Brunswick (BC) Dusty McCoy on Q4 2015 Results - Earnings Call Transcript

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Brunswick Corporation (NYSE:BC)

Q4 2015 Earnings Conference Call

January 28, 2016 11:00 AM ET

Executives

Bruce Byots - Vice President-Investor Relations

Dusty McCoy - Chairman & Chief Executive Officer

Mark Schwabero - President, Chief Operating Officer & Director

Bill Metzger - Chief Financial Officer & Senior Vice President

Analysts

James Hardiman - Wedbush Securities, Inc

Tim Conder - Wells Fargo Securities

Lee Giardano - Sterne Agee CRT

Greg Badishkanian - Citigroup Investment Research

Michael Swartz - SunTrust Robinson Humphrey, Inc.

Jimmy Baker - B. Riley & Co.

David MacGregor - Longbow Research

Craig Kennison - Robert W. Baird & Co., Inc.

Joseph Spak - RBC Capital Markets

Carla Casella - JPMorgan

Operator

Good morning. And welcome to the Brunswick Corporation 2015 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I will now introduce Bruce Byots, Vice President, Investor Relations.

Bruce Byots

Good morning. And thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO; Mark Schwabero, President and Chief Operating Officer; and Bill Metzger, CFO.

Before we begin with our prepared remarks, I'd 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 are using certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in this presentation, as well as in the supplemental information sections of the consolidated financial statements accompanying today's results. I would like to remind you that figures in this presentation reflect continuing operations only unless otherwise noted.

I would now like to turn the call over to Dusty McCoy.

Dusty McCoy

Thank you, Bruce. Good morning, everyone. I am retiring in a few days and this will be my 11th and last yearend earnings call. I've enjoyed each and every quarterly and annual earnings call over the past 11 years and more importantly, getting to know most of you. The last important thing a retired CEO does is leave behind a good team. This is a great team succeeding me. Style, manner of presentation and other fluffy stuff will be different and that's normal. And grasp of the business strategy and the competition is better. You'll make a lot of money with this team. Finally, as I relate to this succession team, over the last decade we strived to always be credible and never surprised to the downside. This team, I assure you have the same DNA. Today, I will focus my remarks primarily on our 2015 results as well as provide insights in the Global Marine markets and then I'll let Mark and Bill elaborates on business performance and our Outlook for 2016 and beyond. 2015 results reflect an outstanding year for our organization and represent six consecutive years of strong growth in operating and pretax earnings. And our 2015 Outlook continues to reflect another year of strong earnings growth, free cash flow and investment in our business. Revenue in 2015 increased 7%, on a constant currency basis revenue increased 11% with the acquisition contributing 2% of growth.

The stronger growth rates were reported by fiberglass sterndrive/inboard and outboard boats, outboard engines and marine parts and accessories. This growth also included a solid performance in fitness equipment. Our gross margin increased 10 basis points compared to the prior year. Operating expenses increased by 2% and were 16.8% of sales. This compares to 17.6% of sales in 2014.

Adjusted operating earnings increased by 18% versus prior year, with operating margins of 10.4%, up a 100 basis points compared to last year. Over the last five years operating margin has increased over 700 basis points. Operating leverage for the year was approximately 25% on as adjusted basis. But we continue down the P&L, adjusted pretax earnings increased 20% while diluted EPS as adjusted $2.93 with the $0.51 or 21%.

Excluding the benefit of year's R&D tax credit, EPS as adjusted of $2.97, the $0.02 above the top end of our guidance. Finally, full year free cash flow totaled $193 million, an increase of $76 million versus the prior year. For the year on a constant currency basis sales on our combined Marine segment increased by 12%, while our Fitness segment increased by 7%. From the geographic perspective consolidated US sales increased by 14%. On a constant currency basis European sales increased by 10%, rest of the world sales increased by 5%.

So in summary combined sales outside United States increased by 7%. In 2015, adjusted operating earnings were $426.4 million, an increase of $65.8 million or 18% compared to 2014. Our adjusted operating margin at 10.4% is 100 basis points higher than the prior year. Diluted EPS and continuing operation as adjusted for the full year equal $2.93 per share. This reflects a 21% increase versus the prior year. Our fourth quarter sales performance reflects solid market demand as well as contributions from recent investment in new product launches throughout our organization. On a constant currency basis, sales in our combined Marine segment increased by 11% while our Fitness segment increased by 4%. From the geographic perspective consolidated US sales increased by 12%. On a constant currency basis international sales increased by 4%, with European sales flat and rest of world sales up 6%.

Adjusted operating earnings were $67.7 million for the quarter, an increase of $25 million or 59% compared to 2014. Our adjusted operating margin was 6.9% reflects 240 basis points increase compared to the prior year. Diluted EPS and continuing operation as adjusted for the quarter equaled $0.52 per share, an increase $0.19 or 58%. Bill will provide more detail on the charges that were made during the quarter related to pensions and certain restructuring and impairment items.

Now let's take a look at the Marine market. In 2015, US power boat industry grew approximately 6% based on preliminary data has once again outboard boat demonstrate the highest growth rate. The fourth quarter which on average comprises less than 10% of the year retail also reflected a growth rate of approximately 6%. If you recall our initial assumption for 2015 United States industry growth, reflected a rate comparable to that of 2014. This assumption is proved to be on target. As we look forward to 2016, we anticipate US growth rate will be comparable with 2015.

Now let's talk about marine market outside the United States. We will start with Europe. In 2015, retail boat sales in Europe were up mid single digits led by double digit growth in Scandinavia and Spain. The Eastern European and Russian markets which are more impactful to engine than the boats, the significant market declines till the economic uncertainty fueled by falling oil prices. Overall, our marine sales in constant currency outpaced the market growing by double digits through mix improvements to share gains.

We expect the European retail boat market to be up low to mid single digits in 2016. We anticipate our marine sales will once again grow faster than the market due to continuing mix improvement and churnings. Growth in Scandinavia is anticipated to slow as a result of tougher prior year comps and all related headwinds in Norway. Southern Europe is expected to grow high single digit percent as both Italy and Spain continue their growth; other remainder Western Europe continues to stay recovering.

In 2015, the Canadian retail boat market was down 10%. The fact in certain rate by slowing economy and a weak Canadian dollar. Outboard Powerboat were down mid to high single digit, our sterndrive boat were down in greater percentage. Ontario was comprises over 40% of Canadian market grew marginally but was offset by double digit decline from Quebec and oil sensitive Alberta. Our marine sales in constant currency grew 1% led by strong outboard engine sale.

In 2016 we expect the Canadian boat market to de down and modest significantly as 2015. We expect our marine sales to outperform the market and improve mix and market share growth.

In Latin America, the retail boat market declined double digit in 2015 driven largely by significant declines in Brazil, South America's largest boat market. Brazil's decline was a result of commodity price driven economic weakness and political turmoil. Our Latin America sales in constant currency were about flat as we improve market share during the year and benefited from local boat production. We anticipate the 2016 retail boat market to be down mid to half single digits as continued double digit contraction in Brazil, is offset by some growth in Argentina as changing import policies kick start retail boat demand.

Finally, looking at Asia Pacific, retail market demand was flat to down in 2015. But we expect similar market conditions to exist in 2016. The Latin America, Asia and Africa markets are largely commercial markets for our engine business. We expect the commercial engine market in these regions to grow low to mid single digit in 2016. We are planning for Mercury's new commercial outboard engine to help us grow faster than the market.

So to summarize we are planning on the 2016 global boat market to grow in a low single digit range, similar to the 2016 growth rate. We expect to continue to outperform the market through share gains and mix improvements.

Now I'll turn the call over to Mark who will give us a closer look at our segment results.

Mark Schwabero

Thanks, Dusty. I'll start with the Marine Engine segment where fourth quarter sales on a constant currency basis increased by 5%. Overall, 2015 acquisitions including Garelick in the fourth quarter and BLA in the second quarter contributed 3% to the segment's quarterly sales growth. From a geographic perspective, sales in the US were up 4%, reflecting increases in outboard engines and parts and accessories. This performance trailed the full year growth of 10% due to weak sterndrive demand and seasonal changes in P&A sales which I will discuss in a moment, offset by accelerating sales of outboard engine.

Sales to Mercury's European customers, excluding currency changes, were up 6%. Rest-of-World sales on a constant currency basis increased by 8%. The majority of the growth in the quarter came from the BLA acquisition. Performance of this region was offset by the impact of continued market weakness in Brazil. For the full year, the segment sales on a constant currency basis increased by 10%. And overall, our acquisitions contributed 4% to the segment's annual growth.

On a product category basis, the outboard engine business reported accelerating sales growth in the quarter, which included strong contributions for Mercury's new 350 and 400 horsepower engines which launched in Q1 of 2015. Our new four stroke engine platforms are rapidly displacing the two-stroke DFI technology. These new engines have resulted in market share increases within these higher horsepower categories, including gains in targeted saltwater, repower and commercial markets. This shift in outboard mix, along with market share gains continue to create short-term challenges for our manufacturing footprint which have been addressing with our ongoing capacity expansion actions, which would begin to benefit operations in the first half of 2016.

Sterndrive engine sales continued to be affected by unfavorable global retail demand. Mercury's parts and accessory businesses delivered strong sales growth during the quarter. Revenue benefited from acquisitions, new product launches and market share gains including the successful execution of our international growth strategy. In addition, the continued sales records achieved by our portfolio of distribution businesses, including Land 'N' Sea, Kellogg Marine, Diversified Products, Bell, and BLA, demonstrated their ability to deliver on superior customer service, product availability, on time delivery and product category expansions. As we stated in our previous call, the year-over-year growth rates in the first half of 2015 were expected to outpace growth in the second half of 2015. These differences in growth rates between the first half and second half were largely due to the different weather patterns between these two years as well as the contribution from acquisitions.

Mercury's operating earnings increased by 33% compared to last year's fourth quarter. Operating margins were at 8.8%, 200 basis points higher than the prior-year quarter. The improvements in operating earnings reflected higher sales along with cost reductions including the benefits from plan efficiencies, lower commodity cost and the savings related to sourcing initiatives as well as favorable product mix which we benefited from recently launched outboard products. Partially offsetting these positive factors were the unfavorable effects of foreign exchange. For the full year operating margins were 15.1%, 100 basis points higher than last year.

In our Boat segment, fourth quarter revenues on a constant currency basis increased by 18% with strong growth rates in fiberglass outboard boats and fiberglass sterndrive/inboard boats, as well as solid gains in our aluminum boats. On a year-to-date basis, our boat brands continue to make progress in gaining share. In the US, which represented over three-fourths of the segments, sales increased by 25%?

In the quarter, European sales on a constant currency basis, increased by 15% versus the prior year. This performance resulted from the introduction of new products, including larger, more fully featured products by our European manufactured outboard boat brands. Our US brands are also doing well in Europe with their locally manufactured products.

Rest of world sales on a constant currency basis increased by 1%, reflecting the weaker demand in Canada and Asia-Pacific. In 2015, our overall boat revenue on a constant currency basis increased by 16%.

For the year, global retail sales increased by 4% compared to the prior year. US retail units during the same period increased by 9%. Global wholesale unit shipments were up 2% versus an increase in dollar sales of 16% as revenue also benefited from a favorable shift in mix. In the fourth quarter, global retail activity was up 1%, a strong performance in the US was offset by the weaker international markets. In the wholesale unit demand was also down 1%.

Regarding our pipelines, dealers ended the quarter with 35 weeks of boats on hand, measured on a trailing 12-month retail basis compared to the same 35 weeks at the end of fourth quarter of 2014. With units up modestly compared to last year due to an expanded distribution network and all of our new product introductions. We have successfully lowered pipelines in Canada versus the prior year reflecting our efforts to match inventories with the declines in retail demand. We believe our current pipeline levels are appropriate given our current growth expectations in various boat categories and markets and we continue to be very comfortable with these overall levels.

The Boat segment's fourth quarter adjusted operating earnings increased $14.2 million when compared to the prior year. Operating margins were 3.1%. This reflects a 440 basis point increase over last year's fourth quarter as adjusted result. Operating performance in the quarter benefited from higher sales and favorable product mix including pricing benefits from newer fresher models as well as lower commodity cost and the savings related to cost reductions and sourcing initiatives. For the full year, operating margins were 3.6%, 200 basis points higher when compared to the prior year's as adjusted results. Over the last two year, this segment's adjusted operating margin has increased by 420 basis points.

On a constant currency basis, sales at Life Fitness increased by 4% for the quarter. Growth resulted from higher sales to U.S. health clubs and local and Federal governments and hospitality customers partially offset by a slight decline in the international markets. These declines were mostly due to tough comparisons in our European business which grew by 22% in 2014. Additionally, the growth rates in certain international markets have moderated due to changes in economic factors.

SCIFIT contributed about 2% to the segment's growth rate in the quarter. The segment continues to benefit from new product introductions in all the regions with this quarter representing the 13th consecutive quarter of year-over-year revenue growth. In 2015, on a constant currency basis, sales at Life Fitness increased by 7%, the SCIFIT acquisition contributed 1% of segment's full year growth.

Segment operating earnings in the quarter decreased by 2% as transaction cost of approximately $2.6 million associated with the segment's acquisitions strategy and the unfavorable impact of changes in customer and channel sales mix more than offset the favorable impact from higher sales, our cost reductions and the savings related to sourcing initiatives. Operating margins were at 16.8%, 60 basis points lower than the prior year. For the full year, operating margins were at 14.7%, 30 basis points lower than this past year. As a reminder, this year's result reflects the absence of the favorable warranty adjustment that was in the first quarter of 2014.

And now, I'd like to turn the call over to Bill for some additional comments on the financials starting with a consolidated perspective on how foreign exchange has affected our results.

Bill Metzger

Thanks Mark. I would like to start with discussing the impact that foreign currency is having on our sales comparisons. As a reminder, our most material exposures include sales in euros, Canadian dollars, Brazilian real and Australian dollars.

In the fourth quarter, consolidated sales comparisons were negatively affected by approximately $36 million or 3.8%, which was largely in line with our previous guidance. For the full year, changes in exchange rate lowered sales by about 4%. For the full year, operating earnings comparisons were negatively affected by approximately $28 million, or 8%. These estimates include the impact of translation on all sales and cost transacted in a currency other than the US dollar, benefit from hedging activities of $12 million and pricing actions in certain international markets in response to the strengthening US dollar.

Moving to full year 2016, we are anticipating the consolidated sales comparison versus 2015 will be negatively affected by approximately by approximately 1%. The impact on full year operating earnings comparisons is estimated to be $15 million to $20 million or approximately 4%. I'd like to point out that a significant portion of the operating earnings impact is anticipated to occur in the second quarter. These estimates for 2016 assume that rate remain consistent with current rates for the remainder of the year.

This next chart details some additional charges that we recorded in the fourth quarters of both 2015 and 2014 that affected our GAAP earnings. I'd like to provide some background on the charges we recorded in 2015. Charges of $82 million resulted from actions taken to settle a portion of our pension plan obligations. These actions include a transferring certain plan obligations to a third party like purchasing annuities on behalf of participants as well as making lump-sum benefit payments directly to participants. These actions which are part of the company's pension derisking plan contributed to our reduction in plan liabilities of approximately $278 million, or 22% in 2015. We also recorded impairment and restructuring charges in 2015 totaling $12 million. These charges included the impairment of our Brazilian boat manufacturing assets resulting from continued weak economic conditions in that market. And Brunswick's corporate headquarters facilities as we look to relocate our headquarters for more appropriately sized base, and we also recorded severance cost related to organizational realignment activities.

In 2016, we are planning to incur between $5 million and $10 million of restructuring and integration cost associated with the newly acquired Cybex business. These costs are excluded from our as adjusted earnings value.

Regarding our tax provision, our year-to-date effective book tax rate for 2015 as adjusted was 32.6%, slightly higher than the 2014 rate. Both years reflect the impact of the recently enacted US R&D tax credit. Our effective book tax rate for 2016 guidance is between 31% and 32% which include the benefit from the US R&D tax credit as well as benefit from optimizing our international legal entity and cash management structures. For 2016, we are expecting our cash tax rate to be in the low to mid-teen percent range.

Turning to a review of our cash flow statement. 2015 cash provided by continuing operating activities was $338 million, an increase of $91 million versus the prior year. As planned, pension contributions were approximately $74 million, a level consistent with prior year contributions. Net increases in our primary working capital account totaled approximately $64 million which is consistent with the prior year. The biggest changes occurred in inventory which increased by $15 million, accrued expenses which decreased by $34 million and accounts notes receivable increased by $12 million.

Our working capital performance was in line with the prior year but their reported usage was greater than our previous guidance. This was partially due to slightly higher than expected inventory balances which included the impact of new products along with the timing of cash collections. In addition, another component to the difference was due to the classification in the cash flow statement of accounts table increases resulting from capital expenditures. These increases were netted against capital expenditures first included as a favorable change to working capital is envisioned in our previous guidance. So in total this change in classification had no impact on free cash flow.

2015 free cash flow was $193 million versus $116 million in the prior year, an increase of $76 million. Capital spending was $133 million for the year which was lower than our previous guidance due to the timing of expenditures and the impact of the capital expenditure related accounts payable increases that I referenced earlier. As a reminder, capital expenditures are reported on the cash flow statement on a cash basis versus an accrual basis. Our business units continue to remain focused on generating strong free cash flow which will allow us to continue to fund future investments and growth including acquisition and enhance shareholder return.

Cash and marketable securities totaled $669 million. The change from year-end 2014 reflects year-to-date free cash flow of $193 million, as well as cash returned to shareholders through share repurchases and dividends of approximately $120 million and $48 million respectively. Also during the year, spending on acquisitions totaled approximately $30 million. And finally the change in cash also reflects net proceeds received from the sale of the Bowling Products business.

Let me conclude with comments on certain items that will impact our P&L and cash flow for 2016 which now reflects a recently completed Cybex acquisition. Our estimate for depreciation and amortization is approximately a $110 million. We expect our 2016 pension expense to be approximately $50 million, $3 million higher than the prior year. Net interest expense is expected to be flat with last year. Combined equity earnings and other income are also anticipated to be comparable to the prior year. And we expect alluded shares outstanding to be approximately $92 million to $92.5 million for the full year and range between $93 million and $91.5 million for the quarterly period. The reduction in average shares outstanding between years reflects the execution of our share repurchase program which more than offsets stock compensation plan activity.

On the cash flow side, our current plan anticipated working capital changes to result in a usage of cash of $60 million to $80 million. This includes the payout of deferred compensation balances in connection with the planned management transition. We are planning for capital expenditures to be between 4% and 4.5% of sales. This increase level of spending reflects substantial new product investments in our outward engine business and continued capacity investments to support new products and growth which are driving expenditures a bit higher in our long-term planning target.

We're also plan to continue to fund investment in product tooling cost production projects. Our plan reflects approximately $35 million to $45 million of cash contribution to our pension plan, which is a reduction from our 2015 level. We anticipate our cash tax to increase in 2016 slightly versus 2015. And netting together these factors along with our anticipated earnings performance, we expect to generate strong free cash flow for the full year in excess of $200 million.

I'll now turn the call back to Mark to continue our outlook comment.

Mark Schwabero

Thanks, Bill. Our overall operating plans and assumptions for 2016 remain relatively consistent with those we communicated at our November 2015 Investor Day. In addition as Bill stated, we are now reflecting the impact from the acquisition of Cybex that we announced last week. We continue to target 2016 to be another year of outstanding earnings growth with strong free cash flow generation. Our plan reflects approximately 9% to 11% sales growth, which includes the continuation of solid market growth in the US and Europe, partially offset by weakness in certain international marine markets. Our plan also reflects benefits from the success of our new product and market share gains.

In total, acquisitions accounts for about 5% of 2016's growth reflecting completed acquisitions. We anticipate a slight improvement in gross margin and in operating margins. As we previously stated FX will be headwind once again with sales being negatively affected by approximately 1% and operating earnings by $15 million to $20 million. As we demonstrated in 2015, we will continue to focus and benefit from managing cost to initiative such as Lean Six Sigma and by implementing programs to improve our product cost through supply chain initiative and manufacturing efficiency. We will also continue to see cost reductions resulting from favorable commodity pricing trends.

Operating expenses are estimated to increase in 2016 but as percent of sales are expected to be slightly lower than the 2015 levels. These expenses reflect the incremental investments that we feel we need to support growth. Our 2016 EPS guidance as suggested reflects a range of $3.35 to $3.50 which is consistent with our three year plan targets of a mid-teen to high-teen compound annual growth rate. Our EPS outlook for the first quarter reflects a high- teen growth rate. However, our sales growth will be at the lower end of the full year guidance due in part to just the timing of the Cybex acquisition.

Turning to our segments, the 2016 forecast reflects continued revenue and operating earnings growth in our Marine Engine business. Specifically, we're planning for revenue growth in the mid to high single digit percentage range with a solid improvement in operating margins. Our plan continues to reflect a stable pricing environment for our larger horsepower engine business.

Looking at the Boat segment, we're targeting 2016 annual revenue growth rate in the mid to high single percentage range with a solid year-over-year improvement in operating margins of approximately 100 to 120 basis points. This represents a lower rate of improvement in both sales and operating margins compared to the prior two years, which included mix benefits associated with the success of our large boat platform. Moving forward these benefits will be less pronounced as new product introductions replace existing products and are more balanced across the portfolio. We remain positioned to achieve our long-term target of 6% to 7%.

Across our marine businesses along with the execution of a product development and manufacturing strategies, our business leaders are fortifying their efforts and those of their sales and service teams to drive execution in the marketplace with support for a dealer and the brand building activities that are important to our continued growth.

In our Fitness segment, our plan is based upon continued revenue growth and maintaining strong operating margins. In 2016, including the Cybex acquisition and a full year of SCIFIT, we're targeting revenue growth in the mid to high 20% range resulting in total revenue approaching $1 billion. Excluding acquisitions, Life Fitness' sales outlook continues to reflect mid to high single digit percentage growth. As we stated on last Thursday's call, Cybex's margins have historically been lower than those of Life Fitness largely due to a higher operating cost base on a percentage of sales basis. However, after an initial period of margin dilution, we expect to return the combined business margin levels to the traditional Life Fitness margins by 2018 due to cost reductions and revenue growth.

We are planning for 2016 operating margins as adjusted to be lower due to the impact of the Cybex acquisition including the purchase accounting adjustments with the impact being more first half weighted.

And with that I'd like to thank all of you. And I'd also like to thank Dusty for his opening comments today on the call and we are now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from James Hardiman from Wedbush. Please go ahead.

James Hardiman

Hi, good morning. Thanks for taking my call. And I guess first and foremost Dusty you mentioned that this is your last annual call, I am assuming this is your last call overall not sure we are going -- whether not we are going to see--

Dusty McCoy

[Multiple Speakers] Yes. That's right.

James Hardiman

Okay. Not sure if we are going to see you in Miami but either way just wanted to say I think Brunswick is benefited a great deal having you at the helm and I think I speak for most of the people in this call when I say that I think we all benefited from working with you and learning from you overall these years.

Dusty McCoy

Thank you. That's great comment. You will see me in Miami. You are not going to quite get rid of me until after that.

James Hardiman

Okay, okay. And if ever you need a wind manage as you sort of sail off into the sunset I am here for you.

Dusty McCoy

Right. That would be great.

James Hardiman

So Dusty I guess I'll stay on you. You noted on the last call and I think it was really speaking to some of the conversations you had with investors in recent week, that you guys don't sell or you don't sell motorcycle, no mobile and that your business is right marine and fitness really don't bear a whole lot of resemblance to those businesses. Maybe can you speak more broadly about the boat consumer and whether or not you think they might have a bit more resiliency over the course of 2016 and beyond relative to other higher ticket discretionary items where it absolutely seemed that we are seeing those segment get pinched and I realize that this is sort of the reverse of few years back when some of these segment ramping and the boat industry was seeing more measured growth. How is this consumer different and do we think that they might be a little bit more resilient?

Dusty McCoy

We do think consumer is different and definitely more resilient. James, I mentioned this in the call last Thursday, if you fundamentally look where we have been taking our marine business is we first said we are going to make more money in the smaller industry and that's what we are doing. The reason we are able to do that is we really focused around where we thought growth would be. And maybe it is easiest to talk about it around boat. But it is aluminum fishing boat, fiberglass outboard fishing boats, Pontoon boats and then all the engines that support that particular activity. And as we look at those particular buyers, they have a whole bunch of common characteristics that are really serving us well. And we began to see it coming out at recession. So buyer there tends to be someone who works for someone else and not owning their own business. And these all are generalities. And in general as long as they feel comfortable about their job and their ability to obtain a wage on a regular basis, they want a boat because boating support their avocation, it's they don't like someone who just cruises and get some of the bunch of friends and move around, these folks want the boat to fish and for pursue something that is important to their particular lifestyle. And we've been very good at getting and understanding that's the part of the market where there was going to be improvement and we wanted to be there. In the Pontoon market, we talked about this a lot that the Pontoon permits the boater to do everything and more that they can do on similar size of big bottom boat if you will. They are incredibly stable, you can have a great time with your family, your children then want to ski, tube, wakeboard, everything they would ever want to do on the water except like surfing in the ski boat guys have been doing their job on their own, but when the day begins to do slowdown the entire family can be very relaxed with lots of room and great comfort and enjoy themselves. So as we've looked at the market that's where we focused and I think we've done a good job of executing there. And then of course into marine market, our view was not withstanding the fact that new boat sales would take a while to fully recover that boat usage would continue unabated and our judgment was we needed to continue to be very good in the P&A business because the P&A business is supported by boat usage and time again is proven that's been a good call on our part. Because boat usage or participation continue to grow. The only other comment I make this is a discussion I've had with many of you, the price range of these let say ancillary products, eTVs and all that I talked about are just different than boats. So we attract a different buyer who wants to engage in a different activity and again that served us very well. And then lastly the competitive mix is very different in marine than it is in these other businesses and the competitive mix other than in boats, and boat is always going to be a tough place so maybe try to away from it. But when we look at engines and the P&A business the comparative mix is really, really healthy and we have mature, very smart competitors who always understand doing the right thing. And then I do want to talk about replacement cycle for boat and fitness equipment. One of the reasons we are into fitness business is health, wealth and fitness are growing globally and becoming increasingly important. So let's never forget the replacement cycle for fitness product is less than half of existing replacement cycle for boat. Then even as we look at boats and engine and as we go back to registrations back to 1965, we are coming to a period that a replacement cycle is going to be picking up in boats and I think we are beginning to see the first sequence of that in getting good share in fishing boat. That's a very long answer. Takes a long time to explain it up. I apologize but we believe strongly that marine market is very different than these other markets and that's why we are stressing to think we got a company, you have to take time and understand and bring the fitness markets because they are different than those other markets.

James Hardiman

That's extremely helpful. I know I've already taken lot of time but do just one follow up with that keep it high level obviously the oil and gas end market have been particularly problematic. Have you thought about what type of exposure that you have there states like Texas and the parts of Canada that you pointed out? And then the whole millennial thing has become a bear case against the industry, the whole idea that younger consumers aren't really interested in ownership and more interested in sort of the sharing economy. Just high level thoughts, your last call would love to get your thoughts on some of these bigger pictures issues.

Dusty McCoy

Okay. The first about to this -- the sharing economy and some view that it is going to negatively impact this company. We are a shareholder and a deep participant and one of the largest boats leasing operation in the United States and let's just put this in context. 9.8 million Boats registered in America, about 1,000 are in this program. It's silliness to begin to think that's going to have a massive impact on our industry and I really mean that. And even if they does we will serve it because we will prove it that we are the most full on boat to ride the people who want to lease it. This oil economy is very interesting in my judgment first, Mark and Bill talked about sales were down in our fitness business in Europe and if we find sales were down and our distributor business which distributed into a lot of the oil producing countries which are under stress right now. Turkey which is under enormous stress from refugees et cetera. And we are weathering that western Canada is a bit of a problem we are weathering there. I don't count Texas, Texas looks like it's getting through that fine because people still want to fish et cetera. So net-net as we look forward low fuel prices are real benefit to us because it keeps people on the water for a longer period of time which benefit our strong P&A business.

James Hardiman

Extremely helpful

Mark Schwabero

Actually -- this is up in line with the market in 2015.

James Hardiman

Excellent. Thanks guys. I'll see you in Miami.

Operator

Thank you. Our next question comes from Tim Conder from Wells Fargo Securities. Please go ahead.

Tim Conder

Thank you. Dusty after James' congratulation, it has been wonderful pleasure working with you and definitely the team you helped mould here in and passing the reins over to, thank you for that also Mark --

Dusty McCoy

Right. It's a great team. I am not going to be missed for about two seconds since over.

Tim Conder

Unless it's a -- so it's a good bar for Mark and Bill to continue but definitely capable team there, thank you. A couple of things I'll continue on little bit James touched on the oil side. But the only new impact, you hinted a little bit you got water in Texas; people want to fish, what do you hearing seeing from dealers there? Same thing, Cali started to get little bit rain but definitely the droughts not broken but any commentary on that. And then as it relates to FX, Marine Max just picked up a European yacht brand announced this morning. How do you see the incremental competition from the European especially given the EURO over the last year or so here and anything we haven't seen anything to date but anything that you are catching any wind up or anything regarding Yamaha or some other Japanese using FX on the engine side.

Mark Schwabero

Well, Tim, that's a long list. So we will start down through some of the impacts. The bottom line is from the only now, if you want to look from a global perspective or even look at it from a North American perspective, Canada had some impact as we've talked about the FX but from the standpoint of weather up there it has been fine, California has been down a bit but it's a smaller market. Texas as Dusty just mentioned it's actually slightly outpacing what the US is in general and Florida even whether you want to talk about tornados or impacts of anything going on there, it's outpacing the overall US market as well. So you just have so many puts and takes across all the different geographies and markets and that it's tough to say it's having a positive or negative because there is always something imbalance somewhere else really in the world. When you look at the other piece you were talking about kind of the international competition. When we look at that and clearly there is international boats, there is currency impacts but I really want to go back and start live just the pure basic and what the data says. If you look at the where they would most likely come it would be large boats and number two is the fact that if you dig in the detail and get behind the numbers particularly in the fourth quarter, I mean we are virtually 100% of all the growth the industry is seeing is coming from Brunswick. So the data really reflects how strong where we and our dealer partners are doing in this specific market. And we've had considerable share gains in the large boat category across 2015 in total. So sure they've got some advantage but we think when you take, to see way product, the newness, the things with their L class and the fact that it's more than just price point. These are the 1% who is buying this product and it's not shopping for, can I save $10,000. This is someone who is really looking for image, prestige, they want to be able to go back and tell somebody, I just bought a brand new 59 foot seaway. And all those things play in the category. When you look over on the engine side. We've got a large competitor there but it's a very responsible competitor and continues to demonstrate that in the market. And from a US, North America perspective, we are not seeing anything unusual. We see some programs going on but this time of year with boat shows and stuff, that's pretty normal that somebody is going to add a warranty or do some spiff for a program. So it's nothing out of the normal. And we are seeing in a couple places internationally where it might be a little more aggressive and a little less normal. But again with our largest competitor in the market continues to be very responsible and we've continue to make that assumption on a go forward basis. As it relates to the announcement you said for Marine Max, I've just -- Galleon is I'd just say a relatively small manufacture over in Europe. Bill, Miguel in the Marine Max organization feels that this can be a complimentary product. They bring it in a very finite range. I mean the net, net all of that I don't think you are going to see any huge impact either impacting us or other market place by doing that. It's a relatively small Polish boat manufacture.

Tim Conder

Okay. And Mark thank you. A very, very helpful and switching to fitness, one question there and versus the conference call you guys held last week, any color you can talk about now with Cybex in the fold here as to how the combined organization the mix of your business commercial versus consumer going forward. That's one of the things you had mentioned previously is that you might see a little bit of growth in consumer and into the Life Fitness brand but has anything changed now with Cybex in the fold.

Mark Schwabero

I don't think you will -- it's our focus is still primarily on the commercial market and we think the combination of the Life Fitness brand and Cybex really just gives us an even stronger presence in commercial and we believe that fundamentals of the business are really there in that category. I mean if you really go back and look at all the positive things that sit there on the fitness business today, club growth all the things going on around the wellness where the demographics are at. We just think this is a phenomenal business to keep building on. We think the underlying foundation of the business is extremely strong. And the Cybex acquisition just allows us to build on it. And what it's going to be able to do is even create more powerful us in the area of product development against this more capabilities and more capacity from a manufacturing standpoint. And we believe it gives, enhances our capability or even continue to grow this business internationally. So it's not about try to get over to another segment. It's just becoming an even stronger player in the segment we are in.

Tim Conder

Okay. Lastly, Bill, any thoughts I know you guys have been very consistent and steady about the share repo over each quarter and that was the plan but given where the stock is and you got a year 2016 left here on the plan, any thoughts about just maybe accelerating that here into the first half of the year?

Bill Metzger

Tim I would comment couple things. A, we are committed to maintaining balance. When we said it's a -- we want to make sure we execute our plan over a multiple year period of time. We've flexed up and down on share repurchases as we gone through our 2015 depending upon valuations are. And we will continue to do that. I think we have a very high degree of confidence in our ability to grow the company through M&A and organic opportunities. And we really want to make sure that we keep some dry powder to get that done. We committed a pretty large portion of our unallocated capital to Cybex. And we are very confident that we can deliver against the acquisition metrics that we described a week ago. So I think this is one of those situations where we are going to stay to course, we will continue to execute against the plan that we laid it out where reflex kind of a quarterly basis between the boundaries we've established. And go from there, so I think that's the right tact to take as we see there right now.

Operator

Thank you. Our next question comes from Lee Giardano from Sterne Agee. Please go ahead.

Lee Giardano

Thanks. Good morning, everybody. And Dusty best of luck in retirement. So my question is on capacity. You mentioned some increase spend this year. Can you just talk about the capacity levels where they stand in different areas of the business and how much you think you can ramp up to keep up with the demand? Thanks.

Mark Schwabero

Yes. We talked about this some on prior calls but as you go through it we think we've positioned ourselves very well from a capacity standpoint on our boat business. We obviously made the additions and our aluminum fish boat category are Pontoon business down in our Boston Whaler business and then our Rick boat business, so we think we are positioned very well there. Where we are actually making more of the capacity investments are up on the engine side, and really all around the outboard business which is shown phenomenon growth and share and improvements to the Mercury business. And as we've launched the new 75-9115and our new 350 and 400 we are continuing to put in additional machining and assembly capabilities there metering that end kind of ahead where the demand is. And we've also increasing our coding capabilities and capacities up there as well. So our investment of capacity is really around the outboard business on the mercury side. And then the other investments have really been on the fitness side, both in terms of things we've done with our facility in Hungary or additions and expansions up on Ramsey facility. And it was a significant part of our interest in Cybex because we pick up some more manufacturing capacity for our business there to grow of and we looked to we don't have to go create or find a site and start a new plant up from scratch. We basically bring in well established facility with a great workforce and give us the ability to grow that piece as well. So principally the all of the expansion is really not what we focused and go, that's the outboard business and our fitness business.

Operator

Thank you. Our next question comes from Greg Badishkanian from Citi. Please go ahead.

Greg Badishkanian

Great, thanks. And then Dusty congrats on really successful turnaround of the business and successful tenure here at Brunswick. I have two questions. First is just with respect to you know talking to dealers which I know you do very regularly. How comfortable are they with their inventory levels and what's their outlook for the business? And then second should we expect any positive new product new surprises in terms of announcement at the Miami show?

Mark Schwabero

Well, let's start with the comments about the dealer side of the equation. There are lots of different surveys and things that get published and go around but quite frankly we are very comfortable with where the pipeline is that and where our comments were. We think not only as the pipeline level appropriate but as we look at our order, incoming order rates and stuff we think they tie very well to how we've laid out the business for next year. And in fact where we think there is some growth opportunities we are actually been increasing our production a little bit. An all that comes from again the confidence that we are seeing and hearing from our dealers. Lot of boat shows lot of different things going on but as we interact with the dealers in those environments, they are pretty upbeat and positive that 2016 is going to be continuation of some of the good things they saw in the 2015 environment. So dealer attitudes are good, dealer financials all those things are sitting in pretty good place, Greg.

Greg Badishkanian

Good. And I know you won't talk specific --

Mark Schwabero

And about second - I wasn't dropping it, I was just -- it was something that you just have to wait till next week, Greg. I'd tell you but if I tell you there would be surprise I would be announcing it. So --

Operator

Thank you. Our next question comes from Michael Swartz from SunTrust. Please go ahead.

Michael Swartz

Hey, good afternoon, everyone. And Dusty likewise it has been a pleasure working with you in past couple of years and best of luck in retirement. Just wanted to follow up on an earlier question about capacity and specifically some of the capacity you are building in outboard engine. Could you maybe talk about one where I guess where we are in the process, when do we expect to kind of start producing with that expanded capacity and are you having currently any problems, I'd say are you behind demand, is that impacting what we are seeing in terms of growth for the engine business right now.

Mark Schwabero

No. I mean we are delivering on a daily basis across all the lines. We've got -- as we go into a season right now Mike we'd expect to have a little bit and we have a little bit of backlog on our top end product with our new the 350 and 400 just quite frankly have even exceeded all of our expectations and how well that's doing in the marketplace. And so there is a little bit there. We've been investing in the third and fourth quarter and some additional capacity. As I mentioned in the comments that capacity will start coming on early in the second half and provide some incremental production benefits to sterner outboard product launch.

Michael Swartz

Okay. And then just second question on the SG&A leverage in the quarter came in little stronger than I guess would have expected. Was there any kind of shift in spending into the first quarter or this kind of just a new normalized you leverage some of the investments you made over the past couple of years?

Bill Metzger

Mike, I would say that as we go to Q4, I am not sure that when we kind of assess how we ended up the year, we ended up materially different than what we thought we were going to. I do think and as you look at how we navigated through 2015 and try to offset some of the impacts of FX, we were pretty -- we managed our operating expense levels pretty tightly as we move into 2016, we are very much of a view that we need to continue to invest, we've got plans to continue to invest in new products that Dusty referenced last week on the call. We got investments that we need to make an IT as our business would grow and support those strategies. We are investing some of the gains that we are seeing in productivity back into the plan and see even get better and more effective and generating cost reductions there. So when you look into 2016, we are very much positioning ourselves where we are going be probably a little bit higher on operating expense increases I would say that are new normal in 2015 was very much driven by of what we did in 2015 was very much driven by the market environment that we face in the tough headwinds we face from FX.

Operator

Thank you. Our next question comes from Jimmy Baker from B. Riley & Co. Please go ahead.

Jimmy Baker

Thanks. And Dusty look forward to see you in Miami but let me add my sincere gratitude and best wishes on your next chapter. So the couple more questions probably for Bill here but switching to the cash flow outlook, 2016 CapEx looks to be the highest since pre recession peak. I guess how much of that is just a function of some of that planned 2015 spends slipping into 2016. And I guess does it have any impact on sort of your average annual spend over the 2018 plan.

Dusty McCoy

I would say must -- sorry Jimmy I thought you were done.

Jimmy Baker

No. Go ahead. I just have a follow up.

Mark Schwabero

I was anxious to answer your question. So I would say from the CapEx there are a little bit slips over from 2015 to 2016. A large portion of the increase though assigned to new products on the outboard side of the business, we've got some heavier capacity investment that happens and I think that this ends up being a year where we are just a little bit higher than what our long-term average is, we are still very much comfortable with the 3.5% to 4% as a long term average.

Jimmy Baker

Okay, understood. And then just on the working capital front. I guess if I do the math it looks like you are expecting over 30% of your incremental organic sales in 2016 to end up in working capital. Historically the business hasn't been that working capital intensive. So any meaningful change in terms of customer or product mix that we should be aware of that's driving that?

Bill Metzger

No. I would say that we are -- when you start to strip out pluses and minuses one of the big cash requirement we have this year some payouts related to deferred comp with the management transition that's probably a quarter to a third of what our working capital usage is in 2016. So when you take a look and strip that out you get the more normal sort of usage level, Jimmy.

Jimmy Baker

Okay, helpful. And then my --

Bill Metzger

Outside of that is materially different than what we've seen in the past.

Jimmy Baker

Okay, got it. And then Mark a just one clarification question here. I think you said about a 100% of the growth in the industry is coming from Brunswick. Was that specific to large boats, sports yacht and yacht? I just didn't quite understand the context of that comment.

Mark Schwabero

Yes. Large boats, sports yacht, yacht, sport quarter

Operator

Thank you. Our next question comes from David MacGregor from Longbow Research. Please go ahead.

David MacGregor

Yes. Good morning, everyone. Good afternoon, I guess is now. Dusty, good luck for your retirement. I guess is there any way talk about the impact of the improving plan efficiency investments that you have made to date on your 2016 guidance?

Mark Schwabero

Well, when you -- let's go back to kind of start, we've got all the plans kind of in different state of progression and typically what we've talked about is our plan efficiency improvements have been more focused around some of our boat facilities. But I want to start with -- we've got tremendous efficiency improvements Lean Six Sigma activities going on within our aluminum and businesses both the fishing side, Pontoon, lots of great activates going on the efficiency side at Mercury so on the engine business. I think as you get to boat I'd characterize there is two things. We are seeing some efficiency improvements but some of that get in eaten up by the fact that we are still hiring employees and going through training cycle and that eats up some of the efficiencies that obviously we are gaining because one of the side effects to growing is the fact that we are bringing new employees and I think the second thing is we are just continuing to raise the bar on our quality expectations. And what we wanted to be delivering there and so that add some processes and some things from a perspective that eats up some of the efficiencies on the boat side. So David, they are very evident and exist within some of our margin improvements in our engine and some areas of fitness and boat -- and some areas of fitness and boat. There are some areas of the boat that those things I just highlighted kind of negate some of what we are seeing overall on the efficiencies. But if you look back at fundamentally all the headwind we've had on FX and look how we've offset it, it has been with cost reductions, sourcing, efficiency, commodity all those things are contributing to offset those headwinds.

David MacGregor

Okay. Thanks for the detail. And then just second question would be with regard to the saltwater market share for your engine business and if you could just bring us up to date on whatever progress you have been able to achieve there and it is well maybe your ability to hold share in the fresh water market?

Mark Schwabero

I'll start with saltwater. When we started talking about the three areas of focus principally on our outboard business around commercial salt and repower, we were in the high teens and with all the data we get and can see and translate to, we are in the mid to high 20s today. So we paid a nice share growth across the saltwater category. And then as you go to the fresh water market, we are continuing to grow share. We think we are doing it through a couple different things. One, great engine product; two is some exciting and fresh product where we are trying to turn about 30% of our aluminum products on an annual basis or keep that stuff really fresh in the marketplace. And the third point is between what we do in our boat business and then significant other exclusive customers that we have, we've got a certain amount of that business, David, that's really locked up. And so we feel good about it in mature growth.

Operator

Thank you. Our next question comes from Craig Kennison from Baird. Please go ahead.

Craig Kennison

Hey, thanks for squeezing me and Dusty, James expressed my sentiment quite well. Also I supposed to my questions but I'll keep it to the credit side if I could. Are you seeing any changes at all in the behavior of credit providers either on the wholesale side or the retail side especially in market like oil markets where the economy has turned?

Bill Metzger

Craig, I'll take that. What I'll tell you that the oil related markets where I think it would be an issue is just so small to what overall marine demand is. I just don't have a specific comment on that right. Lenders continued to be diligent in their own underwriting and dig in and very constructive relative to terms and we've really see no change in that environment over the last 12 months. It's a very -- still a very constructive retail lending environment for us. And on the wholesale side again, we've really see no change. Dealers' financials are in great shape, the aging of the product and the field is in great shape. And the overall levels of inventory are in great shape. And whenever anything gets out of whack with those three you see a change in lending environment and we are just not seeing that right now.

Operator

Thank you. Our next question comes from Joseph Spak from RBC Capital Markets. Please go ahead.

Joseph Spak

Hi, good afternoon. Thanks for squeezing me in. Two quick ones. One any additional commentary on use boats or non inventory and if you think that could be a bigger competitive issue to new sales if think slow. And the second one is I appreciate the color on CapEx post Cybex, I was wondering if the working capital profile changes with that business at all. Thanks.

Bill Metzger

I will address the -- the working capital profile of the company did not change substantially with Cybex, it's a 4% add to sales, working capital pattern look a lot like life fitness and there is really no dramatic change to our working capital needs on a go forward basis. And on the use product, Joe, I would say we've seen no change in the market there except maybe the commentary has started to tweak a little bit, there is not enough good used product out there and continues to become more and more of a challenge I think for dealers to get a hold a product like that and as we look forward that should be nothing but good for new boat demand.

Operator

Thank you. Our final question comes from Carla Casella from JPMorgan. Please go ahead.

Carla Casella

Hi, my question is also somewhat on the credit side but little more your own credit and the rating agencies. Have you talked to them post Cybex and do you still have a target to get into investment grade or have a target when you maybe able to get there?

Bill Metzger

We are still -- we have talked them after the Cybex transaction. We still have an objective to get back to investment grade. And we are patiently awaiting for them to transition their rating to an investment grade rate. We feel we've done everything that we needed to do from a credit perspective. Our operations are strong, we've diversify the business. I think that benefit both equity holders and credit holders, it just hasn't been reflected in the rating.

Carla Casella

I agree with you. So we get it soon. Thank you.

Operator

Thank you. I'll now turn the call back over to management team for closing remarks.

Mark Schwabero

Yes. First of all, I hope you can sense the understand, the excitement that the entire management team has about some outstanding performance in 2015 and our continued strong outlook at 2016 through 2018 that we've laid out most recently, talked you about in November. So lot of excitement here. The management team is energized, it's -- we are all going kind of hate to see Dusty go. He has been such a friend and advocate and partner over these years. But he not being boastful but he leaves, he has done whatever a Chairman and CEO was supposed to do. And that's leave a legacy of people here to run the business when he leave. And we are comfortable with the things we've laid out. We are confident we can deliver these things. And lastly, we just look forward to seeing all of you down at those of who you are going to come, seeing you all down at Miami here and basically little less than two weeks. So just have a great day. And thank you for giving us time today to share our story.

Operator

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

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