Good morning and welcome to Brunswick Corporation's 2017 First Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. 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, 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 Web-site 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. Today, I will focus my remarks on our first quarter results as well as provide insights into the global marine markets. Bill will elaborate on our financial performance, including comments pertaining to our segments as well as the P&L and cash flow expectations. I will then wrap up with our current 2017 full year outlook. So the marine market is off to a solid start in 2017 and is performing consistent with our expectations. Our emphasis is on product leadership and the market share gains, and this positions us to perform well in a growing marine market. Our Fitness business continues to successfully execute against its integration and transformation plans, which in 2017 include new product introductions, changes to the manufacturing footprint and further cost realignment actions. The benefits of these activities will begin to favorably impact the segment growth rates and margin performance in the second half of 2017. As we look to the remainder of 2017 and assess our business opportunities and risk, we believe we are well positioned to deliver against our plans for the current year and our 2018 targets. First quarter revenue in 2017 increased 8.4%, with acquisitions contributing approximately 2.5% of growth. On an overall basis, foreign currency had a minimal impact on our top line comparisons. Our top line reflected strong growth rates in all three of our primary Boat categories as well as in our marine parts and accessories, Fitness, and outboard engine businesses. While our consolidated top line growth was strong, gross margins in the first quarter declined and were below our expectations. The majority of decline resulted from unfavorable changes in sales mix within the Fitness and Boat segments as well as from changes in mix between segments. Performance in the Engine segment was…

Thanks Mark. For the first quarter, sales in our combined marine segments and Fitness segment increased by 9% and 8% respectively. From a geographic perspective, consolidated U.S. sales increased by 8%. Sales outside the U.S., on a constant currency basis, increased by 10%. By region, sales on a constant currency basis increased by 11% in Europe, while rest of the world sales were up 10%. First quarter of 2017 adjusted operating earnings were $104.2 million, increase of $4.4 million or 4% versus the prior year. Our adjusted operating margin of [9%] [ph] was 30 basis points lower than the prior year. Turning to our Marine Engine segment, where first quarter sales increased by 6%, from a geographic perspective, U.S. were up 5%, reflecting solid growth in outboard engines and parts and accessories, partially offset by declines in sterndrive engines. European sales were up 9% on a constant currency basis, with gains in parts and accessories and outboard engines. This performance reflects our strategy to expand the parts and accessories business in this region. Rest of the world sales on a constant currency basis were up 8% compared to the prior year. Growth was driven by increases in Canada and Asia-Pacific, partially offset by declines in the Africa and Middle East region. Canadian revenue comparisons benefited from the Payne's Marine acquisition completed in the fourth quarter of 2016. On a product category basis, the outboard engine business reported strong sales growth in the quarter, particularly in higher-horsepower categories. This performance reflects a favorable retail demand environment and continued benefits of share gains in targeted saltwater, repower and commercial markets. First quarter sterndrive engine sales declined as the demand environment for these engines continues to be affected by the shift to outboards and unfavorable global retail demand trends. Our market share in…

Thanks Bill. Our overall operating plans and assumptions for 2017 remain relatively consistent with the longer term assumptions that were included in the 2018 plan we communicated at our Investor Day in November of 2015, and what we reiterated on the January call. We continue to target 2017 to be another year of outstanding earnings growth with excellent cash flow generation. Our plan reflects approximately 6% to 8% top line sales growth, which includes the continuation of solid marine market growth in the U.S. and Europe, as well as benefits from the success of our new products and market share gains. The Fitness segment is expected to benefit from overall growth in commercial fitness markets, particularly in the second half of 2017. Completed acquisitions are included in this guidance, and in total are expected to account for about 1% of the 2017's projected growth. We anticipate improvements in gross margin levels, with improvement derived from volume increase and cost reductions related to efficiency initiatives. The impacts of sales mix is projected to be relatively neutral for the year, with more favorable comparisons planned in the second half. Operating expenses are estimated to increase in 2017, as we continue to fund incremental investments to support growth. However, on a percentage of sales basis, they are expected to be 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 the reductions in operating expenses as a percent of sales are anticipated to result in higher operating margins, while operating leverage will be…

[Operator Instructions] Our first question is from James Hardiman with Wedbush.

I wanted to distil the guidance down as much as possible. As always, I appreciate a fantastic presentation. But 40 pages, I just want to make sure the changes versus last time are understood. So the taxes are coming down. It seems like both margins are coming down. And so the guidance is going up $0.05, taxes are coming down more than that. So net-net, is the guidance ex taxes actually coming down to reflect the Boat margin, is that how I should think about this?

As you look at the full year, the [indiscernible] obviously from the share-based compensation and taxes are a little more, but you take what I'll say as a little bit [indiscernible] first quarter and then a little bit of FX for the full year. Those two are probably the two pieces that are the other portion of the tax benefit, James, that isn't flowing through for the full year.

Okay, that's helpful.

So, I don't think it's anything for Q2 through Q4. It's recognizing a little FX and recognizing a little of what we reported for the first quarter.

Okay. And then just another clarification…

James, the only other thing I'll throw onto that, I think as we tend to do at this point in time of the year, we tend not to declare a victory prematurely. So, I think as we sit here and look at, we're three months into the year, we've got a lot of work yet to do throughout the year and we've got our Fitness projections as you can see are still relatively back-half loaded. I think it's just prudent on our part to not necessarily take all of that tax upside to the full year guidance.

Sure, understood. And then the gross margin I guess miss in the first quarter, can you give us a little bit more color around what happened there? Is that more of a one-time event or is this an issue that we should be thinking about going forward, I guess specifically with the sterndrive and inboard [indiscernible]?

James, the miss, probably two or three things are worth talking about. First, the shift in sales mix in the Fitness business, we had some international business which shifted to some larger customers that we did not necessarily expect. And there were some product mix shifts that affected everything that we did not expect, a little bit more severe than we expected. And I would say, we anticipate that those things tend to balance out over the year. We just got into a quarter. If you think about the underlying fundamentals in the Fitness business, we're in a quarter where we had kind of stable demand. So anything like a mix shift tends to have a fairly significant impact on gross margins in the period it occurs. But I would say, some of that is less permanent, more timing. And then on the Boat side, we certainly had a couple of adjustments in our large fiberglass boat business, yacht and sport yacht business, that we didn't necessarily expected added to that. And again, on the margins in Boats, I just want to point out that a year ago our mix was heavily tilted in a very favorable spot. I pointed out in my remarks that margins were up 250 basis points, leverage was very strong. Our mix this year probably is little bit tilted more towards value products than we would traditionally see. Again, would expect some of that to balance out as we go throughout the year. If you can tell from the ASP comments, ASPs were flat in Q1. We expect them to be up for the year, which I think implies that mix factors are maybe a little bit more favorable as we go throughout the remainder of the year.

Really helpful. And then, now that we've gotten some of the, maybe some of the negatives in the quarter out of the way, maybe I would assume that optimism is not likely to be reflected in your guidance coming out of the first quarter, but there has been a lot of discussion about the divergence between hard data, right GDP and employment versus soft data, consumer confidence and the like. And we're hearing a lot of the same from the dealers that we talk to. Your biggest customer actually just raised their same-store sales guidance and is talking about increasing investment in preparation for maybe even better sales. I guess as you talk to your customers and their customers ultimately, and boaters, are you hearing a lot of the same? It doesn't seem like there is any hard data that would suggest things are going to accelerate versus last year, but is there the potential for that to happen based on some of the commentary that you're hearing one-on-one?

Yes, James, I think there's always the potential. But again, I'm going back to the earlier or 17% of the year, and we have a lot of the same qualitative data. I think we've also said in the comments that I had that we'd expect the SSI data to probably go up as that data matures for the quarter. So, I think those things are going to show a little more positives than what some of the quantitative things are saying today. But you have to remember, we're kind of off of the wholesale side and our pipelines are where we want them, retail is kind of playing out as we expected. So we get a few more months into the year, we'll look at it and assess the whole thing. But fundamentally, for where we're at in the year, we think the year kind of looks like we expected at the start of the year.

Got it. Very helpful. Thanks guys.

The next question is from Tim Conder with Wells Fargo Securities.

So again, solid revenue growth but back to the Boat operating margins, and Bill, thank you for the explanation there, both in the preamble and then in James' question. So I guess the best way again just to summarize what happened, a high mix of aluminum boats, some adjustments on the large fiberglass and you anticipate that to start reversing here in the second quarter and throughout the balance of the year. So is that the best way to interpret what you said?

I would say that the only thing I'd add to that, Tim, would be lower sales of the bigger product as well. So the combination of the lower sales, the adjustments that I referenced, combined with kind of the strong performance in the aluminum business and a little bit more of a value-oriented kind of element to what we sold this year, were probably the biggest factors.

Okay. And specifically, when you're saying the larger product, are you talking larger product, sterndrive versus outboard or yacht?

It's yachts and sport yachts. It's not the fiberglass outboard business. It's the sterndrive/inboard business.

Sterndrive/inboard about 40 feet to 65.

Okay. And what [indiscernible] would you attribute that to, I mean at this point?

I think if you go back to the data we had, we've had four consecutive quarters now of declines in that segment and I think part of that is obviously the retail. The other, it's I think we're being prudent on trying to balance the inventory and recognize the fact that from our perspective there's a bit more competition out there from the European market, European manufacturers. Our ability to do anything really, with the strength of the dollar, of selling some of that product outside the U.S. are limited, and most of our new products are kind of launched and happening and in place. So you take all those things together, which is kind of why we've stated the position we've stated for that category of Boats.

Okay. And then, still staying on the sterndrive question, you guys have made some reinvestments there. It just seems again maybe the trends, we thought we'd see some stabilization start to recover, but just this doesn't appear to be materializing to the degree. Then granted, again, that whole segment for the industry has shrunk dramatically. How do you think about your investment in that segment of the engine market and the industry going forward?

Let me begin by, there's always kind of – we still think that there's vessels that a sterndrive product is really the right product for that type of boat. So that boat hasn't recovered, category of boat hasn't recovered the same rate or pace that obviously some other segments have, and that's not new news. And another category is there's obviously the transition for having gone from sterndrive products at lower displacements over to outboards. But Tim, I guess the other thing to put in perspective, we think we're in a better position going through this market today with how our product plans and investments and how we positioned our product portfolio, we think we're better off today than had we not repositioned our product the way we did.

Oh no, I totally agree. I mean you've made the move there. So just I guess the additional cost measures and so forth, both in Boats and Fitness, just some items there you would say that maybe unanticipated but for the balance of the year, you do not believe – you've taken appropriate measures in the balance of the year and we should start to see the benefits in a larger I guess flow-down sales leverage flowing down to the bottom line. Is that fair?

I think that we'll see some benefits particularly on the Fitness side into the flowing later in the year. The Boats, as a reminder, most of the Brazil stuff is the 2018 benefit. But I'm going to go back to a comment there, Tim, a little I closed with, is I think we have a reputation as being pretty good operators and when we see things that we think we need to adjust for in order to stay on target and on plan for our longer-term strategies, we do that. We've dealt with that through the decision on Brazil and we've also taken some other cost actions inside Boat and Fitness, recognizing the need to do that.

Okay. Okay, gentlemen, thank you.

The next question is from Scott Hamann with KeyBanc.

Just some clarification on the Fitness segment, Mark, in your comments you kind of talked about maybe some structural shifts going on there. Can you kind of give us a sense of what that looks like? I mean first quarter was it organically kind of in line with what you were looking for, were there orders that were delayed or shifted into other quarters, and just how should we think about how this kind of plays out?

I think there's a couple of things, and let's go back, I guess I'll go back. I think as you look at just the pure club commercial market, there is a little bit of transitioning going on as there may be a little less equipment base than where boutiques are at and the value clubs are at, and there's probably a little bit of transitioning and stuff going on. So I think the two biggest things that really are the triggers or the catalyst for some of this changing is, we've had a number of quarters now where we've had small growth in the domestic market to flattish. And so, I think as we get to clubs needing to refresh, and one of the reasons people decide to refresh is where you've got new products and things coming, and we're excited about new things that we have coming to both the Life Fitness and the Cybex. And if that triggers some of the refreshment that's going to go on in that segment, I think we'll see some upticks there.

Okay. And I guess on the Boat side, heard some positive commentary recently around the used boat market. Can you kind of provide some thoughts on what you're seeing there? Thanks.

Scott, there's not a lot of hard data out there. What I would tell you again, it's more the qualitative. Dealers are saying they really wish they had more used product and that the values of that used product are going up. That's the same message we've talked about for some time. So again, typically, as the gap between new and used closes or people believe that they're getting a good trade-in value and stuff on the product, those things in our opinion bode well for new product sales. But it's largely qualitative, Scott.

All right, thanks.

The next question is from David MacGregor with Longbow Research.

I wanted to ask you about the yachts and sports yachts and your observation about that 40 to 65 category, and I'm mindful it's down 9%, but wondering if we're seeing a shift back into kind of the value portion of that segment, which is kind of whitespace for you. It's kind of where Meridian used to play. And are you seeing that as a consequence of maybe losing some share there?

The amount of that segment size, David, is really, really small. And I think the other part of it is, I don't think it's just the Meridian question, it's really that whole value segment has dropped and there's a bunch of other people really trying to play in that segment. Making the investment in a value boat brand in that size today and being able to get a return on that investment just probably doesn't make sense, particularly given the FX environment, strength of the dollar. So, I think that's just one of the real realities. And we've got a great brand in the Sea Ray and some great product lines and we've really elected to play in that fashion.

Thanks. And then just as a follow-up, I know you don't normally break out count on parts and accessories, but is there any way you can give us some sense of just kind of the margin contribution from global parts and accessories? I know Marine Engine was up 6%, so I'm presuming it was greater than that. But can you help us think about just magnitude of the year-over-year there?

We just traditionally go directional against what are externals. Gross margins obviously are going to be a measure higher than what our overall Company gross margins are going to be and operating margins are the same. We really don't get into the margins at all on that specific business.

Thanks very much.

The next question is from Jimmy Baker with B. Riley & Co.

Just the softness in – I just wanted to circle back to the softness in sterndrive and inboard boats. So by our math, that's call it 10% to 11% of your total revenue, sport yacht and yachts within that, that compete against the European brands, even smaller. So I guess, on the surface it doesn't strike us as particularly material except when evaluating your capacity footprint. So just help us understand, as we're hearing about some tightness in availability on the aluminum side and even from some Whaler dealers, what you can do to sort of improve your let's say mix of capacity to match what's going on at retail and where the demand trends are?

We've got a nice plan in place for how we want to grow the Boston Whaler business, a multi-year plan around the facilities and that campus we're executing against. I think as you look at the aluminum, a lot of that gets to where you're at relative to the market. And we think with trying to level load our plants and have the pipeline appropriately positioned for the year, we're fine with our aluminum capacity. We're adding a little bit of pontoon capacity to our low operations. But from a facility and everything, we're positioned pretty well, Jimmy. I think the thing that we always mentioned is, when we talk about how we deal with capacity, it includes that inventory and positioning for the year, but it's also a function of our supply base and its ability to support us. So those two things kind of go together.

Okay, that's very helpful. And just lastly, I was hoping you could speak to some of the strengths, within the domestic market, speak to the strength geographically that you are seeing. So, obviously some of the slower reporting states are driving outperformance for you and the industry, if we look at the variance between the preliminary SSI data and then what you're showing today. So could you just shed some light on which of those states are fueling the outsized gains for you?

The states that – you want to go to – I'm pulling up a piece of – you go to Minnesota, not reported; Wisconsin, not reported, as examples of some states that have a fair amount of aluminum and pontoons and unit volume in them. So you have that – I would say that from a regional standpoint, the area that's probably had more of a weather in the quarter was really the Northeast. But the main thing we're talking about is there's some significant states that just aren't in the numbers yet that have a lot of unit volume to go with them.

Sure it makes sense. Thanks a lot.

Jimmy, we got some visibility into outboard registrations, industry outboard registrations by state, we've got some visibility into floor plan liquidation activity by state, as well as our own internal registration. So when we triangulate that, the states that are either not reported at all or incomplete are performing at a level that's higher than where the SSI data is reporting.

Understood, Bill. Thanks for the time.

The next question is from Mike Swartz with SunTrust.

Just wanted to touch on the Fitness business and understanding some of the puts and takes in the quarter, but taking a step back, you even said the last several quarters you've seen some kind of slower or stable growth in the commercial market, yet you're expanding capacity around that. Some of that's obviously Cybex. So, I guess what gives you comfort, [confidence] [ph] that those investments in capacity on the Fitness side are I guess justified?

A couple of things. I mean, one of it is we're doing the – obviously tying that to some of the new products which tends to have some demand stimulus around, and as I mentioned, if refresh and things go into place that has demand. Another element of this, we elected as we had some of the demand that we were using outside third parties from the standpoint of supplying product to us, and we continue to do that, but as we're bringing out new product, part of what that capacity investment is, is the in-sourcing of work that was formerly done on the outside, which also brings us some nice margin returns to the business. So, when we talk about the expansion, some of it's tied to the market, some of it's tied to new products, some of it's tied to some in-sourcing that's related to that new product.

Okay, that's great. And just on the…

Mike, it's kind of all those items.

Okay. And then just on the Canadian markets, flipping over to the marine side, I think the general sense is that Canada is stabilizing, maybe even getting a little better. Could you talk about are you seeing that? I know you have production up in Canada. Can you talk about it, are you seeing that strength across both the internally manufactured product as well as maybe some of the stuff that's being imported into Canada?

Let me just clarify it. We make aluminum boats, it's Princecraft in Quebec, and most of those boats are really kind of sold in the Quebec province or are highly skewed to that province. Almost all the other boats that go into Canada, particularly a large market like Ontario, those are almost all imported products from the United States going in there. And so, they are all dealing with some of the same currency exposure and material cost, et cetera. I'm not sure if that answers your question or not, Mike.

I just didn't know if there was any discernible difference between the strength of internally produced product versus imported, just on a broader sense.

Bill, you might want to comment on it.

Mike, you look at it, one, I'll point out that we're still dealing with relatively small numbers at retail. The season up there is probably even more behind where the overall U.S. market is. So that would be point number one. But so far, we've actually seen some of our U.S. brands outperform the stuff that's manufactured up there.

Okay, great. That's helpful.

But we're not talking about size of numbers that are meaningful. But I will say we've seen good strength in the product that we've manufactured in the U.S.

Thanks.

Our final question comes from Seth Woolf with Northcoast Research.

Thanks for squeezing me in here at the end. Don't want to belabor the point about the Boat revision, but just curious, maybe if you could provide a little bit of context as to the timing of your decision to kind of revise the outlook? Specifically, is there anything other than what you're seeing with retail dealer inventories that made you make that decision now, three months after you gave the initial guide in January? The reason I ask is because I think historically you guys have been pretty reluctant to change your guidance in the marine industry, in the marine market after just three months.

I think part of it, Bill went through a lot of the elements, but if you look at from the standpoint of we're mixing a little different on product, for instance we've had tremendous success with some of the value product unit-wise in our aluminum business, you take what we're seeing in Brazil and to date charges there as well as when we look at what we think is being our desire to be a little more conservative from the standpoint of managing inventory and things on big boats, you marry all those things together, we just felt that it's appropriate to get that out there. We're quite comfortable that we're still going to deliver the 6% to 7% for 2018, but we thought it was important to, based upon things we're seeing, to pull that down for the year and get that on the table.

Okay. Thanks a lot, guys. That's all for me.

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

All I'd like to do is again thank all of you for taking the time and spending some time with us on the phone today. Obviously, those who want to do follow-up calls [indiscernible]. Some of you we'll be seeing on road trips during the second quarter. We look forward to some of that one-on-one interaction by phone or by visit. Thank you again for your time today.

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