Ryan Gwillim - Vice President, IR Mark Schwabero - Chairman and CEO Bill Metzger - CFO.

Craig Kennison - Baird Michael Swartz - SunTrust Tim Conder - Wells Fargo Scott Stember - CL King James Hardiman - Wedbush Joe Altobello - Raymond James Joseph Spak - RBC.

Good morning, and welcome to Brunswick Corporation's 2017 Fourth Quarter and Full 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 like to now to introduce Ryan Gwillim, Vice President, Investor Relations. You may begin, sir..

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 and today's press release. All of these documents are available on our website at brunswick.com.

During our presentation, we'll be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to the presentation and the reconciliation sections of the consolidated financial statements accompanying today's results.

Just a reminder, on December 5th of last year, Brunswick announced its intention to sell Sea Ray boat businesses, including the Meridian brand. Starting with the fourth quarter of 2017, Brunswick has reporting this historical and future results of these businesses as discontinued operations.

Therefore, for all periods presented in this release, all figures and outlook statements incorporate this change and reflect continuing operations only, unless otherwise noted. I would like to now turn the call over to Mark..

Thank you, Ryan, and good morning, everyone. Today, I will focus my remarks on our fourth quarter and the full year results as well as provide insights into the global Marine and Fitness 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 outlook for 2018. Our results in 2017 reflect the continued successful execution of our strategy by our business teams with our emphasis on creating and increasing shareholder value.

Our performance represents the eighth consecutive year of adjusted EPS growth and with this record high EPS, resulting from the strong operating performance by our Marine businesses. The U.S. Marine market performed consistent with our expectations throughout the year and remains healthy moving into 2018.

Overall demand in international Marine markets also remains strong. Our largest business, Mercury Marine, continues to leverage this market growth into outstanding performance and continued strong market share through product leadership, overall operational excellence and our Boat segment also recorded strong results.

As a result, our combined Marine businesses reported a 10% increase in both revenue and operating earnings over 2016. In December, we announced our intention to sell our Sea Ray boat business. The sales process is underway and there has been significant interest in the business.

Our goal remains to complete the divestiture in the first half of this year. Our remaining Boat portfolio is very well positioned to serve healthy, expanding market segments and will complement our other Marine offerings, including engines, arts and accessories, while operating an improved margin profile.

Our Fitness businesses is executing against its strategy to overcome some market headwinds and enable future growth. Revenue grew 5% for the year, reflecting growth in international markets, while domestic market demand continued to be flat versus 2016. Revenue gains also included the impact of the Indoor Cycling Group acquisition completed in 2017.

Throughout the year, this segment encountered several factors that negatively affected operating margins, including higher cost, particularly freight in the fourth quarter, challenging pricing dynamics in certain international markets and unfavorable changes in sales mix.

Moving forward, our strategic focus remains on driving product leadership, operational excellence and technology development, which we believe positions us for success in this evolving commercial Fitness marketplace.

The long-term fundamentals of the Fitness market are favorable and we're confident that the plans we've developed and have been executing against positions this business to capitalize on future market opportunities and deliver earnings growth.

Our annual revenue in 2017 increased by 9% and gross margins were 27.6%, down 80 basis points from 2016 due to the declines in our Fitness business. Adjusted operating earnings increased by 5% while diluted EPS as adjusted, of $3.89, was an increase of $0.43 or 12% over 2016. Free cash flow for the year was $243 million.

Now I will provide our perspective on the U.S. Marine market. Industry unit volume grew by approximately 5% in 2017, which was consistent with 2016. The U.S. market continues to perform in line with our expectations and in line with our forward-looking strategic plan targets.

Note that despite the August and September hurricanes that affected certain areas in the South and southeastern United States, fourth quarter domestic unit growth remains strong. Outward board demand remains healthy across all three categories increasing by approximately 6%, matching outboard engine retail demand, which was also up 6%.

I'd like to point out that over 95% of our Boat volume in dollars in 2017 was powered by outward propulsion. As we look to 2018, we remain confident in the growth of the U.S.

Marine market, early feedback from Boat Shows, dealer sentiment, new product offerings across the industry, favorable replacement psychodynamics and strong global macroeconomic conditions have positively affected the start of the year.

Next, I would like to share some perspective on our retail data for boats based upon our pipeline inventory activity. Our internal U.S. retail Boat registrations were up 6% for the year. The year-to-date performance is slightly above the overall industry and better than the results reflected in the SSI retail performance data reported for Brunswick.

Global retail unit sales grew 5% for the year, ahead of the previously reported trends for the first nine months. This full year growth is trending positively versus the annual performance in prior years and was a slightly higher than our previous expectations.

International markets contributed to our growth rate in 2017 after being a headwind for several years. Overall, our retail growth in the U.S. and nobody is performing at/or above the high end of our planning targets. Next, I would like to review with you our current perspectives on the regional Marine markets.

Revenue in Europe reflected a favorable market environment in 2017, and our performance exceeded market growth rates. We expect - we anticipate growth in the European market for 2018 at rates similar to 2017.

In Canada, the retail and wholesale unit demand for the year improved versus the prior year as a more favorable economic conditions and a relatively stable exchange rate environment has contributed to the overall market success. Our 2018 outlook assumes that the demand environment in Canada will continue to recover.

Strong growth continued in the Asia Pacific markets as we continue to benefit from share gains in the commercial markets, capitalizing our expanded range of Sea Pro commercial 4-stroke engines and strengthen distribution channels across the region.

Overall, the international Marine market demand has been solid in 2017 with growth that top our initial expectations. Our overall Marine growth in dollars exceeded the market unit growth rates, reflecting improvements in mix as well as benefits from recently completed acquisitions. We expect these trends to continue into 2018.

Moving to our Fitness segment. Revenue increased 2% in 2017 on a constant currency basis, excluding acquisitions. Our revenue performance in the quarter was up 3% on a comparable basis versus the prior year, which was slightly ahead of our expectations.

The North American and European commercial Fitness equipment markets were flat year-over-year, although the fourth quarter sales in Europe were up 14%, behind the strong Indoor Cycling Group distributors and distributors sales.

Value-oriented franchise clubs continue to grow and invest, while investments by traditional clubs and certain vertical markets have declined. Our view remains about traditional clubs are slowing investments in certain categories of cardio products as they evaluate alternatives in response to the changing exercise preferences.

Our performance in Europe was affected by ongoing competitive dynamics, which are influencing pricing, particularly on cardio products where competitors have begun offering improved console technology and was previously offered only on higher end products.

However, we're responding to this dynamic with our new integrity line, which is well positioned to meet this evolving demand. I'll discuss this a little further in my outlook comments on Fitness. Asia-Pacific has seen strong growth with Japan, Australia and China leading the way.

Latin American markets, particularly Brazil, are starting to recover as economies improve and currencies stabilize. We anticipate that these positive trends will persist into 2018, resolving in sustained growth in these regions. And now I'll turn the call over to Bill for additional comments on our financial performance..

Thanks Mark. I would like to start with an overview of our revenue performance in 2017. For the year, sales in our combined Marine segments and Fitness segment increased by 10% and 5%, respectively. From a geographic perspective, consolidated U.S. sales increased by 8%, while sales outside the U.S. on a constant currency basis increased by 10%.

Adjusted operating earnings for 2017 were $501.6 million, an increase of $24.4 million. Our adjusted operating margin of 11.1% was 40 basis points lower than the prior year. For the fourth quarter, sales in our combined Marine segments and Fitness segments increased by 14% and 3%, respectively. From a geographic perspective, consolidated U.S.

sales increased by 11%, while sales outside the U.S. on a constant currency basis, increased by 7%. Fourth quarter adjusted operating earnings were $93.4 million, a 6% increase versus the prior year. Our adjusted operating margin for the quarter declined 40 basis points to 8.6%.

Diluted EPS from continuing operations as adjusted for the year equaled $3.89 per share. This reflects a 12% increase versus the prior year. On our third quarter call, we revised our full year EPS guidance to $3.85 to $3.87 per share.

As a result of removing Sea Ray from our continuing operations reporting, adjusted operating earnings and diluted EPS, as adjusted for 2017, improved by approximately $70 million and $0.13 per share, respectively.

This benefit was offset by several factors, including some additional margin weakness in our Fitness segment due mostly to freight cost, adjustments recorded in our engine segment to warranty and litigation reserves, some additional earnings weakness at Sea Ray and project expenses incurred at corporate. Turning to our Marine Engine segment.

Fourth quarter sales increased by 13%. From a geographic perspective, revenue growth was strong in the U. S. driven by outboard engines and parts and accessories. Growth in Europe was modest in the fourth quarter, but sales were up 6% for the year on a constant currency basis. Rest of the world sales were up 5% compared to the prior year.

Growth was driven primarily by increases in African, Middle East and Latin America. On a product category basis, the outboard engine business reported strong sales growth in the quarter.

This performance reflects a favorable retail demand environment, particularly for higher horsepower engines and ongoing benefits from share gains in targeted saltwater, repower and commercial markets, including benefits from recently launched products.

Mercury's parts and accessories businesses delivered strong sales growth in the quarter, particularly in international markets, reflecting its successful execution of our international growth strategy. This growth also reflects expansion through acquisitions, which have strengthened both our product portfolio and distribution capabilities.

New product launches, along with a growing adoption of new engine control technologies, continues to add to the growth of these businesses. Finally, fourth quarter sterndrive engine sales declined as the demand environment continues to be affected by the shift to outboards and unfavorable global retail demand trends.

Mercury's operating earnings in the quarter grew by 13%, and operating margins were at 10.2%, which was in line with the prior year.

The improvement in operating earnings included benefits from higher sales and favorable product mix, which were partially offset by planned increases in growth related investments in advance of new product introductions.

Margins were also negatively affected by unfavorable adjustments related primarily to product warranty and the resolution of litigation in the quarter. For the year, operating margins were 15.5%, equal to 2016 operating margins.

In our Boat segment, fourth quarter revenues increased by 15%, with strong growth in the aluminum and fiberglass outboard Boat categories. This included higher pontoon sales, resulting from successful efforts to increase production levels in advance of the 2018 selling season. In the U.S. which represented 73% of the segment, sales increased 16%.

We also reported strong growth in international markets led by Canada and Asia Pacific. Global wholesale shipments for the quarter increased 6%, and were up 8% year-to-date. Changes in average selling prices increased by 8% in the quarter and were up 6% for the year.

These increases resulted from continued customer migration to boats with more content and higher horsepower engines, which are adding to topline benefits over and above normal price increases. Our 2018 plan anticipates continued growth in average selling prices, but at a lower growth rate in 2017.

Dealer pipeline inventories ended the quarter at 35.5 weeks of boats on hand measured on a trailing 12-month retail basis, which was slightly higher than prior-year levels.

We believe that our pipeline levels are appropriate, given our growth expectations in the various Boat categories and markets, as well as dealer sentiment and outlook for the upcoming 2018 retail selling season. For 2018, we are planning for weeks of inventory on hand at the year-end to be comparable to year-end 2017 levels.

Consistent with this assumption, we are also assuming that wholesale unit growth rates will be in line with the retail unit growth rates. The Boat segment's fourth quarter adjusted operating earnings were higher by $8.6 million when compared to the prior year.

This increase resulted mostly from higher sales and margin gains, partially stemming from improved operating efficiencies. For the full year, operating margins as adjusted, were 6.8%, which is 60 basis points higher than the full year of 2016. This is in addition to a 180 basis point increase between 2016 and 2015. Shifting to our Fitness segment.

Sales for the fourth quarter increased by 3%. The revenue gains resulted mostly from growth in international markets, including Europe, Africa and Middle East and Asia Pacific.

Domestic sales was slightly below 2016 levels resulting from factors Mark noted earlier, and including anticipated declines in Cybex sales that had a planned new product launches in the first half of 2018. For the quarter, adjusted operating earnings were at 12.5%, which was 380 basis points lower than the prior-year quarter.

The reduction in operating earnings was caused by margin declines reflecting several factors, including higher freight cost, challenging competitive dynamics in certain international markets and unfavorable changes in sales mix, which more than offset benefits from higher sales and cost reduction activities.

For the full year, operating margins, as adjusted, were 10.4%, 290 basis points lower than last year. Also in the quarter, we recorded a $13.9 million charge related to the impairment of the Cybex tradename.

This non-cash charge resulted from our annual testing of intangible valuations and was required due to sales declines versus our initial expectations. We also booked a $13. 5 million charge for estimated future cost related to fuel campaigns on certain Cybex products design prior to the acquisition.

We have made indemnification claims against the seller for recovery that includes this amount, but are unable to record them until we reach an agreement. Next, I would like to discuss the impact of foreign currencies having on our performance.

For the full year, sales comparisons were positively affected by less than 1% and operating earnings comparisons were positively affected by $1 million, which was slightly lower than our plan. Moving to full year 2018.

We are expecting a favorable impact on consolidated sales comparisons of 1%, and favorable impact on the operating earnings comparisons of $10 million to $15 million. These estimates are slightly more favorable than the estimates used when providing 2018 EPS guidance on our third quarter call.

These estimates for 2018, assume that foreign exchange rates remain consistent with average rates for the last three months. 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 2017 at approximately $140 million.

Assuming interest rates remain at current levels, along with planned annual contributions of between $70 million and $75 million, we remain on track to be fully funded by the end of 2020. I would note that we may increase contributions in 2018 to take advantage of higher deductions against our 2017 taxable income at a more favorable statutory rate.

In the fourth quarter of 2017, we again took action to settle plan obligations with a select group participants, these actions reflected a transfer of approximately $220 million of planned obligations to a third party by purchasing annuities on behalf of participants. The payment for the annuities was funded from planned assets.

A non-cash settlement charge of $97 million was recorded in connection with these actions. Our full year effective book tax rate in 2017, as adjusted, was 28.4%. This includes net tax benefits resulting from share-based compensation activity of $7.9 million, substantially, all of which occurred in the first half of 2017.

We recorded a $72 million non-cash charge in the fourth quarter related to the impact of U.S. tax reform, including an adjustment to our deferred tax balances, resulting from the reduction in the statutory rate from 35% to 21%, along with an estimate of repatriation taxes payable.

Our estimated effective book tax rate for 2018, as adjusted, is approximately 23% to 24% based on the lower U.S. federal statutory rate of 21%, and reflects tax guidance to date. Our estimated cash tax rate is expected to be in the high single digit percent range, including the impacts of an anticipated refund resulting from overpayments in 2017.

Turning to our review of our cash flow statement. Cash generated by continuing operating activities was $417 million, which is $6 million lower than the prior year as a result of higher working capital usage, which more than offset the improved operating performance.

The $24 million increase in working capital used by business versus the prior year primarily reflects greater increases in accounts receivable against prior year, mainly the result of strong sales towards the end of the fourth quarter and higher inventory balances partially offset by favorable change and include expenses.

Capital spending was $189 million for the year, which included investments in new products as well as capacity expansions in our Marine and Fitness segments. Full year free cash flow was $243 million, down $10 million from the prior year.

The primary drivers of the shortfall in free cash flow versus our previous expectations were changes in accounts receivable and inventory noted earlier, along with increases in inventory levels.

Our business units continued to remain focused on generating strong free cash flow, which will allow us to continue to fund future investments and growth, including acquisitions and successfully implement our capital strategy.

Let me conclude with comments on certain items that will impact our P&L and cash flow for 2018 with a focus on some of the more notable items. Aside from the change in tax rates, which I discussed earlier, the 2018 estimates on these items are not materially different than our 2017 results, except for shares outstanding.

Our plan reflects diluted shares outstanding of approximately $88.5 million for the full year, which includes the planned share repurchase activity for 2018, which I will discuss further on the next slide. We are projecting free cash flow in 2018 to be greater than $275 million.

Capital expenditures for the year will be between $215 million and $225 million. This level continues to be above our targeted 3.5% to 4% of sales as we bolster capacity to support growth and continue to invest in product leadership and reflects our decision to invest a portion of cash benefits from tax reform back into the businesses.

Working capital usage is anticipated to be between $20 million and $40 million driven by increased business volumes. We continue to execute against our share repurchase program with repurchases of $10 million in the fourth quarter and $130 million completed for the full year 2017.

With $100 million of planned share repurchases for 2018, we continue to view share repurchases as an attractive use of capital and will balance additional repurchases against other investment opportunities. I would now like to turn the call back to Mark to continue our outlook comments..

Thanks Bill. Our outlook for 2018 is generally consistent with our recently provided three-year strategic plan, and indicates another year of strong revenue and earnings growth with excellent cash flow generation.

Our recent results reflect the ongoing execution of our strategy, and we believe we are well-positioned to generate increased shareholder returns throughout our three-year plan. We expect our Marine businesses' top line performance to benefit from the continuation of solid global growth, along with the success of new products.

In the Fitness segment, we're planning for market demand similar to the second half of 2017, and are anticipating contributions from the new and recently introduced products, particularly in the second half of the year.

As a result, absent any significant changes in global macroeconomic conditions, our plan reflects overall revenue growth rates in 2018 in the range of 5% to 7%, including benefits from completed acquisition and favorable movement in foreign exchange rates.

For the full year, we anticipate improvement in both the gross margins and operating margins, as we plan to continue to benefit from a number of factors, including new products, cost reductions related to efficiency initiatives and a favorable impact from foreign exchange rates.

Operating expenses are estimated to increase in 2018, as we continue to fund incremental investments to support growth. However, on a percentage of sales basis, we expect to be slightly lower than 2017 levels. Considering these targets and taking in account the benefits from the recently enacted U.S.

tax reform and ongoing execution of our share repurchase program, we are increasing our guidance for 2018 to a diluted EPS, as adjusted, ranging $4.45 to $4.65 versus our previous guidance, we are projecting a 45% to 50% improvement in EPS from the lower effective tax rate, and we're also planning our businesses to fund additional investments in growth and capabilities that we believe will enhance our performance in future periods.

These are investments that we were planning to defer to future periods, but are now accelerating them into 2018, given our confidence in the business and the benefits from tax reform. In addition, we are also lowering our expectations for this Fitness segment, which I will discuss shortly.

Finally, we expect operating margins for the first quarter of 2018 to be consistent with those from the first quarter of 2017 with sales growth in the first quarter expected to be towards the top end of our guided range for the full year. Turning to our segments, our Marine Engine business looks to continue with strong momentum into 2018.

There will be a series of new outboard product launches in 2018 the first of which will be announced in two weeks at the Miami Boat show.

As with past outboard engine platforms, we expect the new engines to generate market share gains, while also improving margin performance, resulting from a better cost position and enhanced performance of the new engines.

Mercury will leverage these and existing products to maintain its focus on saltwater repower and commercial market segments where its outboard engine technology, especially in higher horsepower, should enable growth in excess of the market.

We will continue to pursue opportunities to grow our parts and accessories business, both organically and through acquisitions.

This growth will be spurred by increased focus on technology systems that improve boater experiences, including integrated engine control systems and applications that improve the consumer's ability to remotely monitor their engine and boat.

In addition, continued channel improvements, especially in relation to our global service and distribution capabilities, including our e-commerce footprint, will create more opportunities to grow our parts and accessories business. As a result, our 2018 forecast reflects continued revenue and operating earnings growth in our Marine Engine segment.

Specifically, we're planning for revenue growth for the year to be in the mid to high-single-digit percentage range. Our engine segment is expected to continue to deliver sales growth that exceeds the market as we continue to invest in new product and upgrades and expand our manufacturing and distribution capability to drive future growth.

We anticipate solid operating margin improvements for this business in 2018, resulting from the new products, improving our cost efficiencies along with our strong parts and accessory businesses, while maintaining our investment at healthy levels.

Moving to the Boat segment, we'll continue to drive growth through product leadership, focusing on products in the growing outboard market.

Recent new product launches, including Lund Boats impact access and bus and Boston Whaler's 350 Realm, which you will be able to see at the Miami Boat show, enforce our dedication to developing industry-leading products in an effort to attract and retain boaters and our brands.

All remaining brands in our Boat portfolio are profitable, and we will continue to invest in projects to help improve our product margins, our operating performance and our cost efficiency to drive margin improvements across the brands.

Lean Six Sigma and other cost-saving programs will continue to be championed by our business leaders in order to drive the cost savings and production efficiency initiatives throughout all levels of the organization.

Finally, the business will focus on efforts of completing the Sea Ray divestiture during the first half of the year, while ensuring that the business is diligently managed through the execution of its business and product plans to support our employees, our dealers and our customers.

Given these factors, we're targeting Boat segment annual revenue growth for 2018 in the high single-digit percentage range led by continued strength in the fiberglass and aluminum outboard markets, including strong demand in our pontoon business.

We anticipate that operating margins will improve modestly for the year and that leverage will be in the low to mid-teens percentage, including additional investments in our operations. The Fitness business is focused on several priorities moving into 2018, starting with new products.

We've taken clear actions to capitalize on the evolving trends in the industry. As evidenced between 2017 and 2018, the amount of new and planned product introductions is substantial, including the new integrity line of cardio products.

The transition to the new line is complete with additional console options with upgraded features available in the first half of the year. In addition, new Cybex cardio products have been introduced and will be available for shipment after the first quarter.

As a result of these new introductions, approximately half of the segment's cardio products sales in 2018 will result from products refreshed in either 2017 or 2018. The offering of console capabilities on a greater range of product, allows us to better address the club's changing console needs.

Both exercisers and club operators are looking for cardio equipment with greater capabilities, enabled by today's technology. This is a key development moving forward in an enabler of our digital strategy.

Under Jamie's leadership in 2017, we established a dedicated team to focus on developing the industry's leading suite of digital offering to capitalize from the capabilities of these new consoles.

Enhanced digital offerings are coming to market in 2018, and will deliver several benefits, including improving the exerciser experience and outcomes, enhancing member retention, creating potential new income streams and improving the operating efficiencies and asset utilization.

We believe that these new technology offerings will create a demand for the new consoles and promote an investment by club owners who will benefit from attracting and retaining members. We are also keenly focused on taking actions to improve the operating margins of the business.

This includes Lean Six Sigma initiatives, which gained even greater traction in 2017, as well as a number of other operational excellence initiatives. New product launches should also favorably impact the margins in certain project categories. Finally, we continue to be focused on strengthening our relationship with key customers.

In addition to a strong brand position in the market, our broad product lineup, our manufacturing and service capabilities and our focus on R&D and technology, position us well to expand and further strengthen our global market share and drive incremental sales.

Our plan projects revenue growth in the low single-digit percent range for the year, which is consistent with the organic growth rates in 2017. We expect overall operating margins for the full year to be consistent with 2017 as some of the headwinds that we faced in 2017 will continue into the first half of 2018.

Consequently, our plan reflects margin pressure continuing in the first half of the year and beginning to show improvement in the back half as comparables normalize and benefits from new product and cost initiatives take place. Lastly, a note on our 2018, 2020 plan.

As a result of the tax reform and other elements we've discussed today, we're raising our 2020 EPS target, provided that our Investor Day in November, to $5.60 to $6.10, to reflect tax reform and other factors discussed today that affect our business outlook.

In closing, 2018 is the first year of our three-year strategic plan that we laid out in November in New York. We believe that we are well positioned to execute this strategy at the take advantage of market opportunities for Marine and Fitness business, and we're confident in our ability to execute in this environment.

These factors, combined with strong macroeconomic conditions, including the effects of the recent tax reform, lead us to believe at that 2018 will result in another year of strong revenue and earnings performance, along with excellent cash flow generation. I'm excited about the prospects moving forward.

I'm confident at our management team and our 15,000 dedicated Brunswick colleagues are committed to delivering and executing our growth strategy in 2018 and beyond in a continued effort to deliver value to our shareholders.

As announced earlier this week, in response to recommendations made public by one of our shareholders, Brunswick is always evaluating and pursuing actions that enhance shareholder value, and we welcome input from shareholders on how we can further strengthen the company.

Our Management and Board have a proven record of driving strong operating performance and taking the size of actions with respect to our portfolio as part of our commitment to delivering shareholder value, and we will continue executing against this approach.

I hope that you will be able to join us at the Miami Boat show on Thursday, February 15, we'll host a product focused investor event and we'll offer the investment community the opportunity to hear from our Marine business leaders on how they plan to deliver increased shareholder value through exciting new products and technology development.

The next morning, we will offer a unique opportunity to see and test many of these new products first hand on the water through guided experience hosted by many of our Marine Engine and Boat segment personnel. And with that, I'd be happy to take your questions. .

[Operator Instructions] And our first question comes from Craig Kennison from Baird. Please go ahead..

I guess, this is a Fitness and tax related question, but I'm just wondering if there's any evidence of that some of your Fitness club customers might eventually accelerate spending on equipment, given the changes in tax policy as it relates to capital expenditures?.

I guess, my comment on that is at, obviously, the tax reform and the immediate expensing is something that should be favorable for people who are investing in capital assets.

I would say that cash flow has always been an extremely important part of the investment decisions on the part of the clubs, so I think that, that is something I would put into favorable column moving into 2018.

That being said, we've had some form of immediate expensing as part of the tax provisions for - on and off for several years and I think when we've seen it turned on, it has had a positive impact, should be something that's favorable to us..

And then as a follow-up, just on the broader tax windfall.

How do you see investing that windfall, whether it's with consumers in the form of lower prices, employees or with shareholders?.

Craig, what we've down as we've outlined in here, we essentially taken about half of the tax benefit and putting that benefit directly to the shareholder and the other half is really things that we'll be looking at and addressing of ways to look at longer-term opportunities, growth initiatives for the company that may be would have been initiatives, would have kicked off in 2019.

The other point is that, there'll be things that we'll continue doing relative to being an employer of choice. But fundamentally, the takeaway would be about half of it is going to shareholders and about half of it would be things we'd want to do relative to investing, growing and further improving the business..

And our next question comes from Michael Swartz from SunTrust. Please go ahead..

I just wanted to touch on the Fitness business. I guess, the margins in fourth quarter were the most striking thing to me, and it looks like you're now expecting flat margins year-over-year. So maybe just give us a little backdrop on, I guess, why margins should be flat year-over-year, I know there's some cost improvements things going on.

How much of that is structural pricing product mix, et cetera.

That I think with your 2020 plan, you had expected 100 basis points to 200 basis points in margin improvements in that business, is that still the outlook?.

Just to touch on the fourth quarter little bit. Freight was the big change between kind of what we’ve seen through the first nine months of the year, and then that - it really related to two things. First, seasonably, obviously, a very big quarter on the delivery and install side.

I would say, we saw great increase on that activity beyond what we had planned for. I think there's probably people outside of our industry that just - that rely on a delivery of products in the fourth quarter, they probably saw some of the same thing.

We also had some actions that we had to take to expedite product in response to new products that we introduced, maybe had little bit different mix than we needed on console options, and we ended up expediting some product to be able to meet demand that we incurred some additional cost on.

I would view that latter activity as something that should not be with us moving into 2018. The freight delivery install is something that may continue, but I think that's a place where we are keenly focused on trying to offset that cost and/or change the way we price and execute transactions with customers to offset some of that.

So I would say, moving into '18, that's something that we expect to be less of a headwind. And I'll just say, in general margins moving forward, I think, we've got some balanced actions. We certainly consider some of the headwinds we faced in '18 will continuing on and comp should improve on that as we move into the back half of the year.

Our Lean Six Sigma efforts are increased and enhanced moving into '18. We've got some product margin factors that we expect to be beneficial and currencies a little bit positive for the business.

So feel comfortable with our guide on kind of flat margins moving into 2018, especially with sales growth in the low single-digits should be something we are able to get accomplished..

And then just to 2020, I know Mark had mentioned that you raised your numbers largely ,looks like tax rate, but you said there were some offsetting factors as well, is one of those fitness margins through 2020?.

Yes. I would say, what we've done is to we've essentially said that 100 to 200 basis-point increase is going to occur off of a lower 2017 base than what we expected. And the timing is probably going to be a little bit more based on '19 to '20 performance than expecting some improvement in 2018..

And our next one question comes from Tim Conder from Wells Fargo. Please go ahead..

A couple of things here, maybe just continuing on the previous question there, so you're still looking for 100 to 200 basis points, but has there been any change also on the engine on the boat? I mean, overall, by 2020, it would seem that the answer is no but just as far as the cadence; do you see any change in that here over your plan?.

No, Tim, we don't. I think we're still targeting improvements in engines. We're still targeting that 7% to 8% for boats, and that's something that we adjusted when we made the Sea Ray announcement back in December..

In general, you talked about some of that redeployment, Mark, and Billy you touched on a little bit to some of the tax savings here. You have M&A opportunities; you said that there's some M&A baked it to your outlook here both for '18 and obviously through 2020.

Can you just remind us what's your hurdle rate is for the company, the ROICs that you need to get on that.

Maybe not in the initial year, but maybe over a three-year period or whatever, what's your target to basically do a no or go decision on M&A?.

Tim, I guess, relative to the M&A starting from hurdle rates. I mean, we're looking for some sort of excess where a reasonable amount of excess over our cost of capital. I think as you look at some of the P&A deals we've done, that's typically been mid-teens or higher.

I think some of the larger deals we look at tends to be mid-teens or lower, would be kind of where the hurdle rates would be. Obviously with tax reform, that certainly helps with cash flow performance and things like that. So should be favorable from an M&A perspective..

So even with tax reform, your still haven't changed your hurdle rates on a go-forward basis?.

Well, I think our premise is still based upon a reasonable or a substantial sort of excess over our - a cost of capital that we believe is necessary to make the investment worthwhile..

So basically....

Depending on what kind of asset we're looking at..

So mid-teens would be fair?.

Yes..

I'll take it the next step then. Fitness. Historically, when all has been asked, even when Fitness was going really well, you'd say, people say, why are you in Fitness, it doesn't fit with Marine, your answer had been, it gives us a very good return we're the leader in that, we can have scale, we believe we can operate this business very, very well.

Now that's turned a little bit, and you're looking at things to repair that.

At what point I guess, are you earning? And how long would it take to say, hey, we can't get to that hurdle rate that we continue to need so therefore, whether we're going to spend this or we're going to sell it? How long was that decision process take?.

Well, Tim. I'd start with the answer we gave as a result of the shareholder letter this week. We've got a very robust process that we use with the board. We're constantly looking at the portfolio and the board has a very solid track record of addressing and dealing and doing the reviews and acting accordingly.

And we'd expect that looking at the - all our business portfolio wouldn't be any different on a go-forward basis..

So if the outlook for Fitness is where you can earn that mid-teens return favor that getting back to that in the next couple of years, you would look to divest or do something else with that, is that a fair assumption?.

Tim, I'm going to answer. When you look at all the fundamentals around the Fitness industry, healthcare calls, wellness, millennial's, diabetes, obesity, people, millennial's, the list goes on, the fundamentals are very good. I think one of the things we're seeing it's in industry going through a better transition.

And all businesses kind of go through that clearly the way a little more even direct. Clearly, the way when we're doing portfolio, we look at longer term views and the longer term view in the fundamentals in the industry are still good..

Okay..

Tim, this is a multifactor - what we go through is a multifactor, Mark referenced, longer term. I think to comment on any specific factor just isn't something we're going to engage in..

Lastly, just a little color, if you would, on the litigation detail, whether that's complete, warranty cost and also whether that's complete with an engine? And then the higher corporate spending that you alluded too and seems to be implied going forward..

Yes. Let me start with the first two. It's public out. I mean, we're addressing a steering pump, was the steering pump issue, so I want to make sure you know it's not an engine issue. So we had that, and we've been addressing that in the marketplace, not anything new.

The other part is that when you look at the specific litigation, it's something that goes back to over five years, back to the - when we were doing facility consolidation work post recession. So there, again, it's over five year ago issue and not around product or service or a customer or anything in that regard..

And then the….

Tim, I would just kind of - Tim, I comment to warrant that we continue to have just really exceptional warranty claims experience in that business.

Typically, recognize some level of favorability, but we probably were a little bit optimistic on what we were going to be able to recognize in the quarter based on what happened through the mechanics of accrual calculations, et cetera. So some of its just estimate differences between what we expected and what ends up happening.

So I wouldn't read anything into this that's a change in our warranty rates at all. We still have very strong warranty rates moving forward..

In corporate too?.

Corporate, we term as Q4 as Project expenses and I don't want to get into a lot of detail beyond that. I would say, moving next year, we've got things on the technology side, on IT side, that we are funding at corporate so it's more growth related and investment related than it is more corporate overhead, it's the best way that we put it..

And the next question comes from Scott Stember from CL King. Please go ahead..

Could you maybe talk about what the reception has been? What you're seeing to some of the newer predicts on the integrity line that's going on so far?.

The feedback is it's been pretty positive, there are customers now in the first quarter, we are making. They're 100%. We have some going 100% convergence happening from the prior gen product. And we're continuing to come out with, as I mentioned, in my comments, some of the console enhancements to go along with the new equipment.

So we're feeling pretty positive about the response we've been getting from customers with the new products..

And I would say, the comment I'd add is, like-for-like, the new integrity line that's available today is better than the old, but the attachment of the new console options is really going to be, I think, a bigger game-changer than just the change of a like-for-like sort of product..

Got it..

So 2018, there should be more lift from the fact that we've got new console options available. I would point out that this is a kind of a multiple event, they're not all coming out that once. They get layered in or phased in over the first half of the year..

And this experience that you're seeing, this is across the entire gamut of your distribution, whether it's some of the bigger change or discount change, or is it more towards any one of those, particularly?.

No. It goes across the entire spectrum of our customer base. Obviously, you've got the base platform of the cardio we're working off of into those points, it's improvement versus prior. But then various customers are going to add different ways they want to participate from the console and its capability.

And some of that will vary by customer mix, but they're going to have some of that capabilities to differentiate. But literally, the reception in the movement will go across the range..

And then the last questions also in Fitness. You talked about in Europe, I guess, some competitors have come out with some products that are kind of leading the way, and you sound like you're about to launch some new stuff over there as well.

Maybe just give us an estimate on the timing and whether or not any of your customers over there have seen any of the new product?.

Customers over there have seen the new product and what we've talked about the competition, we have some competitors who were pulling what would traditionally be some of the console things on higher end products down to lower end products, and we, fundamentally, as we're rolling out our new product, we had to address it through price.

And as the new product comes out now, fundamentally, it is they're seeing that new product, we have a lot of different options on how we can address that versus the options we had available with the prior product range..

And our next question comes from James Hardiman from Wedbush. Please go ahead..

So a couple of questions for me. I guess, first, I want to make sure I have the math right, and then I guess beyond that sort of a justification for the math. I think you guys called out a $0.40 to $0.50 benefit from the lower tax. I guess about $0.15 taken Sea Ray out, and then you had some FX balance sheet.

And the 2018 guide, looks like it's going up $0.25. So it seems like an apples-to-apples basis, it's coming down pretty meaningfully, maybe $0.40, somewhere in that range. So I think I heard two things.

Obviously, Fitness is coming down, but then, Mark, I think you said that you were given the tax benefits that may be some investments that you were going to make in future periods or brought back into 2018.

I guess, first, does that math shakeout? And maybe if you could quantify sort of those pieces, at least, maybe order of magnitude, Fitness piece versus just the timing piece, which I think we should probably think about slightly differently.

But then as we fast-forward 2020, it sounds like the delta there, which is also less than the tax benefit, that's all Fitness, and I'm assuming that the timing of expenditures sort of works its way out over the three-year period?.

Let me start because not all the math works that you just went through, James. So I'll try to put it together. First of all, let me deal with the easy, well, they're all the easy, but I’ll deal with the Sea Ray piece. And that is as you look at 2018 and beyond, Sea Ray wasn't in our guidance and go forward from our Investor Day of being at a loss.

So you first have to address that you can't count that on a go-forward basis. Our '18 plan was essentially Sea Ray being at breakeven. So now would be in the - our basis of the 4.20 to 4.40 is a breakeven.

The tax benefit that we said $0.40 to $0.50, and I'll just - let's keep it simple and call it $0.50, so if you take the midpoint 4.20, 4.40, $0.50, it gets us up to $4.80, and so we put half of that to my earlier comments about $0.25 moving to the $4.45, $4.65. The other half, it's really kind of in two buckets.

The Fitness portion, it's probably about $0.15 going down and the growth and investments are probably a worth about $0.10 of the favorability we get from the tax reform. So essentially, that's the math, James..

But I guess part of my question is do you get that $0.10 back, it seems like you were talking more in terms of that being a timing thing..

We'll get it back longer term because again, as Bill talked a little of some of the things from a corporate and things we're looking at, the tax reform is giving us the ability to look at some longer term investments so that we might all get kicked off and going on in 2018.

So it's not going to have a 2018 impact, and maybe even not a lot in 2019, but we would expect a future periods to benefit, yes..

Got it..

And James, I would look at it this way. We're doing more faster, should get benefits earlier but - and it derisk the plan for 2020, right, by having some incremental earnings improvement that, I would be the first to admit we haven't necessarily incorporated fully into our 2020 targets..

And then my second question here. So on the Fitness side, obviously, the biggest take away coming out of the third quarter was that that wasn't up to expectation, and we had to really sort of reset expectations on that business.

But seems to be the biggest take away of this call is well, I guess, how do we have confidence that over the course of the next year, we won't be bringing down expectations on that business again? And I guess, specifically, and I understand how dedicate it is to talk about a particular customer, but given that your - I believe, your biggest customer in Fitness side is making a decision, whether it's to stay with you or growth somewhere else some time mid-year.

How does that factor into this guidance, if it's the guidance still - I guess, for time to come from how you think about that? And does that affect how you look at the business and for some reason you might lose some contracts?.

Yes. So let me start with some of the - when we talk about some of the fourth quarter perspective. I think we've been a fairly clear. The biggest item we had in the fourth quarter was really around the freight impact.

And so I would consider that, a, call it, a rifle shot of an issue to go work around at address from either logistics, efficiency, price, whatever those equations are. So I categorize that very differently, James.

I think the second part, I would just tell you, our guidance clearly, to the customer, it doesn't assume the worst case scenario but nor does it is the assumption that everything is going to be status quo. And fundamentally, that's the manner in which we've looked at creating the guidance for Fitness..

And our next question comes from Joe Altobello from Raymond James. Please go ahead..

Quick question, I guess, I'll pick up on the Fitness or the RFP there.

What's the timing that the guys will find out about that? And where is the test now? I believe all three of your each in five locations at this point?.

Yes. A lot of the detail you really need to talk to Planet Fitness about. They have indicated that they'll make a decision in the first quarter. And they've indicated there's five locations per - and of course, we're in a five locations, so we know that piece as well.

So Joe, it's a decision they're going to make, at least, we've been told they're going to make somewhere in the first quarter..

And then secondly and more strategic, I guess, with Sea Ray soon to be gone officially, how does that change the way that you guys operate the Boat business in terms of allocating resources.

I mean, it seems like your sales outlook for '18, a little bit slower than '17, I know you probably don't get as much ASP improvement this year as you did last year.

But I would think that would Sea Ray gone that visible out of resource you can divert toward some of your other faster growing brands like Whaler or Lund for example?.

Yes, I think I'd answer it two dimensions. One of those is, obviously, it freeze up management time and focus that gets very clear. I think the other part of just how much gets freed up is a function of who the buyer is and what services are the things they want to have for some short period of time.

So some of that is still detailed, that I'll have to be worked through when they actually get to a transaction but, clearly, focused time and attention of the Boat management team gets more directed and there's goodness that comes out of that..

Joe, I'll just comment that the capital allocated to our other brands was not affected by the presence of Sea Ray in the portfolio. Our investments were very much on what brands required and not necessarily tilting investment towards one brand as the expense of others..

And our next question comes from Joseph Spak from RBC. Please go ahead..

First one, I guess, a couple of just housekeeping.

Sorry if I missed this, but can you quantify the impact in Marine Engine this quarter, ideally between, let's say, like warranty litigation and then the investments? So what was sort of more for the business and what was more out of the ordinary?.

Joe, that's kind of a low to mid-single-digit millions sort of number that affected comparables between years..

And then just to follow-up on the RFP.

I understand that's somewhat out of your control but can you remind us of what's embedded in your guidance for '18? And I guess, after '20 in terms of your retention?.

Yes. I'm going to just repeat what I said before, and that is we haven't assumed the worst case scenario, nor have we assumed that everything remains the status quo, and that's really how we've given our guidance for 2018..

Okay. And then just….

Joe, if you look at top line assumptions of low single-digits and flat operating margins, we certainly incorporated some change, but we're not going to get into the details of what's there because then we start having to deal with the variables about we've got in for other things as well. I think the top-level kind of speaks for itself..

And just to circle back on a topic you're talking about before in terms of returns in Fitness. Look obviously, they're lower than they were and we don't have access to the complete maybe financial picture as you do.

But if we look at just returns on the assets by sort of segment, as you described, there's clearly a wide gap now between Marine and Fitness. And it used to be narrower and so maybe you can get back to that. That gap still - it seems like it was always persistent.

So I guess, the question is I know you're not the constrained for capital per se, but how do you really think about and/or justify commenting that incremental dollar capital when that return profile even in sort of the best case, was always different and lacking?.

One thing I'd point out, Joe, is that the Fitness business compared to some of the Marine assets, still carries considerable amount of acquisition intangibles associated from the original purchase of Fitness combined with other acquisitions we've made along the way. So in some ways, you're dealing with apples and oranges between the two comps.

That being said, we fully recognize that in a business where margins have declined by 300 basis points in a low growth, we're in a position where returns on invested capital, especially when combined on asset levels with intangibles are some place where we need to go to work to improve.

And then I think our plans address incremental improvements in margins and a top line growth without a material level of investment required to make that happen. So I think most of the money we need to have spent has already been spent to drive the growth. Now it's just a matter of whether we monetize those investments or not..

And I realize ROA's isn't imperfect measures to my point to what we have.

But I mean, I guess, so to your point, the plan assumes that if you can fix this business, you can drive the growth, and then really ROIC between the Marine and Fitness is pretty negligible?.

Well, I think realistically, Joe, the ROI's of Fitness will never approach for Mercury's are given the acquisition intangibles. I think our plan is based upon driving improvement in ROI seized over time.

And if we're able to accomplish it, that we think we generates - that being said, I'm not going necessarily engage in a conversation on to specific targets of what sort of ROICs we are looking for by segments and what might be embedded in portfolio decisions we make..

Thank you. This concludes the Q&A session. I'll now turn the call back over to Mark for final remarks..

Yes, I just want to thank everyone for your time and focus, attention, some very meaningful questions as we went through this. 2017 is reported and done and quite frankly, our focus is all around 2018. We think we've got some really exciting things coming on, on the engine side of the equation.

We're encouraged by all the interest we've been seeing on the Sea Ray side, and as we mentioned before the Fitness business, the new products there and the maturing of that, and the technology strategies that go with it, all to us point some very positive things for 2018. And I thank you..

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