an important element of this success is our approach to developing our long-term plans, which are balanced from a risk and opportunity perspective.

2016 also represents the first year of our 2018 plan, which we shared with you in November 2015. Our performance in 2016 puts us in a strong position to achieve the 2018 targets, while continuing to deliver strong free cash flow and invest in our business.

Our annual revenue in 2016 increased 9%. On a constant currency basis, revenue increased by 10%, with acquisitions contributing approximately 5% of the growth. The strongest growth rates were reported by our fitness segment, our fiberglass outboard boats, and our marine parts and accessories. Our aluminum boats, our outboard engine, and our fiberglass sterndrive/inboard boat businesses also contributed solid growth.

Our overall revenue growth was strong, but was slightly lower than our expectations. This is mostly attributable to lower marine sales, due to timing of wholesale shipping activity and a weaker retail environment, caused in part by greater uncertainty stemming from the US elections.

Our gross margin of 27.3% was 20 basis points higher than last year. Our operating expenses increased by 8% and were 16.6% of sales. This compares to 16.8% of sales for 2015. And excluding the impact of the acquisitions, our operating expenses increased by 2%.

Adjusted operating earnings increased by 13% versus the prior year and our operating margins were 10.7%, up 30 basis points compared to last year. Operating leverage for the year was approximately 14% on an as-adjusted basis. Excluding the impact of acquisitions, our operating leverage for the year was 21%, which is in line with our long-term planning objectives.

Continuing down the P&L, our adjusted pretax earnings increased by 12%, while diluted EPS as adjusted of $3.48 was up $0.55, or 19%.

And finally, our full-year free cash flow totaled $234 million, an improvement of $41 million versus the prior year.

Now I will provide you a perspective on the US marine market. In 2016, the US powerboat industry, as defined by NMMA, the unit volume grew by 4.4%, which is slightly below the growth rate in 2015 of 6%. Our 2017 plan assumes that the US industry unit growth will be similar to the 2016 trends.

As we look to 2017, we are confident that the growth in the US market demand is sustainable, even though demand was weaker in the second half of 2016. This confidence is supported by dealer sentiment, strong order levels going into new model year, the new and innovative product offerings across the entire industry, favorable replacement cycle dynamics as existing boats age, as well as the stable economic conditions and, again, the improved consumer sentiments.

Now I would like to review with you the current regional marine market perspectives. Europe reflected modest retail unit growth in 2016. We experienced mixed results throughout the continent, but overall the demand was relatively healthy and our performance exceeded the market growth rates. We expect the European retail boat market in units to be up low to mid single digits in 2017. We anticipate that our marine sales will once again grow faster than the market, due to continuing improvements in mix and share gains.

In Canada, the demand in 2016 continued to show weakness, as challenging economic and foreign currency environments affected demand. We expect the Canadian boat market to stabilize, due to more favorable economic and exchange rate environment as we enter 2017.

In other rest of world markets, our outlook for Asia-Pacific continues to reflect stable retail demand, while Latin America, Africa, and the Middle East remain difficult markets with additional, but more moderate, retail declines anticipated.

In summary, while the global unit growth in 2016 was below our 3% to 5% range, we expect 2017 global unit growth to be in the 3% to 5% range. Our revenue growth will continue to outperform through the share gains and mix improvement, as well as benefiting from recently completed acquisitions in our parts and accessories and boat businesses.

Moving to our fitness segment, our 2016 results reflect a solid growth rate in the US and a strong growth in Europe, which together represents just under three-quarters of the segment's sales. Revenues in both regions are benefiting from the growth of franchised clubs.

In addition, Europe is benefiting from recent investments in manufacturing capacity.

The third largest region, Asia-Pacific, experienced strong sales improvements due to the combination of market growth and share gains in both Japan and China. This performance reflects the success of our continued focus on expanding our presence in these key growing markets.

In emerging markets, demand was lower, but trends improved throughout 2016 as the impacts of currency devaluations and commodity markets moderated. Our fitness business continues to benefit from solid overall demand, particularly in the global commercial fitness markets. While we have experienced uneven quarterly growth in the global revenue throughout this year, we remain comfortable with the overall demand fundamentals and our ability to capitalize on the evolving market opportunities.

And now, I will turn the call over to Bill for some additional comments on our financial performance.

Thanks, Mark.

I would like to start with an overview of our revenue performance in 2016. For the year, on a constant currency basis, sales in our combined marine segments increased by 6%, while our fitness segment increased by 24%. From a geographic perspective, consolidated US sales increased by 11%. Sales outside the US increased by 7% on a constant currency basis, including growth in Europe of 15% and growth in other international regions of 3%.

In 2016, adjusted operating earnings were $479.7 million, an increase of $53.3 million compared to 2015. Our adjusted operating margin of 10.7% is 30 basis points above the prior year.

For the fourth quarter on a constant currency basis, sales in our combined marine segments and fitness segment increased by 5% and 25%, respectively. From a geographic perspective, consolidated US sales increased by 11%. Sales outside the US on a constant currency basis increased by 7%. By region, sales on a constant currency basis increased by 13% in Europe, while rest of the world sales were up 4%.

In the fourth quarter of 2016, adjusted operating earnings were $90.5 million, an increase of $22.8 million or 34% versus the prior year. Our adjusted operating margin of 8.4% was 150 basis points higher than the prior year.

Turning to our marine engine segment, where fourth-quarter sales on a constant currency basis increased by 4%.

From a geographic perspective, sales in the US were up 5%, reflecting strong growth in parts and accessories and modest sterndrive engine growth, while outboard engine demand was stable. European sales were up 7%, excluding currency changes, with gains in all major product categories. This performance reflects benefits from recently introduced new engine models and our strategy to expand the parts and accessories business in this region. Rest of the world sales on a constant currency basis were up 1% compared to the prior year. Performance was mixed, as growth in Asia-Pacific and Canada was mostly offset by moderating declines in Africa, Middle East, and Latin America regions.

On a product category basis, the outboard engine business reported slight sales growth in the quarter, reflecting the timing of wholesale demand and a less favorable market environment. For the year, outboard engine sales increased mid-single digits, benefiting from a favorable retail demand environment, particularly in the US and Europe, offset by weakness in certain international markets.

New products introduced over the past several years have resulted in market share gains and target saltwater, repower, and commercial markets.

For 2016, the retail unit growth rate of outboard engines exceeded the wholesale unit growth rate. As we look forward to 2017, we expect the wholesale and retail unit growth rates to be more balanced for the year.

Fourth quarter of sterndrive engine sales increased modestly, but for the year declined mid-single digits. The demand environment for sterndrive engine sales continued to be affected by the shift to outboards and unfavorable global retail demand trends. However, our share remains strong, as we continue to experience growing adoption of our recently introduced purpose-built engines.

Marine parts at Mercury's parts and accessories businesses delivered strong sales growth during the quarter. Revenue benefited from market share gains, acquisitions, and new product launches, including the successful execution of our international growth strategy. For the year, the parts and accessories businesses exhibited strong growth rates in both their product and distribution businesses.

During the fourth quarter, we completed the acquisition of Payne's Marine Group, a Canadian distributor of marine parts and accessories. This acquisition augments the presence of Mercury's Land 'N' Sea business, particularly in western Canadian markets, and is the most recent example of our strategy to expand the parts and accessories business through acquisition.

Mercury's operating earnings increased by 22% and operating margins were at 10.2%, 140 basis points higher than the prior-year quarter. The improvement in operating earnings reflected higher sales and cost reductions, including benefits from lower commodity costs and savings related to sourcing initiatives. Partially offsetting these positive factors were the unfavorable effects of foreign exchange.

For 2016, operating margins were 15.5%, which is 40 basis points higher than the prior year.

In our boat segment, fourth-quarter revenues on a constant currency basis increased by 6%, with strong growth rates in the fiberglass outboard and sterndrive/inboard boat categories, as well as increases in aluminum boats. In the US, which represented 75% of this segment, sales increased by 10%. In addition to favorable retail market demand for the year, US sales continue to benefit from dealer inventory restocking, recently introduced new products, and market share gains.

European sales on a constant currency basis increased by 27% versus the prior year, due to recent product introductions and solid retail growth. Rest of the world sales on a constant currency basis declined by 12%, reflecting decreased wholesale demand in Latin America, Africa, and the Middle East.

Our global retail units for the fourth quarter declined by 8%, while retail units in the US declined by 1%. As a reminder, fourth quarter is the off-season for most of our markets, and consequently retail activity is less than 10% of our overall retail activity for the full year and therefore is not always a good indicator of the overall retail demand environment in total. For the full year, global retail units increased by 3%, while US unit sales increased by 8%. These results exceeded our overall market performance, reflecting the benefit share gains across our boat offerings.

Global wholesale shipments for the fourth quarter increased 3%, which was below our expectations, mostly due to our aluminum outboard businesses. As we discussed on the third-quarter earnings call, we expected the dealers would continue to restock inventories after a very successful 2016 model year. While this restocking activity did occur, it was less than anticipated, due to the factors referenced by Mark earlier in the call.

For the year, global wholesale shipments grew 2%, which was slightly below growth in retail.

Increases in average selling prices contributed approximately 6% to both the quarter and full-year sales growth rates. We are planning for additional increases in average selling prices in 2017, but the rate of increases will be lower than 2016.

Dealer pipeline inventories ended the year at 35 weeks of boats on hand, measured on a trailing 12-month retail basis, which was consistent with our plan and prior-year levels, while units were up modestly. We believe that our year-end pipeline levels are appropriate, given our growth expectations in various boat categories and markets, and we continue to be comfortable with these overall levels.

In 2017, we are planning for the weeks of inventory on hand at year-end to be consistent with or slightly below year-end 2016 levels. Consistent with this assumption, we're assuming wholesale and retail unit growth rates will be relatively consistent in 2017. I would note that some of the variances between quarterly wholesale and retail growth rates in 2016 may impact quarterly comparisons to the prior year in 2017.

The boat segment's fourth-quarter operating earnings as adjusted increased by $5.2 million, or 50%, when compared to the prior year. Operating margins were 4.3%, as adjusted, which reflects an increase of 120 basis points. Operating performance in the quarter benefited from higher sales and a favorable change in product mix. For the year, operating margins as adjusted were 4.5%, a 90 basis-point increase.

Shifting to our fitness segment, sales increased by 25% for the quarter on a constant currency basis. Excluding acquisitions, fitness sales increased by 4% on a constant currency basis.

Sales in the US, excluding acquisitions, were up 2% compared with the prior year, reflecting modest growth in sales to commercial fitness customers, including the impact of declines in sales to local and federal governments. International sales growth, excluding acquisitions, was solid, led by gains in Asia-Pacific and Europe. For the full year 2016, sales increased by 5% on a constant currency basis, excluding acquisitions.

Segment operating earnings increased by $8 million, as adjusted. Operating margins were at 16.3%, as adjusted, which was 50 basis points lower than the prior year. Segment earnings and margins were affected by benefits from the impact of the Cybex acquisition and higher sales, which were partially offset by the net unfavorable impact of a change in sales mix.

For the year, operating margins as adjusted were 13.3%, or 140 basis points lower than last year, which is due in part to the impact of the Cybex acquisition, but also reflects the impacts of changes in sales mix and investments in growth referenced throughout the year. In 2016, Cybex contributed earnings that slightly exceeded our initial targets.

Included in our operating earnings is $6.8 million of purchase accounting adjustments related to the three acquisitions completed since 2015.

Next, I would like to discuss the impact that foreign currency is having on our sales and operating earnings comparisons. In the fourth quarter, consolidated sales comparisons were favorably affected by currency by a slight amount and operating earnings were negatively affected by approximately $2 million. For the full year of 2016, consolidated sales comparisons were unfavorable by approximately 1/2 of 1% and operating earnings comparisons were negatively affected by approximately $14 million, or 3.5%.

Moving to full-year 2017, we are anticipating that consolidated sales and operating earnings comparisons versus 2016 will be minimally affected by changes in currency. These estimates for 2017 assume that foreign exchange rates remain relatively consistent with current rates for the remainder of the year.

This next chart details restructuring integration and impairment charges that were recorded in the fourth quarter and full-year of 2016 and 2015 that affected our GAAP earnings. I would like to provide some background on the 2016 charges.

We recorded charges in the fourth quarter of 2016 totaling $6.8 million. These amounts include costs associated with the integration of fitness acquisitions, impairment of certain corporate assets, and severance costs related to the organizational realignment activity in our boat business. Total charges for the full year of 2016 were $15.6 million.

In 2017, we are planning to incur between $11 million and $13 million of restructuring and integration costs associated with the fitness segment, including costs associated with the recent management transition. These costs are excluded from our as-adjusted earnings guidance.

I would also like to take a few moments to update you on our pension plans. As a result of derisking activities and recent increases in interest rates, our unfunded obligations ended 2016 at approximately $200 million. Assuming interest rates remain at current levels, along with planned annual contributions of $70 million to $75 million, we remain on track to be fully funded by the end of 2020.

In the fourth quarter of 2016, we again took actions to settle pension obligations with a select group of participants. These actions reflected the transfer of $122 million of plan obligations to a third party by purchasing annuity on behalf of participants. The payment for the annuities was funded from plan assets. A non-cash settlement charge of $55.1 million was recorded in connection with these actions. Additional measures will be completed in 2017 to settle liabilities, which will also be funded from plan assets. Any non-cash settlement charges associated with these actions are not incorporated into our guidance for 2017.

By the completion of 2017, assuming planned derisking actions and current interest rates, total plan liabilities will be less than $800 million, approximately 35% lower than at the end of 2013.

Our full-year effective book tax rate as adjusted was $30.5 million (sic), 210 basis points lower than 2015. This reduction includes the benefits from optimizing our legal entity and cash management structures. Our effective cash income tax rate as adjusted was 8% in 2016, which included the impacts from benefit contributions, accelerated bonus depreciation, and the realization of deferred tax credits. Our effective book tax rates guidance for full-year 2017 is expected to be approximately 31%, as adjusted, and we're expecting our cash tax rate to be in the low to mid teens percent range.

Our book tax rate guidance for 2017 excludes any impact from the excess tax benefits and efficiencies resulting from stock compensation plan activity. Starting in 2017, these amounts will be reflected in the income tax provision in the quarter realized, which will create some additional variability in our quarter-to-quarter effective tax rate. These amounts result from the difference between the amount of book and tax expense for equity compensation. As these amounts are dependent on changes in equity valuations and timing of plan activity, we plan to incorporate these benefits into our guidance as they are realized.

Looking forward to 2018, we anticipate that our effective tax rate will continue to be favorable to the 32% to 33% range provided at our investor day in November 2015. This favorability is due in part to the permanent extension of the R&D tax credit in December 2015. This excludes any potential impact from US tax reform proposals, as well as excess tax benefits and efficiencies resulting from stock compensation plan activity.

Turning to a review of our cash flow statement, cash generated by continuing operating activities was $426 million, an improvement of $87 million versus the prior year. The improvement reflects increased net earnings and more favorable working capital timing. Net increases in our primary working capital accounts totaled $30.4 million. The biggest changes included an increase in inventory of $48 million and a decrease in accrued expenses of $21 million.

The favorable impact from these changes were partially offset by an increase in accounts payable of $39 million. There was minimal impact from changes in accounts and notes receivable, as they remained relatively unchanged.

Full-year free cash flow was $234 million versus $193 million in the prior year, an improvement of $41 million. Capital spending was $194 million for the year, which included investments in new products, as well as capacity expansions in our marine and fitness segments.

Our business units continue to remain focused on generating strong free cash flow, which will allow us to continue to fund future investments and growth, including acquisitions, enhance shareholder returns, and fund contributions for our pension plans.

Let me conclude with comments on certain items that will impact our P&L and cash flow for 2017. Our estimate for depreciation and amortization is approximately $120 million. We expect our 2017 pension expense to be approximately $10 million, $4 million lower than the prior year. Net interest expense is expected to be flat with last year. Combined equity earnings and other income are expected to be slightly higher when compared to the prior year.

And we expect our diluted shares outstanding to be between 90 million and 90.5 million shares for the full year and range between 91 million and 89.5 million shares for the quarterly periods. The reduction in average shares outstanding between quarterly periods and years reflects the execution of our share repurchase program, which is projected to more than offset stock compensation plan activity.

On the cash flow side, the current plan anticipates working capital changes will result in a usage of cash between $30 million and $50 million for the year. We are planning for capital expenditures to be between $185 million and $195 million. This level of spending reflects substantial new product investments in our outboard engine and fitness businesses and continued capacity investments to support new products and growth.

Pension contributions for 2017 are expected to be approximately $75 million, and we are expecting cash tax payments during the year to be in the low to mid-teen percentage range of pretax earnings.

Netting together these factors, along with our anticipated earnings performance, we expect to generate free cash flow for the full year in excess of $250 million. This guidance excludes the impact of excess tax benefits from stock compensation plan activity, which starting in 2017 will be included in cash provided by operating activities. As these benefits are dependent on the stock price and timing of stock plan activity, we plan to incorporate these benefits into our guidance as they are realized.

Our plan also assumes share repurchases of approximately $100 million in 2017 and the dividend payments remain at current levels.

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

Thanks, Bill.

Our overall operating plans and the assumptions for 2017 remain relatively consistent with the longer-term assumptions included in the 2018 plan we had communicated at our investor day in November 2015. We target 2017 to be another year of outstanding earnings growth, with excellent free cash flow generation. Our plan reflects approximately 6% to 8% sales growth, which includes the continuation of solid market growth in the US and Europe and improving market conditions in certain international markets.

Our plan also reflects benefits from the success of our new products and our market share gains. As a reminder, we only include completed acquisitions in our guidance and, in total, they are expected to account for about 1% of 2017's projected growth.

We anticipate continued improvement in gross margin levels and in operating margins. Our operating expenses are estimated to increase in 2017 as we continue to fund incremental investments to support our growth. However, on a percentage of sales basis, they are actually expected to be a little lower than 2016 levels. These investments will be directed toward new products; initiatives that help us advance our productivity, such as Lean Six Sigma; and investments to support our growth plans, including information technology. We will continue to see the benefits of these and prior investments as we move through 2017 and into 2018.

The increases in gross margin and reduction in operating expenses as a percentage of sales are anticipated to result in operating leverage in the high teen percent range. Our guidance for the 2017 EPS as adjusted is a range of $3.90 to $4.05. Our EPS outlook for the first quarter reflects a low teen growth rate, with sales in the range of full-year guidance.

Turning to our segments, the 2017 forecast reflects continued revenue and operating earnings growth in our marine engine segment. Specifically, we are planning for revenue growth for the year to be mid-single digits, excluding the impact of future acquisitions. The plan continues to reflect a stable pricing environment for our larger horsepower engine businesses.

Our engine segment businesses are expected to continue to deliver sales growth that exceed the market. An additional margin improvement is also planned in 2017. With the gains in operating margins that we experienced in 2016 and the growth we anticipate in 2017, along with continued emphasis on improving our cost efficiencies and new product development initiatives, we now anticipate that the 2018 engine operating margins will likely outpace our prior estimates.

Looking at our boat segment, we are targeting 2017 annual revenue growth in the high single-digit percentage range. We anticipate year-over-year increases in operating margins with an improvement of approximately 110 to 130 basis points versus the prior year, including the benefits from our cost reductions and efficiency improvements. Our planned progress in 2017 keeps us on track to achieve the operating margin target for 2018 of 6% to 7%.

In our fitness segment, our plan is based upon continued revenue growth and improving our operating margins. In 2017, including the completed acquisitions, we are targeting high single-digit revenue growth. We anticipate continued growth in the global commercial fitness market, as well as contributions from new products, particularly in the second half of 2017.

We are planning for 2017 fitness operating margins as adjusted to improve, including benefits from acquisition synergies and new products. We continue to expect to return the combined business margins to 2015 levels by 2018 as we execute against our integration, manufacturing, and product plans.

Last week's announcement of Jaime Irick as the head of the fitness division positions the fitness business to fully leverage its strength as a product leader, while building new capabilities to succeed as the larger portfolio of winning brands into traditional and new markets.

Overall, the fitness business is performing very well versus the market and is successfully executing its growth strategy. The completed acquisitions, along with capacity expansion and new product development activities, are enhancing our ability to serve the evolving global commercial fitness industry and expand our offerings into adjacent markets.

And now, I will take just one moment before opening up for questions to recognize the hard work and dedication of all of our employees around the world and the support of our suppliers and our distribution channel partners. Working together in 2016, we have delivered an all-time record EPS as adjusted at a level of sales revenue $1.4 billion less than our previous record in 2005. Thank you and we are ready for your questions.

(Operator Instructions). Randy Konik, Jefferies.

This is [John Madisizki] on the line for Randy. Thanks for taking our questions. I guess, first off, can you just share some more color on trends in the Cybex business since last quarter? I think third quarter was characterized by some international distribution challenges and some decreasing demand for certain product categories. Did you see those factors lessen this quarter?

I think the things that have gone on there are a combination of the distribution channels have, I am going to say, been cleaned up, contracted. Literally, the transitioning has been going very nicely with those changes.

We still have a little bit of mix there and Cybex was a little heavier into some retail channels that have been a little less growth than what we have seen in the global commercial aspects. But, again, fundamentally we are very pleased with where Cybex is at and, as I mentioned, we have slightly exceeded the earnings target for that acquisition for the first year. So, the integration is going very nicely.

Great, and then just a follow-up for fitness more broadly. In the outlook, you alluded to some new products beating growth, particularly in the second half of 2017. Any more color you can give there? Are these new products related to Cybex or just more broadly across the fitness segment in general?

One of the things we have said as part of the acquisition strategy is we would probably be doing more platforming work by having the various brands going across the segment.

So, the new products we're talking about aren't unique to Cybex, but they do cross various categories of our fitness products. And we won't be giving a lot more color to those today. Actually, where those will be front and center and get to the industry and the consumer space is literally at IHRSA, which happens in March of this year out in Los Angeles.

Great. Thanks for taking our questions.

James Hardiman, Wedbush Securities.

Thanks for taking my call. So let's talk about guidance here for a bit. You grew earnings or EPS 19% in 2016. The guide, at least at the midpoint, for 2017 is about 14%. And then to get to your guidance -- or your targets, the midpoint of your 2018 is closer to 20% growth.

So I guess the question is, why the deceleration here in 2017 and what gives you confidence that, assuming the midpoint of that number is still reasonable, that we would be able to reaccelerate in 2018? And I guess maybe, Mark, you had made a comment in the prepared remarks that the 2017 numbers do not include any uncompleted acquisitions and I am thinking that maybe there is some apples and oranges here because, correct me if I'm wrong, but I do think the 2018 number would include acquisitions that haven't been completed. So how should we square all that?

Yes, let me take the last part of your question. When we were at the investor day in November of 2015, you will remember we said we would get 3% to 5% from the market. We would get 2% due to share price, ASPs, and 2% from acquisitions. So, that is where we were at, the 7% to 9% number. Again, that is talking 2016, 2017, and 2018.

So, when we actually do the guidance for the next year, we only put in there what we have completed. So, we are right on plan relative to 5% to 7% essentially coming from the core business and 1 point for completed acquisitions. We fully expect to do some more acquisitions during the year, and obviously as we do those acquisitions, the revenue number will go -- readjust and go up accordingly.

So, there is a little bit of apples and oranges there, James. And then, I will let Bill comment about the midpoint, your early part of the question.

So James, I think one thing to put into your calculus there is just tax rate impact. We saw a fairly nice lift in EPS growth this year from tax rate improvements.

I think when you look at our three-year plan, those benefits were contemplated to be a little bit of front-end loaded, so going into 2017, we don't see that same sort of lift from the tax rate.

The other thing I would point out is that when you look at product development activities, as well as integration activities, the impact of those on 2018 versus 2017 should provide us a nice little tailwind as we look forward to 2018 and are a little bit more meaningful as we get to 2018 and then into 2019.

So I would say that your guide there or your view of it is correct. I think there is a couple factors to keep in mind. I think the other thing as we look forward to the environment we're in now, we are certainly, I think, long-term think very positively about some of the changes being talked about by the administration change, the federal government, but probably view there to be maybe some risks or things unintended -- not unintended consequences, but things that may impact the business in the short term, like FX markets and things like that where maybe we are being a little bit on the conservative side and a little bit prudent as we set our plans for 2017.

That's really helpful. And then, maybe to follow up on the point you made about product development activities, maybe this is a good opportunity to talk about what has been announced so far.

Well, actually, let's take a step back. You had a bunch of new, smaller SLX product that you announced a year ago. I don't know how quickly you were able to get that out into the channel. Maybe walk us through how much of that -- the relative benefit to 2017 versus 2016. Is maybe 2017 even a bigger year for those products than 2016?

And then, for the New York Boat Show, obviously, you just announced this 400 SLX, which seems like, as the successor to the 350 SLX, which was really a big deal, it would seem like that would have -- could be a really nice sales driver for you guys. But given your comments that 2018 is probably going to be a bigger new product year than 2017, how should I think about all that? Is that product going to be capacity constrained? And as we think about this upgraded engine product that you have been teasing for a while, should I take away that is going to more likely be 2018 than 2017?

Yes, so let me start at a very high level. First of all, the question about boats, we a year ago announced the SLX, the 250, 280, 310s all the way. And some product there, we talked about the fact that they would probably pull our ASP growth rate down a little bit because we were moving from white space bigger boats to a more average type of boat.

But that stuff has gone extremely well. There is products out in the pipeline. They are pulling through very nicely. If you did feedback calls to, for instance, Sea-Ray dealers, you would get very positive feedback about the market acceptance and that stuff is coming through.

So you are seeing that and that is happening, but, James, what I really want to take you back to is what we are talking about, really, the increased investment, and if you look at the capital and PD&E investments and things we're doing, most of that stuff is all over in the engine and fitness area. And so, we have talked about fitness from the standpoint of second half of 2017. We have talked about the fact some of that will get showcased during the year.

But the other big piece of the investment is in our engine business and you won't see the benefit of that yet in 2017. But it is why we remain optimistic and think we are right on plan relative to our three-year plan and 2018 targets, because of full-year benefits we will get from both fitness and engine in 2018.

I would -- just to add to that, I would characterize the boat introductions as very much of the same pace as we have seen over the last couple years. Obviously, with a couple white space products, but we have also had white space products that have been sprinkled in the mix over the last two or three years as well. So, we're certainly pretty bullish on our outlook for the boat business relative to new products, but I think where the big changes are in fitness and engines.

And James, to your specific example of the 400 at the New York show, it is going to be -- that is really an extension of our -- you used the term replacement of the 350; it is really an extension of that product line, moving that up.

You know what, probably, if you have been at the show or go to the show, what the average price point of that will be. I would just keep in context what the relative size of those markets are relative to how much to extrapolate it into. But it is going to be an absolute home run product.

Excellent. Thank you, guys.

Scott Stember, CL King.

Could you maybe talk about -- you referred to timing from the election and just maybe some general softness in the market as the year finished out. Granted, the last quarter is only 10% of the boating world. But could you maybe just talk about some of the comments that you made about your optimism for reacceleration and growth in 2017? You said some products that you have seen, dealers are liking, or is it just something else that is going on? Maybe just expand on that a little bit.

Well, let's go to the higher level, even, and then I will get specific to your question.

First of all, when you just look at the fundamentals of marine, the stable boating participation, favorable replacement cycle, our comments as well around innovation, so the fundamentals of things going on. I think the things to give a little more color about I will say in the second half is really around I think the elections had our dealers maybe getting a little conservative of how this is all going to go or where it is going to happen, although we were getting some good order rates.

And I think now is -- we are very early into the boat season, but as we look at dealer sentiments, the consumer sentiments, the attendance at some of the shows, the activity that is going on, I just think there is some renewed energy in the market that goes even beyond the fundamentals of the marine industry.

Okay, and as far as the new products, I know it's a little early, but what is some of the feedback that you're getting, anything that has gone out so far?

The feedback has been good. We brought out the kinds of things that we don't talk about that size much, but one pontoon and Crestliner pontoons and the new 400. And we have got some new Sea-Ray products, larger boats there as well. So on the boat side, the products have been good.

We continue on the engine side to see the acceleration of things around the joystick piloting, and really the big show and all that activity for the fitness is really -- starts with IHRSA in the month of March. But whether it has been Houston, Dusseldorf, Toronto is going on now, Chicago, Atlanta, Nashville, all those shows, the feedback, although fairly limited three weeks into the boat season, all those places have had some real energy about the products we are launching.

Okay, this is the last quick question, on ASPs. I think you said up 6% I think in the fourth quarter. And you said probably not to the same extent in 2017. Maybe just expand on that a little bit.

Yes, I would characterize is that there is probably a little bit better balance and growth between our three businesses in the boat segment in 2017 than it would have been in 2016. And we're just what I would deem to be getting back to a more normal increase in ASPs as we get a little bit more balance between the three lines of businesses and large and small product.

Got it. Thanks so much for taking my questions.

Joe Spak, RBC Capital Markets.

Bill, I was wondering if, now that we have had some time, if you have -- I am assuming you have done some scenario planning on at least what we know from the better way plan. Do you have any indication as to sort of at least where your book tax rate would go based on [boat] adjustability, CapEx deduction, et cetera?

Joe, I guess maybe, A, we have done quite a bit of work to understand what the impact of some of the proposals would be.

I think maybe a couple things just to share with you to help understand what the impacts could be. When you look at our overall tax position, between 80% to 85% of our taxable income is the result of our US operations. So as you start to think -- and if you think about some of the other things that are at play in tax reform, like deductibility of interest expense, et cetera, we're not a highly leveraged entity at all. When you start thinking about the benefits of a reduction in the statutory tax rate, our presence in the US naturally, I think, will give us a really nice reduction in our tax rate just as a result of a decline in the statutory rate, especially given the fact that our foreign tax rate is only slightly higher than about 20%.

So when we look at tax reform, that reduction in a statutory rate would be beneficial to us, and then when you just take a look at border tax adjustments and things like that, we are a net exporter, given the base of our operations. A lot of the products we sell internationally come from our US operations. I think we are not necessarily in a position today to share -- size what that could be, but net net we are positively affected by that element of tax reform as well.

And really, I think maybe differently situated than some of our other participants in the industry would be when you think about the outboard business, large fiberglass boats, things like that, where our base of operations is a little bit differently structured than some of the competition would be.

That's helpful. I guess would -- just thinking through off the cuff, given some of the potential deductibility, would it actually even potentially increase your deferred tax assets and maybe even lower your cash taxes further?

I think there is -- the cash tax reduction from tax reform, there will be a reduction in cash taxes.

Okay.

Well, from the 8%, that's what you are basing it on (multiple speakers)

Well, no, from the -- I guess you said, what, 10% to 15%, right? (multiple speakers). Or mid-teens, I think you said, yes.

(multiple speakers). Joe, I think it is a bit premature to talk about what the absolute impacts of these things are. I think if you just start to base it on a 20% statutory rate and you start to factor in, we are probably higher than that just based on that, and border tax adjustment would give us favorability below the 20%.

Okay, and then real quick on pension. I am sorry if I missed this, but the contribution this year, is it in line with that 70 per annum over the planning period?

Yes, it is. Yes, yes.

Okay. And then, have you -- just given where -- rates look like they are finally moving higher, but they are still advantageous, have you given any thought to maybe advantageously raising some debt now and maybe even using that to help fund further off-loading of the pension liability?

Yes, I would tell you we look at all of that stuff on a pretty regular basis, Joe, and as we sit here and think about where things have changed, it is all things that we've considered. Haven't necessarily adjusted our plans at all in that regard, but certainly something that we have looked at.

Okay. Congrats, guys. Thanks.

Mike Swartz, SunTrust.

Mark, just wanted to ask you a question regarding sterndrive. Is there a drive market in general? Specifically, I think in the presentation you talked about sterndrive engine growth this quarter, and I think that's the first time I've heard that in quite some time. So, could you just give us a little perspective in what you are seeing in the sterndrive market? Is it starting to flatten out or is this simply share gains?

I think, first of all, you just got to start with the fact that the volume in the industry is some stuff that dropped to levels that it doesn't take a lot today to move a number from being flat to up a little bit. So, first, I just want to temper that a little bit.

I think to us specifically now is there is finally the place where all the banks and transitions and all that stuff were going through. We're feeling very good about other markets accepting our purpose-built engines, and as that becomes the current production being more of the norm, we just think we are greatly -- in a great position on a go-forward basis there.

But some of the increased stuff, again, it is relatively -- fourth quarter is relatively a low quarter, and then when you take the relatively low numbers, I wouldn't -- I am still very positive that there is a real place for sterndrive engines, but I wouldn't overread the comments.

Okay, fair enough. And then just sticking with the boat side of the business, looking at margins in that business up, I think, about 110, 130 basis points in 2017, and I think it was up 90 basis points in 2016, so maybe you could bridge the gap for us and what is really driving that acceleration as we go into 2017? Is it favorable boat mix? Is it lower production costs?

I think it is all of the above. We are going to get some volume benefit. We're going to get productivity enhancement. To Bill's earlier comment, there is probably a little more normal level of some of the integration work that is going on. The mix, a little different. There is a whole bunch of factors that come through there, but the biggest ones are just our ability now is we are a little more stable environment and getting the industry increase and the volume increase to really have more of that drop to the bottom line.

Okay, great. Thanks a lot.

(multiple speakers) goes into the margin.

And I would say mix is pretty neutral in that equation.

Yes.

Tim Conder, Wells Fargo.

Gentlemen, just somewhat following on that prior comment. So, again, just to make sure we are understanding this, given that your investments in several of the areas are, let's say, on the down slope, winding down, I think, Mark, you alluded to that in your preamble, could we see that high teens operating leverage or pickup rate, could this potentially be conservative? And I guess, again, that's obviously dependent on if you get a little bit more of a volume uptick if the dealers now start to order a little more in line with what they are seeing the takeaway?

Well, I think the answer to the question, Tim, is it is really based upon the set of parameters we have defined with the growth being what they are, how they are going to happen around the world, what we think the market is going to be, we think those are -- the leverages and the improvements are commensurate with that.

So then when you start talking about, well, what if the market was better and what if the sentiments were better and what if, those start creating some little different conditions. And if those conditions happen, yes, we would probably have a little upside there.

Okay, okay. And then, could you just remind us, especially maybe in the US market on the marine side, it would seem that the back half of 2016 and first half of 2017 would have some more difficult comparisons from a retail perspective. As you got water basically in Texas in the middle of 2015, so that made the comp in the back half of 2016 tough, and then continuing on with the strong market. So does it lay out that way from a retail perspective, difficult first-half comps and more normalized comps in the back half of 2017?

If you think back to 2016, the first half of 2016 was pretty lumpy on a monthly basis. It was fairly significant there. So, I think we would expect to be a little more consistent levels there. You always got the nuance about, is it an early spring? Is it a late spring? But our month to month was a little lumpy in the first half.

I think the second half of 2016 that we have talked about and showed in our slides wasn't a lot of retail growth, and so I think the comps for the second half of 2017 are going to be easier. But the first half, Tim, as you know, it really is -- there are so many factors that come into play around the shows and the timing of spring, and the list goes on there. But it was a bit lumpy last year, and anytime you got that, you're always going to have a little volatility in the comps as well.

Okay, and then (multiple speakers) just to revisit. Yes?

Tim, I was just going to follow up and just say part of the Q3 market environment, I think, at least can be attributable to the fact that we had a very, very strong 2016 model year and ended the second quarter with extremely clean inventories.

So I think there is naturally some level of model year-end promotional activity that normally would occur that would stimulate some demand there. And that level of activity would have been substantially lower in 2016 than it would have been in prior years. I mean, A, we got off to a very early, strong start to the season, and, B, inventories ended very clean. So as you look at the second-half demand, that has got to be a factor.

And just to clarify the commentary about the slight growth in outboard that you saw, and you cited the environment. That was more led by international, and then how do you see that shifting here on outboards in particular as it is baked into your engine outlook for 2017?

So, Tim, I would say that for 2017 we expect the US to still be a very good market for us and that international markets will be better than they were in 2016.

And then if you look at Q4 specifically, I would deem that to be more of a timing of shipments within 2016, in Q4 specifically, for it to be flat. We still have some weaker international markets for sure, but the US market was a little bit stable and that is reflecting more timing, right. Overall market demand for the US is still very strong.

Okay, okay. Okay, gentlemen. Thank you.

Craig Kennison, Baird.

Thanks for squeezing me in. Bill, first, could you confirm that your $250 million free cash flow target includes your pension contribution?

It does include pensions.

Thanks, and then, Mark, could you comment on the M&A pipeline? How does it look right now versus this time last year, and where do you see more of the activity, whether it is in marine or fitness?

Well, go back to the place we have talked about, from the standpoint of we clearly want to get to the $1.5 billion by 2020 on the fitness side, so I will take that piece first. And if you look at what the CAGR has to be on growth, it is not going to come from core and therefore there will be more acquisitions as we move from 2017 now through 2020.

So, our eyes and activities are clearly focused on things that we think make sense to add into the fitness mix, and we are at -- we are able to -- at the one-year mark on the Cybex right now, so that integration is well understood and underway and feeling better and better, as we've said, about that.

The second part we have done, ICG in September. So we are clearly evaluating opportunities that are out there and we will continue to do M&A in the fitness arena.

On the marine side, what I would comment there, we've specifically talked about wanting to do 350 over five years. That started back in 2014 on the P&A, and this year we have done some P&A, but we also saw some nice opportunities to go in and we did Thunder Jet and we also bought the assets from the brand Heyday and stuff. So, I think we are still tracking fairly well and continuing to look at opportunities that approximate roughly doing the $70 million, $80 million of topline in the marine space going forward.

I would tell you a lot of places where we go to get that, Craig, has been where people are looking for successors, and I think until people have a little more certainty around the state tax and tax rates, it could be a little slower early in the year. The flip side, I think, is when some of that becomes known M&A activity, it could accelerate as well.

That's very helpful. And if I could just finish with a follow-up on the fitness side, The Wall Street Journal recently ran an article about changes in the fitness market with some dollars shifting from clubs to more subscription apps and other alternatives. Do you see that trend affecting Brunswick in how you approach the large portion of your revenue that addresses the clubs?

It is another good question, Craig. I don't -- there has always been something out there. I am going to date myself a little bit, the Jane Fonda workout tapes and everything. There has always been the home exercise, the late-night TV things -- that has always been an element in the background and part of it.

Some of it, if you take some of the people that are in that space now, I think they're doing a nice job around it. But there is still people who -- and we still see very strong things in the gym membership and revenue being spent there.

I think one of the bigger things going on on our market is just you see a little bit of the bifurcated. You got the franchise model and you got boutique models going on, but those things have always been there, subscription wise. We think some of that is still going to continue to be there, but the fundamentals around our core market we believe are still very sound.

Thank you.

At this time, we would like to turn the call back to the management team for some concluding remarks.

Yes, the only comment I would close with is we really feel good. The seventh consecutive year, as we said in our release, of strong improvement in our operating performance, the record EPS earnings that we are having, the fact that we are able to maintain the course relative to our three-year plan and feeling very good about our ability to achieve that.

And I would add the other part, looking forward to November 2017 when we can come and talk about the 2018 through 2020 as well. Good. We're feeling pretty good right now.

Thanks, everybody.