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Edited Transcript of BC earnings conference call or presentation 30-Jan-20 4:00pm GMT

Q4 2019 Brunswick Corp Earnings Call

LAKE FOREST Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Brunswick Corp earnings conference call or presentation Thursday, January 30, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander F. Marchetti

Brunswick Corporation - Senior Director of IR

* David M. Foulkes

Brunswick Corporation - CEO & Director

* Ryan M. Gwillim

Brunswick Corporation - VP of Finance & Treasurer

* William L. Metzger

Brunswick Corporation - Senior VP & CFO

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Conference Call Participants

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* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* James Lloyd Hardiman

Wedbush Securities Inc., Research Division - MD of Equity Research

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Steven Emanuel Zaccone

JP Morgan Chase & Co, Research Division - Analyst

* Timothy Andrew Conder

Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Brunswick Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Al Marchetti, Senior Director, Investor Relations.

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Alexander F. Marchetti, Brunswick Corporation - Senior Director of IR [2]

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Good morning, and thank you for joining us. On the call this morning are Dave Foulkes, Brunswick's CEO; Bill Metzger, CFO; and Ryan Gwillim, Vice President, Finance and Treasurer.

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

As a reminder, on June 27, 2019, Brunswick completed the sale of its Fitness business. Starting with the second quarter of 2019, the historical and future results of this business are now reported 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 now like to turn the call over to Dave.

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David M. Foulkes, Brunswick Corporation - CEO & Director [3]

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Thanks, Al, and good morning, everybody. 2019 was a very successful year for Brunswick and our shareholders. We delivered record earnings for the 10th consecutive year, substantially grew margins, made significant additions to our product portfolio, manufacturing capacity and technology platforms, completed meaningful cost reduction actions and have emerged as the world's premier recreational marine company.

Our solid fourth quarter performance reflects the continued successful execution of our marine strategy and reinforces the tremendous confidence we have in the future growth opportunities within each of our businesses. The more favorable retail trends in the U.S. persisted in the quarter and together with planned lower wholesale shipment activity, resulted in us achieving our stated goals of lower field inventory than 2018 and relatively flat pipelines on a weeks-on-hand basis.

Aside from our updated estimates on tariffs, our views on our 2020 financial goals have not changed, and I have a high degree of confidence that we will execute our strategy and deliver strong shareholder returns in 2020. We started the year off an exciting fashion with a spectacular debut at CES and new product launches at early boat shows, and I look forward to leading Brunswick through further successes in our first full year as an integrated marine powerhouse.

I'll now provide some highlights on our segments and the overall marine market. The Marine Engine segment had tremendous success in 2019, again, posting record earnings and significant margin increases. This was in the face of approximately $25 million of headwinds from unfavorable changes in foreign currency rates and tariffs, partially mitigated by a full year of solid performance by power products.

Demand for higher horsepower outboard engines remains particularly strong, especially in the 175- to 300-horsepower categories introduced in 2018,and the 400- and 500-horsepower engines released in 2019. During the fourth quarter, we brought online additional capacity, allowing us to manufacture significantly more of these engines in 2020 with dealers and international channels already seeing some of the benefits in the fourth quarter.

We also continue to expand our outboard engine presence in saltwater markets. Our industry-leading engine lineup was on full display at the Fort Lauderdale boat show, where we, again, had a leading engine share, and we plan to continue our success at Miami in 2 weeks.

Finally, in December, we announced the formation of the Advanced Systems Group, which is comprised of the Power Products brands and the Attwood group of businesses, which include Attwood, Whale, Garelick and MotorGuide. Power Products continues to perform in line with our expectations and is accretive to the overall growth and margins of the Parts and Accessories portfolio. Brett Dibkey, who joined us at the start of the year from Whirlpool, will be leading ASG and brings a great combination of talent and relevant experience to deliver future growth in these outstanding businesses.

In the Boat segment, revenue and earnings in 2019 were lower as anticipated, but we are primed for sizable improvement in 2020 due to our new products, focus on operating efficiency and wholesale volume improvements enabled by the lowering of pipeline inventories in 2019 to appropriate levels.

Our premium boat brands, including Boston Whaler, Sea Ray and Lund, all performed strongly at retail in their key product categories. Sea Ray also had strong wholesale sales growth with larger, higher content product driving the improved sales. As we discussed on recent calls, Boston Whaler continues to have very strong retail momentum as we exit 2019. However, wholesale sales in the second half of the year faced challenging comparisons versus 2018. In 2019, the business has been leaning pipelines in advance of new product introductions in 2020 compared to strong pipeline increases in 2018 due to the introduction of new rail models. As we enter 2020 with a substantial offering of new products, we anticipate a very strong retail and wholesale performance from this brand in the upcoming year.

The Boat business continues to focus on product leadership and expanding operating margins. The cost reduction and organizational initiatives that we undertook in the back half of 2019 are already driving efficiencies and allowing us to fully leverage our scale and drive operational excellence. Sharing knowledge, engineering capabilities and best practices across brands is enhancing our product and technology development and design excellence while lowering related costs and accelerating time to market.

Lastly, Freedom Boat Club celebrated the opening of its 200th franchise location early in the quarter, on its way to a current total of 210 locations and continues to perform as anticipated. Freedom was also named as a top 500 Franchise with the top spot in the miscellaneous recreational business category by Entrepreneur magazine, which is a further testament to the substantial opportunities associated with this business.

Next, I would like to review the year-to-date sales performance of our segments by region on a constant currency basis, excluding acquisitions. In the U.S., total revenues were down 4% while international sales in total were up 4%. International sales for the Engine segment increased by 6% with gains in all regions except Canada. The Engine segment performance relates mostly to increased demand for 175- to 300-horsepower engines.

Boat segment international sales were down 4%. As expected, European sales continue to be lower due to slower market condition and the supply constraint caused by the transition from a contract manufacturing relationship that we noted at the beginning of the year. This capacity is anticipated to be fully recovered as we exit 2020 as a result of production expansion efforts at our manufacturing facility in Portugal with minimal investment.

Finally, Canadian Boat revenue remained flat versus prior year.

This table provides some color on the performance of the U.S. marine retail market. In the fourth quarter, which comprises only 10% of the total sales for the year, retail trends continue to be slightly ahead of our expectations. For the second half of 2019, retail sales of outboard boats were up 3%,while the main powerboat segments were up 1%. Outboard engine sales were up 1% for the year. SSI data for the main powerboat segments was down 4% for the year. NMMA outboard engine unit registrations are up slightly year-to-date with outboards, 150 horsepower and above, up 9% for the year. These results reflect the softness experienced in value pontoon and aluminum fish categories in the first half of the year and strength in premium offerings, which is generating dollar growth that is outpacing unit performance.

We remain confident in the retail market environment as we move into 2020. Dealer sentiment is positive with well-positioned pipeline inventories and strong early season dealership traffic. We believe that retail unit growth for both U.S. and global markets will be flat to slightly positive in 2020 with outperformance of premium offerings, again, benefiting dollar growth.

2019 was also a very significant year for capital strategy actions. As anticipated, we completed the remainder of our $400 million share repurchase commitment in the quarter, which, together with the purchase of Freedom Boat Club in May, fully deploys the proceeds from the Fitness sale. In addition, we completed the exit of our defined benefit pension plans, retired $300 million of near-term debt through the retirement of our 2021 notes and refinancing of acquisition-related debt, raised dividends and invested over $350 million in growth-related R&D and capital expenditures.

Our year-end balance sheet position and cash flow generation capabilities continue to afford us the opportunity to deploy capital in a variety of ways depending on market conditions, including for acquisitions, capacity enhancements, debt reduction or further share repurchases. Bill will speak more on our specific plans for 2020 during his outlook section later on this call.

I'll now turn the call over to Bill for additional comments on our financial performance.

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [4]

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Thanks, Dave. For the full year, net sales were up 1% versus 2018 with acquisitions providing 4 points of growth. Operating earnings on an as-adjusted basis increased by 6% with solid margin expansion of 50 basis points. We finished the year with an adjusted EPS of $4.33 per share, which exceeded our most recent guidance. This reflected a more favorable tax rate and strong execution by our businesses, particularly Mercury. As anticipated, fourth quarter sales were down 4% with slight decreases in operating earnings and margin. Our operating deleverage reflects the timing of some tariff-related activity in 2018, which I will address in upcoming comments.

In the Marine Engine segment, revenue was relatively consistent with Q4 of 2018 as continued robust demand for higher horsepower outboard engines, especially in dealer and international sales channels, and gains in P&A sales led by solid growth at Power Products were offset by anticipated softness in outboard engines, 150 horsepower and below, in sterndrive engines. For the full year, Mercury sales were up 3% with Power Products contributing 5% of growth.

Mercury's adjusted operating margins and operating earnings were also slightly lower in the quarter as comparisons between years were unfavorably influenced by the impact of a tariff exemption received in December 2018. For the full year, adjusted operating margins increased by a substantial 100 basis points, outpacing our expectations. This performance included contributions from Power Products, improving sales mix and operating efficiency gains, which exceeded the impact of tariffs and unfavorable changes in foreign exchange rates.

In the Boat segment, adjusted revenues were lower by 15% in the fourth quarter as we completed our planned pipeline rebalancing efforts. For the full year, sales were lower by 6% versus 2018 but were in line with our revised expectations from July. By category in the quarter, aluminum freshwater sales were down primarily due to planned reductions in value pontoons and aluminum fish products; recreational fiberglass remained essentially flat; and saltwater fishing performance was lower but in line with our expectations due to the wholesale and pipeline dynamics Dave described earlier. Wholesale units sold in the fourth quarter were down 21% versus Q4 2018 with a 13% decrease for the full year. Average selling prices increased, reflecting a more favorable mix and expanded content on boats.

Margins for the fourth quarter and full year decreased versus prior year periods due to several factors, including pressure from the impact of lower volume and production rates, plant inefficiencies due in part to new product integrations, higher retail discounts in previous quarters required a lower pipelines during the second half of the year, the impact of these factors exceeding benefits from cost reduction and operation excellence initiatives, which will also contribute to margin growth in future years.

Pipelines are well positioned as we start the year and enter the boat show season. Dealer pipelines ended the year with 36.6 weeks of boats on hand measured on a trailing 12-month basis, which is essentially in line with year-end 2018 levels. However, on a unit basis, field inventory is down 7% versus the end of 2018. In 2020, our plan assumes that pipelines will decrease slightly.

Our fourth quarter continuing operations GAAP results also reflect the impact of certain items that are excluded from our as-adjusted results. In operating earnings, these include restructuring, exit, impairment and other charges in the quarter, totaling $3.8 million primarily related to our previously announced structural cost reductions taken across the enterprise. In addition, we incurred $7.5 million of purchase accounting amortization in connection with the Power Products and Freedom Boat Club acquisitions. Finally, we recorded $4.9 million of charges related to the legacy's sport yacht and yacht products.

Moving to 2020 and guidance for the year. We anticipate diluted EPS as adjusted of between $5.10 and $5.40 per share, taking into account our view of the market, our cost reduction efforts in '19 as well as some of the more recent tariff developments, which I discuss on the next slide. We believe that the 4 main EPS drivers that we have discussed on our last few calls, namely, the impact from successful execution of our capital strategy, additional 175-plus horsepower outboard engine capacity, normal P&A seasonal demand and our diligent management of pipeline inventory levels, each remain intact and support our view on EPS.

Our plan contemplates revenue growth of between 6% and 8%, operating margin improvements of between 40 and 60 basis points, continuing the favorable margin trends from recent years. Operating expenses should decrease as a percentage of sales due in part to the full year impact of the cost measures taken in 2019. We are also projecting low double-digit percent growth in operating earnings and free cash flow in excess of 3 dollars and -- $325 million.

First quarter revenue growth of low single digits will under-index to the full year expectations. This is due mostly to the timing of wholesale shipments in 2019 and the significant reductions in the second half of the year. EPS in the first quarter will increase by high single-digit percent versus Q1 2019 mostly due to benefits from 2019 share repurchases.

Moving to tariffs. We anticipate a net impact to 2020 pretax earnings of between $30 million and $35 million or $10 million to $15 million incremental to the 2019 impact. The incremental impact is due solely to our Wave 1 exemption on the 40- to 60-horsepower engines not being extended into 2020. As you likely know, very few exemptions were extended. We are highly disappointed in this outcome and would note that our non-U. S. engine competitors import cost is not affected by these tariffs, despite utilizing the very same Chinese supply chain for engine components.

Otherwise, there are no changes to our tariff assumptions. We're anticipating Wave 1 through 3 tariffs staying at the 25% rate and that any Wave 4 tariffs will not have any material impact on our businesses. We're not assuming any additional tariff exemptions being granted, although we do have several Wave 3 exemptions still under review by the USTR, which could total up to $5 million of -- in relief if fully granted.

On the Boat side, the impact of retaliatory tariffs on boat exports to the EU remains unchanged and incorporated into our plan. We continue to proactively take actions to minimize the impact of tariffs on our businesses, which are included in our estimates, and we're evaluating alternative manufacturing and supply chain strategies to further mitigate the impacts.

I will conclude with an update on certain items that will impact our P&L and cash flow for 2020. We're anticipating free cash flow for the year in excess of $325 million and our free cash flow conversion will approach 80%. We expect to use between $30 million and $50 million of cash for working capital for the year and incur between $120 million and $130 million of depreciation and amortization. Our effective tax rate is estimated to be between 21% and 22% for the year, and the cash tax rate is anticipated to be in the low to mid-teens percent range. Finally, including the impact of the $400 million of share repurchases completed in '19, along with planned repurchases in 2020, our average shares outstanding for 2020 will be approximately 79.5 million shares.

We will execute our balanced capital strategy in 2020, leveraging our strong free cash flow generation. We plan to retire approximately $100 million of our long term -- of our term loan obligations and expect to lower our debt-to-EBITDA ratio to less than 1.5x on a gross basis by the end of the year. Our net interest expense is estimated to be about $65 million for the year. We anticipate spending between 20 -- $200 million and $220 million on capital expenditures throughout the year, including investments in new product in our Engine, P&A and premium Boat businesses, cost reduction and automation projects and additional capacity in our Propulsion business. Finally, we plan to return to a systematic approach to share repurchases, and our plan includes $100 million of repurchases in 2020 spread relatively evenly across the year.

I'll now turn the call back to Dave to continue our outlook comments.

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David M. Foulkes, Brunswick Corporation - CEO & Director [5]

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Thanks, Bill. I'd like to provide some commentary on our new segment reporting, which we signaled on our third quarter call. During 2019, Brunswick implemented a series of strategic and organizational initiatives to sharpen the focus of the company on the recreational marine market and adjacent opportunities. Starting in 2020, the company's strategies are now focused on 4 business pillars: Propulsion, Parts and Accessories, Boats and Business Acceleration.

As a result, the existing Marine Engine segment will now be broken into 2 segments beginning in the first quarter of 2020: the Propulsion segment, which will contain both outboard and sterndrive engine businesses, along with controls and rigging products, which are closely associated with our Propulsion businesses; and the P&A segment, which will contain all of the P&A categories, including engine parts and consumables, electrical products, boat parts and systems and our distribution business. Concurrent with this change, the company has also decided to change its measurement of segment profit and loss due to a decision to streamline internal and external reporting practices related to Marine Engine sold from the Propulsion segment to the Boat segment. This change in presentation, which is not the result of a change in business practice, more closely follows current market dynamics and provides improved comparability with other boat companies.

Consistent with past practice, we have provided select historical information reflecting this new reporting structure in today's Form 8-K. We believe that these changes will allow investors to more clearly evaluate the performance and value of each business, especially the aftermarket-focused P&A business, which contributes nearly half of the earnings of the corporation.

Moving to our outlook by segment under the new structure. 2020 is setting up to be a fantastic year for all of our businesses. For our Propulsion segment, we anticipate net sales growth for the first -- for the year of between 6% to 8% with operating margins that are flat to up slightly versus 2019. We expect earnings growth, even with currency headwinds and the significant incremental tariff impact that Bill discussed earlier.

Our top priority for this segment continues to be satisfying outboard engine demand and expanding market share, especially in the greater-than-175 horsepower categories enabled by the added production capacity now online for higher horsepower engines. We also anticipate additional margin benefits as we satisfy greater levels of demand in the dealer, repower and international channels. We remain focused on developing new platforms and technology for our engines and related control systems and are investing in a robust new product pipeline to enable top line and earnings growth into the future.

Finally, we remain committed to delivering improved technology and performance in our sterndrive and inboard lineup of engines. Although a much smaller component of our business versus a decade ago, these products serve a loyal customer base, and it remains our goal to retain our market leadership position in this category.

Turning to our Parts and Accessories segment. We anticipate organic net sales growth of between 4% and 6% accompanied by solid margin improvement. As a reminder, operating margins in this segment were just shy of 20% in 2019 with more than 75% of segment revenues derived from the aftermarket. If you include the controls and rigging business, which is now part of the Propulsion segment, operating margins were in the low 20% range, consistent with what we've articulated in the past. We will continue to concentrate our M&A efforts in this area as we have the ability to build out our technology stack and fill white space product areas through acquisitions. Potential bolt-on deals in this area are generally in the $20 million to $50 million range, which could be funded from free cash flow.

The growth of Power Products, which is now part of the Advanced Systems Group as I discussed earlier, continues to outpace the rest of our P&A business and should benefit from more normal aftermarket demand and improved OEM outlook in 2020, along with new products and other business opportunities. Our Attwood group, which is the other portion of ASG, also plans to leverage new products and a streamlined operating model to increase margins and earnings this year. We're very excited and confident in the outlook and growth opportunities for this business under Brett's leadership.

Finally, our Boat business is keenly focused on improving operational performance and completing significant product launches and integrations in 2020, the combination of which should lead to top line growth of between 6% and 8% and strong improvement in operating earnings and margins. Including the change in the reporting segments I discussed earlier, we anticipate exiting 2021 with double-digit margins in this segment. In Miami in a few weeks, we will give further information on how we can reach even more aggressive margin targets by the end of our new 3-year plan.

Our efforts in the back half of 2019 to manage pipeline inventory levels put us in a favorable position entering this year with 2020 wholesale sales expected to be -- to more closely match retail sales for the year, resulting in top line growth versus 2019. Additionally, our structural cost reductions as well as the strategic actions within this segment that I referenced earlier in the call will both provide benefits to our margin expansion plans in 2020 and beyond.

We will continue to expand Freedom Boat Club and execute against its strategic growth strategy. We anticipate adding another 30 locations in 2020 and capitalizing on our synergy opportunities. Notably, the Freedom fleet conversion to Brunswick Boats and Mercury engines is ahead of plan, and we anticipate strong sales into the franchisee base in 2020.

Lastly, as shown in Fort Lauderdale with the launch of the Boston Whaler 315 and 405 Conquest models at CES, where we debuted the Sea Ray SLX-R 400e, and in New York with the Whaler 280 Vantage launch, our aggressive new product cadence is generating additional higher margin sales and capturing market share. Although the integration of these new products will likely result in a slight operational headwind during the first half of the year, these new products leverage technology capabilities from across our integrated marine platform that enable users to more easily enjoy their day on the water.

Finally, as many of you know, Brunswick exhibited for the first time at the Consumer Electronics Show in 2020, showcasing our technology on a global stage. We not only launched the new Sea Ray SLX-R 400e with our unique Fathom power management system, but our team created a concept helm that illustrated what the future of boating could look like. The exhibit was awarded an A+ grade, and we engaged with more than 40 potential partners that are interested in collaborating with us in areas such as artificial intelligence, sensors, autonomy and more. The traffic in our exhibit far exceeded our expectations, and we counted anywhere between 30 and 60 people per minute taking pictures in our exhibit, 8 hours a day for 4 days. We also garnered national media attention and still have more stories in the queue. CES 2020 was so successful that we have already signed up for CES 2021. In case you're wondering, yes, we sold the boats on display, it will be delivered after the Miami boat show. Two people said that they wanted that exact boat, and we have taken orders for several more just like it.

In closing, we had record earnings in 2019 and are proud of what we accomplished as a company, but our focus has now turned to 2020 and beyond. We will introduce an updated 2020 to 2022 strategic plan at our Investor Day in Miami on Tuesday, February 11 and hope you will join us for this event.

2020 is our first full year of operations as an integrated marine enterprise. We have the best recreational marine brands in the world, the most capable workforce and a streamlined strategy that has positioned us for success in any economic environment. We plan on executing against our strategic plan and delivering shareholder returns consistent with our long-term goals. We're confident that you will see that innovation and inspiration on water isn't just a phase, but it's the purpose that separates us from all other companies in our space and drives us to deliver the best on-water experiences for our customers, which in turn will create and sustain lasting value for all our stakeholders.

I'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from James Hardiman with Wedbush.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [2]

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It was a strong finish to the year, so I figure I'd start with a nitpick here. So inventory 3 months ago, you said you thought they'd be flat to down in terms of weeks on hand. It seems like the retail environment was, if anything, better than expected. They finished up just a hair. What's the difference there?

And then as I think about competitive inventory levels, I think -- certainly, the checks that we've done would suggest that you guys have been a lot more aggressive maybe than some of your peers. Is there any concern that, that could create sort of a heightened competitive environment here in 2020?

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David M. Foulkes, Brunswick Corporation - CEO & Director [3]

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James, and thanks for joining us. Yes, I think it's not possible for us to manage inventories down to the nearest 0.1. But I would tell you, given the start to the retail season in 2020, I'm pleased that we finished slightly on the upside versus slightly on the downside because I think that we have a potential risk of -- it's more of a risk of it's not having enough than there is of having too much right now. So I think we managed very diligently. We managed units down very well. Managing exactly to the 10ths of a week is probably -- is not something we can do. But I think to all intents and purposes, we finished as we planned, and I have no problem with that very slight kind of half a week.

I think what we've seen more broadly across our competitors is good behavior. I think some started a little later than we did coming down. So I don't see, broadly across the industry, that excess inventory of competitors is going to be a hurdle for us going into the year.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [4]

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Okay. And should I interpret the first answer as you feel a little bit better about where demand is likely to go than maybe you did 3 months ago?

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David M. Foulkes, Brunswick Corporation - CEO & Director [5]

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Yes. You should interpret it that way. I think early season dealer traffic has been good, boat shows have been good and dealer sentiment is positive. So I would say that the season is off to a good start for us. And yes, so that's a good interpretation. I'm glad we are where we are.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [6]

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Got it. And then I think you essentially answered this. But the incremental tariff on the 40- to 60-horsepower outboards, that request actually got denied. Or have you just not gotten any approval yet? I guess I'm asking, is there any chance that, that could come back? It sounds like the answer to that question is no. Is that the way to think about it?

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David M. Foulkes, Brunswick Corporation - CEO & Director [7]

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Yes. So I think the process, as it turns out, is different every time. And when we first were granted the exemption, the U.S. was speaking with companies individually. This time, of this, I think, several hundred extension requests, only a handful were granted. And the message that we got was that, that was it. So I don't know if we actually finally got a company communication, but the message that we have is that no further exemptions are on the table.

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Operator [8]

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And our next question comes from Craig Kennison with Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [9]

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And congratulations on a big year last year. Bill, I had a question on gross margin. Is there any way you can frame gross margin for both Propulsion and the P&A segment? I know you're not going to give me a precise number, but any light you can shed there would help us build our models.

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [10]

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Craig, we really don't get to that level of specificity in anything that we report externally. I think we do talk generally about kind of how things may index above or below the boat companies, where I think we've been pretty clear with people, under-indexed overall to company gross margins. The Propulsion business is more in line, maybe a bit more favorable that -- to company margins. And then the P&A business, the new P&A segment would over-index to overall company margins.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [11]

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Okay. And then Dave, a question for you. I mean there have been just so many changes here, including changes in the Boat Group, and I'm just trying to maybe wrap my head around it. But you've made changes to the Aluminum Boat Group and then the Technology Center. I'm wondering if you can provide an anecdote or 2 that'll help illustrate what those changes have created from a product standpoint.

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David M. Foulkes, Brunswick Corporation - CEO & Director [12]

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Yes. Craig, and thank you for joining us, too. Yes, I think the way to think about this is that we are continuing to build strong brands, but it's brand focused as opposed to individual businesses. So we see a lot of benefits in consolidating some of the kind of back-end operations, if you like, of the closely related businesses to leverage scale and increase the expertise available to all of our brands.

So the Aluminum Boat Group, which is Lund, Lowe, Crestliner, Harris, a lot of commonality around operations, a lot of need to enhance the digital marketing, which is not necessarily possible on individual brand basis but is very possible on a collective basis. So -- and then on the value fiberglass side, we formed a venture group to achieve something similar. So this is really about making sure we have strong brands, but we leverage our scale and bring to bear the highest possible of level of expertise through leverage kind of back-end operations, if you like.

So the 2 brands that we have not done that fully on yet are -- or don't intend to do are Sea Ray and Whaler. They have very strong kind of individual operations.

But we have put together the fiberglass tech center, which is serving both of those brands. And you will see, possibly already seen, but certainly will see over the next year, the rate at which that tech center can push out new products for both of those brands and others is extremely high. And we have 160 engineers and technicians in that group now. That is more horsepower than any other company can bring to bear in that kind of product line. So think about it as maintaining strong brands, leveraging infrastructure, improving capability and -- but sharing best practices.

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Operator [13]

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And our next question comes from Michael Swartz with SunTrust.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [14]

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David, I just wanted to talk about your commentary around the -- your retail expectations for 2020. I think you've said flat to low single-digit growth. Just, I guess, a point of clarification. Is that global growth or U.S. growth? And then how to think about the cadence of retail through 2020?

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David M. Foulkes, Brunswick Corporation - CEO & Director [15]

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Yes. It's a global view. So I think, typically, the U.S. over-indexes. Probably U.S. will -- Europe will probably under-index a bit, but it's broadly global.

In terms of cadence, I guess, versus last year, we were, at this point in the year, still anticipating a stronger first half to the year than we actually achieved. So we were still building wholesale, and the retail activity obviously didn't emerge quite as we expected it to. So I think this year will be a much more balanced year. We go in with lower pipelines. So I think we'll better match wholesale and retail throughout the year this year. Obviously, we'll still be building inventory in the first part of the year to serve the demand of the peak season, but I expect just an overall more balanced wholesale and retail across all quarters.

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [16]

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I think, Michael, the only thing I'd add to that is that I think we're kind of expecting or anticipating more normal seasonality, and 2019 probably didn't have -- exhibit kind of normal seasonality. It was a bit more back-end loaded than front-end loaded. On the retail side, wholesale was exactly the opposite, more front-end loaded than back-end loaded. So I think as you look at wholesale comparisons, '19 to '20, the comps get to be a little bit more challenging in the first half, back half obviously much more favorable. On the retail side, the performance in the back half of the year was a little bit more -- or the front half of '19, a bit more challenged. We'd expect maybe the comps to be a little bit more favorable in the first half of the year.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [17]

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Okay. Great. That's very helpful. And then just maybe -- I think you've given us the total tariff impact you expect for 2020 and then the incremental versus '19. I guess how much of that increase was due solely to not getting the exemptions on the smaller horsepower engines? If I go back to '18, I think the number was some kind of in the high teens millions as far as that impact. Is that still the way to think about it from just that piece?

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Ryan M. Gwillim, Brunswick Corporation - VP of Finance & Treasurer [18]

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No. Mike, this is Ryan. The way to think of it is $10 million to $15 million incremental for the year, and it is all related to the 40- to 60-horsepower exemption not being renewed. There's a little difference in volume. There's a little bit of difference in how many engines we had on the way over here and inventory position. So it's within a margin of error. But $10 million to 15 million is the best way to think of it.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [19]

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Okay. Great. Great. And then, David, I think in your closing comments, you had mentioned on the Boat group, you think you can get the margins back to double digits by 2021. I guess that caught me a little off guard. So maybe -- and I'm sure we'll get more color in Miami. But maybe give us a sense of some of the larger levers you can pull getting there because I think the guidance for this year implies 8.5%, so -- 8.5%-plus. So that seems like a pretty big jump.

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David M. Foulkes, Brunswick Corporation - CEO & Director [20]

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Yes. So I think we've articulated the kind of things that we're doing in the Boat group around a couple of areas. One is, as I referenced with Craig earlier, we have significantly leaned out the Boat Group organization, including the management structure. So SG&A levels will be significantly lower, especially as we get into this year and beyond, and we see a full year effect of the actions that we took in the back half of 2019. And then we have a lot going on operational excellence and supply chain management that we will reap significant benefits from in this year and next year as well. And that is -- those are progressive benefits that will build over time, if you like. We also have some additional capacity in place that allows us to build more of that higher-content, larger boat product that is helpful to margins for us. And of course, in the -- just in the last 3 months, Boston Whaler, which was leaning out its pipelines ahead of product introductions, has already introduced 3 brand-new models. And that is just the start for Whaler, and there's more to come from our other brands as well. So I think a lot of efficiency in operating model, SG&A, in our plants and our supply chain and then some very nice new product coming through as well.

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Operator [21]

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And our next question comes from Steve Zaccone with JPMorgan.

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Steven Emanuel Zaccone, JP Morgan Chase & Co, Research Division - Analyst [22]

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David, first question was just on the marine industry, following up on the first question today. Where do we stand on the health of channel inventories when you segment value versus premium or maybe saltwater markets versus freshwater markets? All markets pretty are stable? Or are there some areas where maybe inventory is still a little bit high?

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David M. Foulkes, Brunswick Corporation - CEO & Director [23]

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I think that -- I think we've done a pretty good job of bringing inventory down in all segments, and I think I mentioned on the last call that what we've been trying to achieve is not just an aggregate number. It is a by-segment number as far as we possibly can, making sure that our inventories are in line with anticipated needs for 2020. I would say that the sell-through of premium products at the back half of 2019 in retail was probably a little higher than we anticipated. And in some earnings calls earlier, you probably heard a little bit more about that. But -- so I would say that we are below average on premium product, particularly Whaler, but really, we're not in bad shape anywhere.

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Steven Emanuel Zaccone, JP Morgan Chase & Co, Research Division - Analyst [24]

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Great. And then just the second question was just talking through the top line expectations for the Boat segment through the year. Any help around thinking about performance by specific category?

And then one clarification within that segment. How much revenue should we be expecting from the Business Acceleration division? Just trying to figure out what the organic growth rate is for the Boat segment versus the guided 6% to 8%.

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David M. Foulkes, Brunswick Corporation - CEO & Director [25]

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Okay. So Bill, do you want to answer the last one?

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [26]

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Right. I think it's going to be pretty similar to what it was this year, which is a couple of points.

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Ryan M. Gwillim, Brunswick Corporation - VP of Finance & Treasurer [27]

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Yes. That's exactly right, a couple of points, full year for Freedom.

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David M. Foulkes, Brunswick Corporation - CEO & Director [28]

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Revenue acceleration for the Boat group by segment, I think Whaler will be particularly strong for us. But our other premium brands, we're anticipating good years for as well. So we're expecting everybody to contribute here. We -- the realignment of wholesale and retail, given our -- the wholesale was so far behind retail in the back of 2019, I think, allows a lot of options for -- a lot of possibilities across our brands. But I would say the premium brands, again, will be particularly strong.

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Operator [29]

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And our next question comes from Tim Conder with Wells Fargo.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [30]

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Congrats on wrapping a strong year. Just a couple here, if I may. The Freedom Boat Club, how -- you commented that the adoption of Brunswick products is maybe trending a little bit ahead of your expectations, and I think you said also 210 locations or franchises by the end of 2020 from the current 200. So what do you have built into that 6% to 8% growth that -- due to the conversion or a picking up of Brunswick products by those locations?

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David M. Foulkes, Brunswick Corporation - CEO & Director [31]

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So yes, Tim. So we just achieved 210 locations. We're expecting probably another 30 this year. So we'll be up in the 230, 240 range by the end of the year. Yes, the conversion rates, we've been very, very pleased, engaging with our franchisees on the very compelling product and service offerings that we can provide and the uptake of both our Boat products and our Engine products has been very, very strong. So that's really good.

As we mentioned earlier, the fleet size of Freedom is roughly in the 2,500 range. It turns over every kind of 2 to 3 years. So you can expect roughly 800 new boats into the franchise every year, and we're expecting to become a significant portion of that. The rate that we'll accelerate, we'll be accelerating more strongly in probably '20 back half of this year and 2021, but we'll make good progress already in 2020. I'm not going to give you an exact number here, but we'll make strong progress in penetrating that 800 this year, both on the Boat side and more on the Engine side.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [32]

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Okay. Okay. No. Helpful, David. And then gentlemen, how would you frame -- I mean you narrowed your -- the range to your guidance kept your midpoint the same, despite the incremental tariffs being folded in there. But how would you frame, at this point, the upside/downside scenarios? Let's just say if the marine industry globally is down $5 or plus $5 versus you're kind of saying globally flat to maybe slightly up. What if we hit that down $5, plus $5? Or is that $5.10, $5.40 still achievable? Or would we fall outside of that range under the down $5, plus $5 scenario?

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David M. Foulkes, Brunswick Corporation - CEO & Director [33]

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Yes. So yes, Tim, so we -- as we set our guidance, we go through a list of risks in ops for the year, and we make an assessment. And I think what we have in place here is a very balanced assessment that includes considerations of potential downside and potential upsides to the market and various other factors. So I would say that we -- our guidance is robust, and we've considered various scenarios, obviously not extreme scenarios, but certainly plausible scenarios on the up and downside.

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [34]

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I think it kind of depends, Tim, of what other things accompany a market adjustment and how much of our portfolio is adjusted. I think we consider some of the opportunities on the premium boat side, high horsepower engines and things like that, not to be potentially as variable as overall market might be. If the 5% market difference in kind of the value end similar to what we experienced this year, our ability to manage the cost structure and things like that, I think, is pretty reasonable, and you could stay within that $5.10 area in that sort of scenario but -- with things like currency and tariffs and other parts of the market start to get influence and gets to be a little bit more difficult. But I think in general, when we've set a bottom end of the guidance range, we generally have tried to understand what sort of things do we need to compensate for, and we feel pretty comfortable that we've got a pretty balanced view of that, given what we know today.

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Ryan M. Gwillim, Brunswick Corporation - VP of Finance & Treasurer [35]

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So one of the -- remember -- Tim, remember also that when we went back to the dollar that took you from the $4.25 midpoint to the $5.25 midpoint, about $0.40 of that was capital strategy, which is relatively already completed due to the share repurchases last year. So there's a little bit more certainty on that piece because it relies on actions that have already been taken.

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Operator [36]

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Our next question comes from Eric Wold with B. Riley.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [37]

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A couple of questions. I guess one follow-up on the last one around the guidance for 2020. So obviously, you kept the midpoint of the range unchanged with the incremental tariffs being in there. I guess, what was the main factor that -- or factors that allows you to kind of absorb that incremental 10 to 15 because obviously now you're giving some better outlook on the sales side. Is the sales growth a little bit more robust than you would've thought, given what you've done to the pipeline, et cetera? Or kind of maybe what were the factors that are going to kept that -- and will keep that unchanged?

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David M. Foulkes, Brunswick Corporation - CEO & Director [38]

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Well, I think certainly there was the unexpected tariff headwind. But if you think about the back half of the year, a lot of things are going very positively and providing a tailwind.

I think when we talked to the analyst investment community about the manufacturing expansions that we were doing on Mercury and the extent of them, there was some nervousness about that. But in fact, they went without a hitch. So we added that additional capacity with no issues. We saw retail tick up in the back half of the year, which was positive for us. When we started to get that manufacturing capacity in place, we also started to see clearly the margin benefits in Mercury from being able to serve the -- some of the higher-margin customers. So that is a validation of part of our strategy. And then our launch of the new boat products has also gone flawlessly, and the reception has been absolutely wonderful.

So we saw this unexpected headwind. But overall, if you think about what I've just described, plus a pretty decent start to the year this year, I think we're in pretty good shape to offset that.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [39]

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Perfect. And then just the follow-up on the Engine capacity. You obviously noted in the CapEx plan for this year possibly additional expansion. Kind of what was added in the fourth quarter around Engines? Is that fully in place? Does it need to kind of ramp a little bit in 2020? Or what else could you add this year?

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David M. Foulkes, Brunswick Corporation - CEO & Director [40]

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No. It's fully executed. It was fully executed in the back half of 2019. So we're able to take full advantage as we enter 2020 and as we have entered 2020. Certainly, there's -- Mercury is always looking at making its operations more efficient, and if we need to add more capacity, we certainly will. But I think we are in very good shape as we enter the season to service all of our customers right now and to go after the Conquest opportunities that have really been in reach, but we couldn't quite get to them because of capacity. So I think the whole Mercury team is very, very excited about having that capacity behind it, to go after those additional opportunities.

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Operator [41]

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And our next question comes from Gerrick Johnson with BMO Capital.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [42]

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Bill, on the new segment reporting, the reallocation of operating profit to Boats from Engines. Can you talk a little bit more specifically about that, what is actually causing that?

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William L. Metzger, Brunswick Corporation - Senior VP & CFO [43]

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Yes. Gerrick, thanks for the question. We -- the process that we're following here, we've decided to make an adjustment to measure of segment profitability. I'd say what we're doing now is very consistent with kind of an ex-internal reporting methodology that we've followed for quite a while or had in place for quite a while, that we think better reflects market dynamics and comparability to external comps.

I think it's important to note that it's not the result of a change in business practice. I think if you look at what's implied on your company sales, that amount is unchanged. We have had a kind of a parallel methodology internally that we've used externally that kind of reflects business practices that date back to over a decade ago. We are -- which maintain consistency with historical practices. But as we sit here today, we've made a decision to streamline and follow kind of what I would consider to be more current and relevant kind of economics between the Boat and -- or between the Engine and Boat segment. And the new segment change was an ideal time to do that.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [44]

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Okay. I don't think I still understand, but we can take that off-line later.

Moving on, on your realignment actions announced last year in June and July. You said you get about $50 million in annual run rate savings. Are you still expecting that $50 million? And is all of that being realized in 2020? And how do we face towards that through the year?

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David M. Foulkes, Brunswick Corporation - CEO & Director [45]

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Yes. So the structural actions that we took in 2019, we expect the full benefit of in 2020. You'll note, I think, that we noted operating expenses down as a percent of sales this year versus last year. That is despite the fact that we have a full year of Freedom Boat Club expenses, despite the fact that we have put a full variable compensation provision back in and despite inflation. So yes, the structural cost reductions of $50 million are firmly holding.

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Operator [46]

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Thank you. At this time, we would like to turn the call back to Dave for some concluding remarks.

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David M. Foulkes, Brunswick Corporation - CEO & Director [47]

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Well, thank you very, very much for joining us today. We are very pleased about 2019, not only for the financial results but also because it was a transformational year for us. We're delighted with the way that the company is operating. We're delighted with the foundation that we put in place, both physically, through product and technology and capacity, but also via our capital strategy.

So I enter 2020 with tremendous expectations for our business. We are built to win right now and it's going to be a very exciting year for us. I cannot wait to share our 2020 to 2022 3-year strategy with you guys in Miami. I think you will be just as excited as we are. So I can't wait to see you in 2 weeks' time.

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Operator [48]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.