Welcome to Brunswick Corporation's 2016 Third Quarter Earnings Conference Call. [Operator Instructions]. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. l would now like to introduce Phillip Haan, Vice President of investor relations. Please go ahead Mr. Haan.

Good morning and thank you for joining us. On the call this morning are Mark Schwabero, Brunswick's Chairman and CEO and Bill Metzger, CFO. Before we begin with our prepared remarks I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings in today's press release. All of these documents are available on our website at brunswick.com. During our presentation we're using 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. Today, I will focus my opening remarks on our third quarter results, as well as provide insights into the global marine and fitness markets. And then Bill will comment with greater detail on our financial performance and then I will wrap up with comments on our current 2016 full year outlook. Our third quarter results reflect the continued successful execution of our growth strategy, with about 90% of the U.S. marine season complete, we have seen the U.S. market perform in line with our expectations. Our emphasis on product leadership is evident and we're seeing benefits from share gains in our businesses. Our outlook for 2016 continues to represent another year of both strong earnings growth and free cash flow. Revenue in the third quarter increased 10% on a constant currency basis, revenue also increased by 10%, with acquisitions contributing approximately 4% of growth. The strongest growth rates were reported by our fitness segment, all three of our primary boat categories, as well as our marine parts and accessories. Our outboard engine business again contributed solid growth. Our overall revenue growth was strong, but was lower than our expectations. This was mostly due to the fitness segment, where sales of Cybex products have been unfavorably affected by some changes in distribution and decreasing demand for certain products. In addition, in the U.S., sales of certain fitness channels were weak, including retail, as well as local and federal governments. The marine businesses also experienced weaker demand in certain international markets. Our gross margin of 28.3% was 10 basis points lower than last year. Operating expenses increased by 11% and were 16.9% of sales. This compares to 16.7% of sales, in 2015. Excluding the impact of acquisitions, our operating expenses increased 6%. Adjusted operating earnings…

Thanks, Mark. I would like to start with an overview of our revenue performance. In the third quarter, on a constant currency basis, sales in our combined marine segments and fitness segments increased by 7% and 20%, respectively. From a geographic perspective, consolidated U.S. sales increased by 11%. Sales outside the U.S.. on a constant currency basis, increased by 9%. By region, sales on a constant currency basis increased by 15% in Europe, while rest of the world sales were up 6% versus prior year. In the first nine months, on a constant currency basis, sales in our combined marine segments increased by 7%, while our fitness segment increased by 24%. From a geographic perspective, consolidated U.S.. sales increased by 11%. Sales outside the U.S. increased by 7% on a constant currency basis. This includes growth in Europe of 15% and growth in other international regions of 2%, compared to prior year. Turning to our marine engine segment, where third quarter sales on a constant currency basis, increased by 5%. From a geographic perspective, sales in the U.S. were up 7%, reflecting strong growth in parts and accessories and outboard engines. Sales to Mercury's European customers, excluding currency changes, were up 7% with gains in all major product categories. This performance reflect benefits for new engine products and our strategy to expand the parts and accessories business in this region. Rest of the world sales, on a constant currency basis, were 3% compared to prior year. Performance in these regions was mixed, with growth in Canada and slight growth in Asia Pacific which was more than offset by declines in Africa, Middle East and Latin American regions. On a product category basis, the outboard engine business reported solid sales growth in the quarter, reflecting a favorable retail demand environment, particularly…

Thanks, Phil. Our overall operating plans and assumptions for 2016 remain relatively consistent with those we communicated in July during our Q2 earnings call. We continue to target 2016 to be another year of outstanding earnings growth, with strong free cash flow generation. Our plan reflects approximately 10% sales growth which includes the continuation of solid market growth in the U.S. and Europe, partially offset by weakness in certain international marine markets. Our plan also reflects benefits from the success of our new products and market share gains. We also are planning for both wholesale and retail unit growth rates to be more in balance for the year which will benefit both growth rates in the fourth quarter. We currently estimate that acquisitions will account for about five percentage points of the 2016's growth rate, reflecting acquisitions completed in 2015 and 2016. We anticipate a slight improvement in our gross margin levels and operating margins. Operating expenses are estimated to increase in 2016, but as a percent of sales, are expected to be slightly lower than 2015 levels. Our plan in 2016 continues to include increased investment spending to support our growth. These investments will be directed toward new products, initiatives that help us advance our productivity, like Lean Six Sigma and investments to support our growth plans, including our information technology. Our decision to continue to proceed with these investments is based upon a favorable view of our markets, the long term growth opportunities and our proven ability to deliver on previous investments. The cost actions taken in 2015 to respond to the foreign currency headwinds continue to yield benefits. As we assess the full-year and our operating plans, we're raising the lower end of our full year EPS guidance of $3.45 to $3.50 per share. Turning to our…

[Operator Instructions]. And we do have a question on the line from James Hardiman, from Wedbush Securities. James, you line is now open.

I just wanted to crystallize, you've given us all the pieces here. I just wanted to crystallize the change in overall guidance. The top line is going from 10% to 11%, from that range to 10%. Some of it sounds like its Cybex but maybe there are some other things in there as well, but you EPS guidance is up a nickel at the low end. I was hoping just clarify and sort of square those two things for us.

James, I think you've got the facts. This is Bill. You've got the facts straight there, James. I would say that as we move into the back half, we're very comfortable with the operating environment and have good visibility into kind of what the revenue opportunity is. And I'd say that our operations, as we move in there, gave us some comfort of moving the bottom end of the range up from $3.40 to $3.45.

It does, but just so we're clear, what's driving the 50 basis point decline or downward revision in the topline guide. Is that mainly Cybex or what us is in there?

It was a lot of the factors that influenced our miss in the third quarter, is what drives the top end down.

I'd and into that, James, it's kind of the international growth on the engine side and it's kind of Cybex on the fitness side, are probably be two main areas.

And then, I thought the commentary on the fourth quarter was really helpful. I think you said high single digits, wholesale growth, at least in terms of the marine business. What's the retail or the boat segment I should say, what's the retail assumption there? The reason I ask is we had an unusually warm November and December, your stock trades lots of times on the retail data that comes out, November and December retail was up, I think 15% in the U.S.. Should we assume that that's down for the industry? Down for you guys, you obviously had a great retail number in the fourth quarter of last year. Whereas your wholesale shipment cadence, essentially independent, of what happens in retail and what is a seasonally small quarter? How should we think about that?

I would comment on a couple things. First, our assumption for the full year is consistent with year to date trends, James. So implied in that is we're anticipating 4% in the fourth quarter. The only thing I'd point out there is that we're moving into the off-season about 10% of the year occurs in the fourth quarter. While we certainly pay attention to what the trends are in the fourth quarter, they just don't have that material of an impact on the full year. And that being said, you did raise how dependent is fourth quarter wholesale on the overall performance of fourth quarter retail? It's more of a function of the strength of what we've seen for the past three months, is what's going to drive the restocking activity in the fourth quarter versus year-over-year activity in the fourth quarter. So I think the fact that we've already completed a very strong performance throughout the 2016 model year, we'll drive restocking activity, as we now enter into the second quarter of the 2017 models year. And we're out with a great set of new products, dealers have had a very successful 2016 and as you can see from third quarter order rates, they have a fair amount of comfort of what they do see demand is going to be like in 2017, as well as a pretty good acceptance of what our new products are.

And then just lastly, Mark or Bill or both, level of frustration that your stock is still not getting credit for the continued execution here, especially when a lot of your peers and consumer discretionary are falling apart. When you talk to investors, are they hoping that you do something that you haven't already? And ultimately, it seems like you stepped up the share repurchase activity. When you see the stock down another 6% today, does that give you incentive to maybe even ratchet that up to a different level? Thanks.

I think our strategy, James, really hasn't changed in terms of what we're trying to do from a business perspective. Obviously, continue to look, as we have a little stronger free cash flow, will continue to look at our overall capital strategy. And we have done a little more on share repurchase. We've also increased the dividends. So there's always going to be the check and balance between the cash we're generating and how we might deploy that cash back into the business. To have the best impact to our shareholders. But fundamentally, our business strategy, is a number of you have already written this morning, is we're delivering pretty much on what we said we were going to do. And we intend to continue that

And our next question form from Greg Badishkanian, from Citigroup. Greg your line is now open

So when you think about the industry, let's say beyond even this quarter into next year, is the mid-single digit, maybe 4%, year to date number. Is that kind of the right growth rate that you would think that the industry would progress at or is there a reason to think that the growth rate trend would deviate from that nine-month trend?

No, what we've assumed for the balance of this year and again to Bill's comments and 90% of the market is done, so no reason to believe it's going to differ from that a lot for this year. If you go back to what we said at the investor day, just about a year ago now is fundamentally, we see the market's kind of chugging along at the 3% to 5% range. So again it's pretty much in line with what we talked about a year ago and are continuing to see.

And our next question comes from Scott Hamann, from KeyBanc Capital. Scott, you line is now open.

Looking at the fitness segment, can you kind of highlight some of the issues you've seen with Cybex, what the strategy has been to address that? And are there any changes to the timing of the long term assumptions around that?

I'll go back to, so let me go back to the fundamentals of what we said and then Scott, I'll get more specific to your question. I think fundamentally, we said we were going to see things in four areas over the first three years of having that acquisition. We'd see things around, taking out redundancy costs in SG&A. We've done that. Sourcing, supply-side improvement. We've done that. And then said that the other two areas would really be coming from the gain from a manufacturing of picking up the location, consolidations, things we could do which obviously takes a little longer period of time. And then the fourth area was revenue and was largely around international growth opportunities, cross-selling, etc. And so the fact, we said, we're in-line with the eight cents EPS we talked about for this year. And the, what we've guided is $0.20 for 2018. A lot of the cost side things are all coming along. I'd say maybe we're a little bullish in terms of this, it's just taken us a little longer to work through some of the things of the international distribution perspective and get the sales forces all acclimated around the product and client rationalization of stuff as we go forward, it's just taken us a little longer.

Okay. And then on the boat segment specifically, I think you called out some of the issues with the margins or the leverage that you're having there. Can you kind of give us a little more detail on, is it mixed investments? What's going on there specifically this quarter and then, I guess the outlook is a bit reduced for the year and how we should kind of expect the map to the higher operating margin assumptions for that segment in your 2018 plan? Thanks.

Yes, Scott, I'm going to go back and tag one thing on the list. I just want to remind you we've owned Cybex now for a total of eight months. So when we're talking about the things around that, just keep that back in perspective. In terms of the boat, we remain committed to where we said we were going to be for the longer term margins. We had talked about 100 to 120 basis. We've change that to 80 to 100. Quite frankly, some of it is just the fact that we're having higher volume. Immediately somebody might say, well that gives you more absorption. The flip side is that is that it also just eats up more of your resources around dealing with the volume increases that may be aren't able to get around all the efficiency kinds of things that you were planning on. So I'll let Bill chime in as well to this, but fundamentally, we think be path to getting to our guided number for 2018 is there. The fact that we're still planning to get 80 to 100 this year I think is a nice improvement along that journey.

I guess the thing I'd add, Scott, is this. If you look at the guide and the plan for the year, we're still very much leveraging consistent with what our long term plans says we're going to leverage which is kind of a high teens sort of leverage. When you look at it on a quarterly basis, it's certainly not happening on a linear basis. I think we've chosen to invest in our boat operations where we've seen nice benefits from Lean Six Sigma and operationally focused resources, to help get cost out of the product, make our operations more efficient. We've seen nice payback there and it's a place where we've decided to increase our level of investment. A lot of that stuff kicks in here in third quarter which I think, as we look forward and how the leverage we've got to get to the 6 and 7, it's not only a volume related sort of play, we're also upping our resources to get after cost and plant efficiencies which arguably, have been, as Mark said, have been made more typical, by the fact that growth rates have been high. We've had to increased levels of employment and in that sort of an environment, it just takes a little while to get that skilled labor up and running, to the level that we want them to be. And that's just taken a little while longer, we thought, but the plants are doing a great job of staying up, getting product out, it's just not operating at efficiency levels yes, that we think we can ultimately attain

And your next question comes from Tim Conder, from Wells Fargo. Tim your line is now open.

Thank you for the explanation on the boat margins. That was definitely a question on our list here. And I guess related to that, I know you've always got to be reinvesting in the business or R&D to keep the product pipeline going and that begets the good market share gains that you've seen this year. But when is the point where we start to see some of that more flow down to the bottom line? I guess would be one question. And then the other one, if you could provide some color on the outboard wholesale being less than retail for 2016, just a little bit more reasoning behind that statement.

If you look at the, I'll take your second question first or element of the question first. When you look at what's happened in our business on our outboard businesses, Tim, one of the things that's happen is we've seen retail activity outpace wholesale activity and that certainly flows through to the outboard business. And as we look at our outboard business on a year to date basis, our wholesale growth rates are trailing below retail just like they are on boats. And that's the situation where we expect that to continue for the full year as well. So we don't get completely caught up. So as you look at the growth rates of that business, they are not up to where retail is, because we're seeing a modest adjustment in outboard pipelines. When you think about the level of investments, I would say in the engine business, we continue to invest in engine families, the engine, the investment in engine families tends to be a little bit lumpy. One of the reasons why the investments are a little bit higher this year but could normalize over the next couple of years as we work through that, on the bulk side, most of our investment is in productivity. It plants, sort of efficiency and product costs, not necessarily increases in product investments, although there are increased product investments. And when you think about the implications of the Cybex acquisition and the implications on our products introductions and new product cadence, there is certainly a concerted effort there to get products updated and refreshed, combined with Life Fitness which should start to yield benefits in 2017 and into 2018.

Okay. And as it relates to the softness that you saw on the fitness side in the government, the local and federal government levels, was there anything particular that caused that? Or some timing? Or was it some canceled orders? Or just a little more color on that, Gentlemen?

I would respond this way, Tim. We have a little less visibility there. And when we talk about local and federal, one of the big elements of federal is just military spending. And there's just less visibility around that and that, in and of itself, is a bit lumpy, as you might imagine, between, what, at times, just sequestering our military budgets or how they're going to spend. So that's one of the bigger pieces of that, Tim.

Okay. And I guess the last question I would have, would be, some were seeing, you're rebuilding, the wholesale is starting to eclipse retail. Here in the back half of the year and if we're worried about a downturn in the economy, that's exactly the wrong time to do it. I think maybe ignore some of the seasonality of your business. But I guess, to maybe put some of those fears to rest, how quickly, if you did start to see a downturn, could you ratchet things back?

It's really a pretty easy thing, for, pulling production down is obviously a lot, quite frankly it's easier than raising production. In one case you're having to hire and train and you have a little different dynamic. The other point is, in a lot of cases it might be a matter of a shift or a matter of us taking a down day in a week. Our ability to adjust, should something happen, Tim, could happen fairly quickly. But again, even with what we're talking about for wholesale the rest of the year, we still have wholesale lagging retail.

And again, that does not seem to be a major issue at this point, meaning that considered cutback.

No. And the point is, we're still doing some, working some overtime, we're still on the shifts. I mean, the ability to make some adjustments are really quite frankly fairly easy for us to. But again, with all the things we read on the tea leaves, we're not really anticipating that deal, to, the things I mentioned, our products, the dealers are feeling good where their inventory, they're making money. They're pretty optimistically going into what I will soon call the winter boat show season, Fort Lauderdale is starting just eminently right now. I don't see anything in the tea leaves that says we have a lot of risk relative to what we're talking about for the wholesale. And again, we still have wholesale lagging the retail.

And your next question comes from Mike Swartz from SunTrust. Mike your line is now open.

Mark, just wanted to touch on your commentary, regarding global retail growth in the marine industry. You said now that you're expecting growth to come in when all is said and done below that 3% to 5% level that you've been talking about for years. So I guess, just help us understand and especially it appears that Canada may have stabilized the past quarter, what's really the Delta between the low end and now coming in below that for the year?

A lot of times, Michael, when you look at some of the international areas, you look at a market and say, well, yeesh, it's only 2% of your sales, I'm doing this in broad numbers, when 2% if your sales have an areas down 25%, it's a half a point. But if you look at another area that's down 20% and its 4%, well, you have another half of a point. So pretty soon, with some small markets on a global basis, you can get a 1.5 points of total growth pretty quickly. And I think that was reflected in some of the charts and data we show here today. So our U.S. market stayed pretty consistent. But when you look at some of what we've seen in Latin America, we're not seeing that situation really changing and, Latin America is really Brazil. And when we look over at the Middle East, Africa, although a small market, between the political, social, all the turmoil there, plus natural resources, that's an area we're just not seeing some of the growth. So in spite of how we see the U.S. market, some of those others just, they're big enough declines in small markets, they start offsetting it. Just to put into context, in an environment where maybe we're a little less bullish on total U.S. and global, our retail unit growth rates year to date are 9% up in the U.S. and 4% globally. So when you look at our long term expectations of unit growth, the U.S. number is well in excess of what we would have planned for and the global numbers right in the middle.

Okay. And then just on the boat, the profitability side, I know we've talked about this. But help us understand, two points. One, hearing some chatter around labor costs in an industry from manufacturing standpoint. Have you guys started to seen any tightness there or this is more the inefficiency aspect that you mentioned earlier? And then two, just with the hurricane Matthew coming through earlier this month, do you expect any costs? Was there any downtime associated with that in the fourth quarter?

Let me take hurricane Matthew first, Michael. We, from an industry perspective, I don't think anybody's really formalized a lot of estimates around that, but from our facilities, we had some minimal disruption. We got a number of our facilities on eastern part. We had to shutdown. We shut down a little in advance of the storm to let employees go home. And over that weekend, we're getting things back up. And I think by, I think it was Tuesday, we pretty much had everything back up and running. So it's been relatively minor disruption to us, to our operations which was great. We have some employees that we're working with to help them out. But from a facility's standpoint, will pick that. And what we lost, will pick up with fifth day or weekend production. A little higher cost because it might be overtime, but we'll pick that production back up in the quarter. In terms of the cost of employees, I think it's more, in some cases, we've had to raise the entry-level wages for somebody onboarding of a new employee. But in general, we haven't a really seen, really our average wage is going up. Essentially, we've had to maybe start at a little higher wage and they work up to, the going rate within our facility. So again, not a big item affecting our cost there. But it is something that is there.

And your final question comes from Joe Altobello, from Raymond James. Joe, your line is now open.

Two quick ones for you guys this morning. First, I guess in terms of the dealer inventory you guys mentioned this morning, 26 weeks, in a different industry, the different dynamics you're seeing in the U.S. versus rest of world. I was curious if you could take that number and parse it out a little bit between what's going on in the U.S. and what's going on outside the U.S.?

I would say pretty consistent trends between the two, Joe. Maybe a little bit greater decreases and a little bit more of a gap between wholesale and retail occurring in the U.S. and some of the international markets. Maybe a little bit of a tick up in weeks on hand. A market like Canada, where you're starting to really get up against minimum stocking levels for a dealer to represent the product in the appropriate way. But nothing there that really gives us any sort of cause for concern.

Okay. That's helpful. And then secondly on boat ASP's, it slowed a little bit this quarter, I'm just curious how you guys think about that for next year, you've got, obviously, innovation which should drive that higher. But as you mentioned both sides and mix is mixing down a little bit, so how are you guys thinking about ASP's in 2017?

I would say if you look at how 2016 has unfolded, we saw very good growth in Q1, some in Q2 and then in the back half of the year, it's starting to moderate, some of that is a result of what's happening with pipeline restocking efforts. A lot of what's going on there is that lower ASP levels in places where we've got a lot of unit volume but, on an ASP basis, it's not necessarily our most highest ASP product. So you've got a little bit of a mixed differential between the first half of the year and the second half of the year which, as you go into 2017, I think it's really too early for us to comment, exactly how that may play out. But the back half of the year from our perspective is not a new normal as to what we'd expect on ASP growth on a go forward basis. We continue to see customers buy boats with greater horsepower engines, with more content, with more features. It's just you're dealing with some seasonal elements here as to when pipeline, pipeline activity, first half versus the second half is having a little bit of an impact on ASP. In the back half of the year.

This concludes the question-and-answer session. At this time I would like to turn the call over back your speakers.

I'd like to just conclude, first of all, I'd like to recognize the management team and all of our employees across the world for what we still consider to be a very good quarter, in line with exactly what we've said we were going to do and what we committed to make happen. And if you look more broadly, I mean, even to go back to a year ago, a year ago we told you we were going to be 335 to 350. We took the bottom up to 340, we then took it up to 345, so in spite of constantly being compared to a bunch of other players or segments of the market, I think we have continued to demonstrate our commitment to deliver on what we say we're going to do. And that's evidenced again, a reminder of the 335 to 350. Continue to look at ways to take the success with those just to reward our shareholders, whether that be share repurchase or weather that be through increased dividends, so all those things, we think we're moderating, we think we have them well in focus. We'll just close by saying our plan is just to continue to deliver on our three-year growth plan that we laid out in November 2015. My last comment, I know I've got a bunch of friends on this phone call from Cleveland. And it would just be Go Cubs. Look forward to talking to you after, about another week. Thank you for your time and attention.

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