Brunswick (BC) Q4 2018 Earnings Conference Call Transcript

Brunswick (BC 2.27%)
Q4 2018 Earnings Conference Call
Jan. 31, 2019 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, and welcome to the Brunswick Corporation's fourth-quarter and full-year 2018 earnings conference call. [Operator instructions] I would now like to introduce Ryan Gwillim, vice president, investor relations.

Ryan Gwillim -- Vice President of Investor Relations

Good morning. Thank you for joining us. On the call this morning are Dave Foulkes, Brunswick's CEO; and Bill Metzger, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results.

Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we 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, the results of the entire Sea Ray business are again being reported in continuing operations for GAAP purposes. However, as adjusted, non-GAAP results exclude the Sea Ray sport yacht and yacht operations that have been round down. Therefore, for all periods presented in this presentation, all figures and outlook statements incorporate these changes, unless otherwise noted.

I would now like to turn the call over to Dave.

Dave Foulkes -- Chief Executive Officer

Thank you, Ryan, and good morning, everyone. Our strong fourth-quarter performance was a fitting end to a very ambitious 2018, which delivered record earnings and our ninth consecutive year of adjusted EPS growth to our shareholders. Our marine business continues to succeed in a steady global marine market with our outstanding financial results reflecting the successful execution of our marine strategy. Our capital strategy accomplishments included funding important investments to support organic growth and leveraging our strong balance sheet to fund the Power Products acquisition.

We also funded our legacy pension obligations as we prepared to exit our remaining plans in 2019 and increased our dividend for the seventh year in a row. Finally, we continue to prepare for the separation of the Fitness business from the portfolio with the process progressing as planned. I'd like to share some perspectives on our segments and the marine market. The engine segment had a record sales and earnings in 2018, with strong contributions from both propulsion and parts and accessories.

The second half performance of this business accelerated due to both top-line expansion and margin improvement. The growth in propulsion was led by the new 175- to 300-horsepower V6 and V8 outboard engines platform, introduced earlier in 2018. Along with growth in other high horsepower product, which continues to be in high demand as customers migrate to larger boats with more content. Enabled by planned capacity expansion, outboard engine sales increased over 17% for the year.

Additional capital projects are under way, which will further enhance our engine production capabilities starting in the late 2019. The parts and accessories businesses strengthened its leading market position by purchasing Power Products, which in addition to growing its already formidable aftermarket business, provides opportunities for Mercury to leverage relationships with boat OEMs to provide an even broader portfolio offerings. The result is full-year revenue growth of 14%, operating margin accretion of 70 basis points and 22% operating leverage, all outstanding achievements. The boat segment also performed well in 2018 with solid increases in net sales and operating margins, resulting from contributions across the product portfolio.

I think it's important to note that the boat segment delivered $100 million of operating earnings in 2018, which last occurred in 2006 when the segment reported $2.9 billion in revenue. With each of our brands contributing to the profitability the segment, operating margins reached 7% for the year, which is already at the bottom end of our 2020 target range. The Boat Group continues to be led by its premium aspirational brands, including Boston Whaler, Lund and the revitalized Sea Ray, while steadily improvement from Harris pontoons augmented the segment's overall performance. Sea Ray's sport boat and cruiser business has performed well since the decision was made to keep it in the portfolio, and there is favorable momentum looking forward for this market-leading brand with very encouraging results from recent boat shows.

Looking at our combined marine segments, global revenue grew by 12%, with 8% growth achieved on a constant currency ex-acquisitions basis. Revenue growth was strongest in the U.S. as each segment recorded strong gains. The engine segment performed well across all regions with growth around the globe in both propulsion and P&A.

The boat business also delivered solid results, but was affected by certain regional factors. In Europe, revenue growth was influenced by colder weather early in the selling season, tariffs on product imported from the U.S. and supply constraints resulting from a capacity reduction in a contract manufacturing arrangement. In Canada, boat sales were also dampened in the second half of the year as dealers limited off-seasons orders due to retaliatory tariffs on product imported from the U.S., which comprise more than half of our boat sales in Canada.

Note that earlier in 2019, we announced the dealer programs to cover a portion of the tariff's impact with the goal of prompting wholesale orders in time for boat shows in the start of the retail selling season. The U.S. marine market performed in line with expectations in 2018, with industry unit growth of 3%. Outboard boats and engines continue to drive industry growth with increases in aluminum fishing boats and pontoons, outpacing overall industry performance.

The fourth quarter, which represents less than 10% of annual retail sales was softer against the very strong Q4 of 2017. Although the outboard engine market continue to grow with Mercury picking up share in all categories 75-horsepower and above. Looking in our internal retail data for boats based on pipeline inventory activity, our U.S. retail boat registrations in the fourth quarter were up 1%, while global unit sales declined by 3% versus a very strong fourth quarter of 2017.

If you exclude the impact of Lowe on these results, as this brand continues to be influenced by Bass Pro's acquisition of Cabela's, which we've discussed throughout the year, retail registrations were up 10% in the U.S. and 2% globally for the quarter. For the full year, excluding the impact of Lowe, registrations increased by 3% in the U.S. and by 2% globally.

These figures are generally in line with industry growth rates and our initial expectations for 2018. Looking ahead to 2019, we remain confident in the steady growth of marine market and anticipate retail unit growth in the U.S., in line with 2018 growth, which was toward the bottom of our 3% to 5% targeted range. Global growth will trend lower as international demand is influenced by tariffs and trade policy. Early feedback from boat shows has been supportive of our market view with premium categories, including Sea Ray and Boston Whaler performing better than value product and pontoons.

Our 2019 unit growth figures will no longer be affected by the year-over-year comparability issues involving Cabela's as Lowe has been actively reestablishing distribution. Lowe is also benefiting from signing many new dealers, transitioning from an aluminum boat brand, recently acquired by a competing engine manufacturer. Turning to the Fitness segment, our attention remains firmly on completing the separation of this business from the portfolio by the end of the first quarter or as promptly thereafter as practicable, while maximizing value to our shareholders. The spin process is on track with the Form 10 filed in November and we continue to work with our advisors to evaluate other options, including an outright sale of the business.

Fitness' fourth quarter was mostly consistent with our expectations. For the year, revenue was flat against 2017. Sales to Planet Fitness declined in the fourth quarter as projected. And although gross margins remained steady sequentially, comparisons versus the previous year continue to be challenged due to the factors we've discussed throughout the year, including freight and the launch of our new cardio products.

The new leadership team with oversight from the dedicated boat committee is executing against the refocused strategy to position this business for strong and long-term success. Now I'll turn the call over to Bill for additional comments on our financial performance.

Bill Metzger -- Chief Financial Officer

Thanks, Dave. Starting with the fourth quarter on an as-adjusted basis, diluted EPS was $0.98, a 32% increase versus fourth quarter 2017. Revenue was up almost 9% with marine business up close to 14%. The combined marine segments had increases in operating margins of 300 basis points and operating earnings of 47%.

For the full year, also on an as-adjusted basis, diluted EPS was $4.77, a 19% increase versus 2017. Revenue was up just over 9% with marine segment up 12%. Adjusted operating margins were consistent with 2017 on a consolidated basis and up 90 basis points for the marine segments. The adjusted operating earnings of the marine segment increased by almost 19% versus 2017, exhibiting the strength of the marine portfolio and giving us confidence in the outlook for the company upon separation of the Fitness business.

In the marine engine segment, revenue grew by 19%, led by continued robust demand for our new higher horsepower outboard engines with Power Products adding 9% to the growth rate. The organic P&A business continues to grow at a steady pace with controls and rigging products gaining acceptance as customers add more content and functionality to their boats. Mercury's adjusted operating earnings increased by 59% in the quarter due to the increased sales as well as favorable impacts from changes and sales mix with -- which both contributed to a 360 basis-point increase in adjusted operating margins and operating leverage of 33%. The boat segment had a very solid fourth quarter.

Adjusted revenue grew 7% against a strong fourth quarter of 2017, led by sales increases at Boston Whaler, Harris pontoons and Sea Ray. The Boat Group leveraged the sales increase into a 90 basis-point improvement in adjusted operating margin and a 20% increase in adjusted operating earnings with operating leverage of 21%, continuing the trend from the third quarter. Wholesale unit sales were down 4% for the fourth quarter and the full year, while average sales prices increased 10% in the quarter and 11% for the year. These increases in ASPs reflect customers continuing to migrate to boats with more content and higher horsepower engines, as well as growth in premium brands, outpacing the performance of value product lines.

In addition, we have raised prices in response to cost increases. Dealer pipeline ended the year at 36 weeks of boats on hand measured on a trailing 12-month retail basis, which is consistent with prior-year levels and demonstrates our ongoing discipline on over pipeline management. We believe that our pipeline levels are appropriate as dealers prepare for upcoming boat shows and the 2019 retail selling season. For 2019, we are planning for weeks of inventory on hand at year end to be slightly lower than year-end 2018 levels.

As expected, net sales for the Fitness segment declined by 6%, which was mostly the result of lower sales to Planet Fitness and declines in Cybex branded cardio product. Commercial strength revenue increased due to improved product availability. Gross margins were relatively consistent on a sequential basis, but down versus 2017 due to several operating factors, including changes in sales mix, inventory adjustments, primarily related to product transitions, increased freight cost, along with other cost inflation and inefficiencies. As a result, operating earnings fell by $17 million versus 2017.

Our fourth-quarter GAAP results also reflect the impact of several items, which have been excluded from our as-adjusted results. We recorded restructuring exit and integration charges in the quarter totaling $24.6 million, which included a further impairment of the Cybex trade name of $14 million. We also recorded restructuring charges of $8.6 million and operating losses of $11 million related in the wind down and exit of the sport yacht and yacht operations. In connection with the Power Products acquisition, we recorded $11.8 million of purchase accounting costs and amortization.

Finally, we incurred other nonrecurring charges related to Fitness business in addition to separation costs. Moving to 2019, with the pending separation of the Fitness segment, we are providing outlook comment and guidance, excluding the Fitness business. This presentation provides greater visibility into the performance in the marine operations and will minimize adjustments to our outlook and separation. However, until completed, our reported continuing operations GAAP results will include Fitness.

On this new basis, absent significant changes in the global macroeconomic climate, our plan reflects overall revenue growth rates in 2019 in the range of 9% to 11%, including an approximate 4% benefit from completed acquisitions. We anticipate strong improvement in both gross and operating margins with operating expenses declining slightly versus 2018 on a percentage of sales basis and operating earnings growth of a high-teens percent. Finally, our guidance for 2019 reflects on an as-adjusted basis, excluding the Fitness business in the range of $4.50 to $4.70 per share. For the first quarter, we expect marine business revenue growth to be slightly higher than the guidance range for the year.

And for marine business operating earnings growth to be within the full-year range. If we look at 2019 guidance on a consolidated basis, including the anticipated full-year 2019 results of the Fitness business, we would project adjusted EPS of $4.80 to $5.05 per share. Dave will provide more details on the expectations for the Fitness business during his outlook section at the end of the call. Incorporated into our 2019 guidance is our view of the impact of tariffs, which has not changed since the update provided after we received the exclusion on the 40- to 60-horsepower outboard engines a few weeks ago.

Our marine business still anticipates an impact to 2019 pre-tax earnings of $17 million to $22 million related to tariffs, or $10 million to $15 million incremental over 2018. This estimate assumes that the previously announced wave three of China tariffs will rise 25% or to 25% on March 2, absent the U.S. administration reaching agreement with China, and assumes no impact from the potential wave four of tariffs, which would have a minimal impact on the marine business. The impact of retaliatory tariffs on both exports to Canada and the EU have been incorporated into our plan, including the program assistance for Canadian dealers that Dave discussed earlier.

Finally, as it relates to the Fitness business, the potential wave four of China tariffs would have an estimated $8 million to $10 million negative impact on pre-tax earnings in 2019. Let me conclude with comments on certain items that will impact our P&L and cash flow for 2019 with a focus on some of the more notable items. We anticipate free cash flow in 2019 in excess of $300 million, reflecting the successful execution of our operating strategies. This estimates includes runoff amounts related to the sport yacht and yacht operations, which were accrued at year-end and excludes any Fitness segment results or separation costs.

We estimate depreciation and amortization of between $100 million and $110 million, which excludes the intangible amortization associated with the Power Products acquisition. Finally, our estimated effective book tax rate for 2019 is between 23% and 24% for the year, up versus 2018 due primarily due to lower foreign tax credit benefits and the impact of excluding the Fitness business. As we have discussed on recent calls, we continue to execute against our capital strategy and debt refinancing plans with no material deviations thus far. We plan on reducing our debt by at least $150 million to $200 million in 2019 and our estimated net interest expense for the year is expected to be between $65 million and $70 million, with the debt reduction to actions primarily occurring in the second half of the year.

We will continue to invest in growth with capital expenditures for the year expected to be between $240 million and $260 million, including investments in capacity and new products, as well as certain cash payments in 2019 that relate to 2018 activities. After the accelerated pension contributions in 2018, we are left with the residual pre-tax funding requirement of between $15 million and $25 million to fully exit the plans, which we intend to complete this year. Finally, our capital plan for 2019 does not incorporate the utilization of any net proceeds that we will receive in connection with the Fitness separation. Upon completion, we will revisit our debt retirement objectives and share repurchase program.

Finally, our debt dividend policy remains unchanged, and we will continue to evaluate opportunities to grow dividends. I will now turn the call back to Dave to continue our outlook comments.

Dave Foulkes -- Chief Executive Officer

Thanks, Bill. As we look to 2019, our plan for our marine business built on a strong momentum generated in the second half of 2018. For the marine engine segment, this entails growing market share in outboard engines, especially in the greater than 150-horsepower categories and completing additional capacity initiatives necessary to meet the strong demand for these products. We will complete the integration of the Power Products business into our strong P&A business and drive synergies resulting from the acquisition.

While also strengthening the aftermarket business, Power Products provides the backbone of electrical systems that complement Mercury's existing propulsion, steering and other control systems provided a fully integrated systems offering for boat manufacturers. Finally, Mercury will not slow down its aggressive pace of new product developments and looks forward to another year of releasing exciting propulsion and P&A products, which make boating more accessible and enjoyable. The results of these activities is estimated net sales growth for the segment in the low to mid-teens percentage range, with a strong improvement in operating margin. Similarly, the Boat Group will look to extend its 2018 momentum.

Sales are anticipated to grow mid-single-digit percent in the U.S. led by continued growth in premium brands. International sales are expected to be flat versus 2018 as a number of factors will impact top-line growth, including the rationalization of our commercial and government products business, retaliatory tariffs and the European supply constraint I discussed earlier, but these factors will have a minimal impact on segment earnings. We intend to continue to grow margins in 2019 through operational efficiency improvements at our facilities and other cost initiatives.

We will also lay the groundwork for additional future growth by launching several significant new products toward the end of the year. The revitalized Sea Ray sport boats and cruiser business is providing a platform for several of the marine business' technology platforms, including Nauticon, advanced control systems and other enhancements, which will continue to drive high value content on boats. Finally, as you'll hear more about in a couple of weeks at our investor meeting in Miami, technology and consumer engagement activities will be a catalyst for more growth in the Boat business as consumers are demanding more content on boats, focused on connectivity and ease of use. Moving to the Fitness business, the 2019 plan anticipates net sales declining by a mid-single-digit percent, reflecting lower sales to value-oriented health clubs and flat market demand.

Gross margins are expected to remain consistent with 2018 levels. As the separation process continues, Fitness will continue to execute against the new strategic plan put in place by the reorganized management team. This plan will leverage increased investment in new products and information technology, including the modernization of the businesses sales platform and continuation of its digital and online content strategy. Finally, the business will engage in cost-reduction initiatives and actions to improve operating efficiency, including opportunities to significantly reduce freight and certain manufacturing process costs.

These actions will result in further operating dilution in 2019, but will be accretive to the growth of the business in future years. Overall, as evidenced by our robust marine business sales and earnings growth and continued execution of our marine business and capital strategies, 2018 was a banner year for our company. I'm looking forward to leading the company and our over 15,000 dedicated employees to even greater success in 2019 and beyond. Mercury Marine is celebrating its 80th anniversary throughout 2019, reflecting on its strong heritage of innovation and leadership in the marine industry.

There'll be several opportunities during the year for Mercury to showcase its focus on product developments and technology, and Mercury looks forward to celebrating with everyone who has made this past 80 years such a success. Finally, we show the market calendars for our upcoming investor event at the Miami Boat Show, which will be held that the Mandarin Oriental hotel in downtown Miami on Thursday, February 14, starting with lunch at 11:45 and presentations at 12:30. Although we hope to see many of you in Miami, the event will be webcast for those not able to attend in person. I will now open the line for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Michael Swartz of SunTrust. Your line is open.

Michael Swartz -- SunTrust Robinson Humphrey -- Analyst

Good morning, everyone. Just wanted to touch on, I guess, the engine business and incremental margins for the year ahead. It looks like you're assuming in the guidance of low 20s, maybe 20%, 21%. Incrementals following the year, which you did, I think you said 22% and you came out of the year doing in the 30s.

So I just want to get a sense of, first, are my numbers correct? And then maybe how we think about some of the incremental investment going forward, as we think about '19 and beyond?

Bill Metzger -- Chief Financial Officer

Michael, it's Bill. I would kind of characterize it this way. We've got going into '19, still very, very strong wind in our back relative to the new product that we introduced in '18, both from a demand perspective as well as an incremental margin perspective. If you dial the clock back on '18, we had some challenges, kind of midyear, relative to the launch of and bringing online some new capacity in the product.

We also started up a new system in our P&A business, both of those will not be a factor of moving forward. I would point out that tariffs, which are mostly engines intensified moving into '19, we've got a little bit more currency headwind in '19 versus where we were in '18. When you blend all of that stuff together and given what the business wants to accomplish from an investment and product perspective, I'd feel very, very comfortable with where we kind of set the leverage expectations for the business. There's certainly factors that are there that could produce a better result.

But I think where we sit at this point in time of the year, it's absolutely the right place to be.

Michael Swartz -- SunTrust Robinson Humphrey -- Analyst

OK, that's helpful. And then second question, just, maybe, David, provide us some color, I think you have mentioned some positive commentary out of the early boat or retail shows that you've seen, maybe a little more color that you can provide on that topic?

Dave Foulkes -- Chief Executive Officer

Yes, certainly. So I would say that results of the shows early this year, let's say, supportive of our growth projections, and I'd say fairly balance. We have a -- we're in a very fortunate position with the breadth of our portfolio that as things ebb and flow between different segments across the years, we can always take advantage in one or more segments. Sea Ray and Boston Whaler have had a particularly strong start in the Boat shows in the U.S.

and also, in fact, the large Düsseldorf Boat Show in Europe. So I would say at the moment, we feel that our premium fiberglass brands are off to a strong start, but we've seen somewhat softer performance in value, aluminum and pontoons in the last year. So overall, I think constructive and supportive, somewhat of a different balance between 2018 and early 2019.

Michael Swartz -- SunTrust Robinson Humphrey -- Analyst

OK. Great. That's it for me.

Operator

Our next question comes from the line of James Hardiman of Wedbush Securities. Your line is open.

James Hardiman -- Wedbush Securities -- Analyst

Good morning. Thanks for taking my questions. So industry growth, 3% in the U.S. this year, that's down a little bit versus last year.

I guess, what gives you confidence that we won't see an incremental step-down into 2019 and that the 2018 deceleration isn't the beginning of a broader trend?

Dave Foulkes -- Chief Executive Officer

Well, I think from a broader perspective, we had a good fourth quarter. I think a number of people are reporting that, although there was some softness in Q4 of last year that there is a pickup in early 2019. And I think reports on early shows, reports on dealer confidence, are all constructed toward the three percentage range, although potentially with a slightly different mix as the last year. I think from Brunswick's perspective, we're very excited about the initial performance of our premium brands in 2019.

I think we're set to capitalize on the market, whether it's 3% or somewhat different to that, I think we're very strongly positioned. But nothing at the moment suggests to us a material deviation from that market scenario.

James Hardiman -- Wedbush Securities -- Analyst

OK. Very helpful. And then the Fitness business, obviously, another tough year anticipated for '19, but where the stock is trading, it's almost as if people are describing zero value to Fitness business. I guess, if I think about 2019 earnings are getting cut in half, $0.30, I guess, where did that number peak, I guess, is question number one.

Question number two, what do you think the potential earnings power is of that Fitness business? If I'm doing the math right, it seems like you're initial 2020 guidance was north of $1. And ultimately, this may or may not be the best setting to ask this question, but what do you think is a fair price for the Fitness business?

Bill Metzger -- Chief Financial Officer

James, I'm not sure I'm going to get into trying to size what the value of the business is, but I will give you some perspectives on what the businesses think about relative to what their long-term objective should be. 2018 certainly turned out a lot differently than we've thought it was going to, I would say, the lion's share of the delta really starts to be tied to, a, where the Planet Fitness outcome ultimately landed with that supply relationship, but also just how the new integrity product line ended up being launched and some of the cost implications, including freight and install, a little bit of warranty, a little bit of production inefficiency, etc. We're just in a completely different place than where we thought we'd be at the end of '18. Looking forward, I'd say the business has an opportunity, a, through better execution to improve margins, I think, fairly substantially from where they're going to trough in 2019.

I think there's opportunities for them to start to stimulate some demand through some additional product investments. I think some of the investments they had planned on the IT side, in simplification side, will allow them to operate, perhaps, in a little bit different cost structure today or tomorrow than they are today. I think all of those have a bit longer-term sort of implications to the earnings of the business. It's not a 2019 thing, it's more of a 2020 to 2021, is when the benefits will start to show.

The team that's there has done a lot of work in a fairly short period of time to put together a plan that's really focused on getting the margins of that business back, not to where they would've been pre kind of back in the 2014, '15 range, but that still a business that should operate substantially higher than where they are today from an operating margin perspective.

James Hardiman -- Wedbush Securities -- Analyst

That's helpful. Thanks, guys.

Dave Foulkes -- Chief Executive Officer

Does that help?

James Hardiman -- Wedbush Securities -- Analyst

Yes, it does. Thank you.

Operator

Our next question is from the line of Scott Stember of CL King. Your line is open.

Scott Stember -- C.L. King -- Analyst

Good morning, guys.

Dave Foulkes -- Chief Executive Officer

Good morning.

Bill Metzger -- Chief Financial Officer

Good morning.

Scott Stember -- C.L. King -- Analyst

Yes, yes. Could you maybe just talk about pontoons and aluminum fish? Your comments are echoing what we're hearing across the board of some of the lower-priced entry-level stuff, lagging some of the more expensive stuff. Maybe just how does that factor into your expectations for 2019? And maybe just if you could just broader speak and just give us an explanation of why you think we're seeing weakness there?

Dave Foulkes -- Chief Executive Officer

Well, I'll certainly -- I'll do my best. I think our primary focus in our Boat businesses is on continuing to improve our margins, and we're focused very, very heavily on our premium aspirational boat brands, particularly our Boston Whaler, Lund and now revitalized Sea Ray. As I mentioned earlier, the fiberglass brands seemed to be doing well. Harris, which is our premium pontoon brand was capacity constrained through 2018 and will be, to some extent, in 2019.

So even though there might be some market softness in pontoons, we still feel confident about the Harris brand. I would say that the softness that we've seen in some aluminum fish value brands does not to extend to the Lund brand, which is our premium brand. So I think that we're watching the marketplace, it's a difficult time of year, there are a lot of weather effects going on, certainly weather affected some of the early shows in the Midwest and in Canada. So we'll wait and see over the next few weeks or so how this develops.

I would say that from our perspective, from Brunswick's perspective though, although it might affect unit volumes, our premium brands with the best margins are performing very well with no indications of weakness. I would say that the comment I made about the Lowe brand. Lowe is recovering, as you know, from Bass Pro's acquisition of Cabela's, but really is benefiting from migration of dealers away from other value aluminum brands that was subject to some disruption last year. And so it'll be interesting to see for all of us how that balance plays out during the year.

And of course, we'll know more in a month or so, as we get through some of the weather effects and lower volumes associated with this time of year.

Scott Stember -- C.L. King -- Analyst

Got it. And last question on tariffs. Obviously, we're getting, I guess, closer to a decision from the administration whether we'd go up to a 25% rate on list three. Can you just give us a couple of scenarios if we do get a 25%, obviously, you have that within the guidance here, but if the 10% goes away outright at some point, maybe just give us an indication of what you would expect to get clawed back into as far as earnings for 2019? I know it's difficult because it's different moving pieces and commodities and whatnot, but just maybe just give us a little flavor there?

Bill Metzger -- Chief Financial Officer

Scott, I guess, I would characterize, I think we've done a pretty good job laying that out in the script, kind of the $17 million to $22 million is what we've got included in the results for 2019 related to tariffs. If the tariff situation were to go away, the lion's share of that number is China. There's probably some revenue implications to it that probably aren't included in that number, but I think when you balance that up against the other kind of headwinds, tailwinds within the Boat Group, I would focus on the $17 million to $22 million in as what the number would be.

Scott Stember -- C.L. King -- Analyst

Got it. Thanks, again.

Operator

Our next question is from the line of Craig Kennison of Baird. Your line is open.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Good morning. Thank you for taking my questions. Wanted to start with Fitness. Have you considered a delay in the spend or sale of that business given the recent performance and given maybe the desire to give that time -- I'm sorry, give the team some time to show better results? And if so, how do you weigh that against maybe shareholders that want to see you move on as quickly as possible?

Dave Foulkes -- Chief Executive Officer

Yes. We're firmly on plan to separate the business. I think there are always things that you could think about that might get better or worse, but we are firmly in the process, in flight with separating the business and working, as we said, along two parallel paths, spin and potential sale. So that is the plan and continues to be the plan.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

And then on a different note, Power Products. Maybe just talk about where you're seeing opportunity for synergy? What surprised you about that opportunity since you've acquired it?

Dave Foulkes -- Chief Executive Officer

Well, Power Products, I think, was a wonderful acquisition for us. If you think about Brunswick marine as a whole, we have a marine platform that is unparalleled and generate -- with the ability to generate tremendous synergies and operate -- and offer value to the whole industry, I think. Mercury is wonderful propulsion systems, our P&A business has everything from seats to lighting, to a whole range of other things. But getting the Power Products gives us a whole electrical backbone and digital backbone of the boat.

And so we can now come to a boat OEM and offer them a fully integrated solution for their boat systems with propulsion, electrical, digital control, water management, steering, essentially allowing an OEM to focus where they want to focus, which is how to differentiate their product, which is typically the boat, the use case, the hull, the interior, those kind of things. Nobody else in the marine industry can offer that kind of integrated solution. And so as soon as we got Power Products, we built that team, which is already out with OEMs, offering that integrated service, and we have a lot of interest on it. So I think I'm incredibly excited about that acquisition.

We could not -- I mean, you could not have imagined a better way of filling out our P&A our portfolio than Power Products. It was the perfect acquisition, it gives us something that nobody else in the industry has anything like, and I think the Power Products team is excited about it as we are. They have a lot on their plate and we're finishing out the acquisition on plan, but I know the whole team is tremendously excited about what we can now offer to the marine industry.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Thank you.

Operator

Our next question comes from the line of Tim Conder of Wells Fargo Securities. Your line is open.

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you. And David, welcome to your first official call here. Looking forward to seeing you again in Miami. A couple of things, gentlemen, here, and just a follow up on the aluminum and the question that was asked earlier.

How much -- again, early in the season, you alluded to weather impacts, how much of that also is maybe from Canada with Princecraft in addition to weather? Any -- and also, from the dealers, are you seeing any feedback that, that consumer may be on the margin, it's harder to close sales year over year relative to the larger products?

Dave Foulkes -- Chief Executive Officer

Good question. I think the Toronto Boat Show did show softness in aluminum. Princecraft is uniquely positioned as a Canadian-based manufacturer, and not subject to tariffs, so we're excited about the prospects for that business. But there's no question that the combination that tariffs and perhaps other things going on in the Canadian economy are potentially affecting buy behavior.

I would say though that I would not read too much into these first shows. It really is a very dynamic time in the year with volumes low and show attendance and other things, significantly affected by weather and other factors. So I think the good news out of all this is that the premium brands are doing well, including our Lund brand, which is a premium aluminum fish brand. So if there is any softness, it's in the value area and I would say, it's very early and we'll keep monitoring it.

We have some factors, as I mentioned earlier, going in our favor in terms of Lowe's competitive position, which is somewhat different to last year. So we'll continue to go after that as hard as we possibly can.

Tim Conder -- Wells Fargo Securities -- Analyst

OK. OK. And then from the perspective of a little bit more on the Fitness side, do you anticipate filing an updated, I think, it's F-10, here for that business? And then it sounds like, Dave, and again, do you expect a sale or spend here sort of in early part of Q2? Is that what we heard from the early part of your commentary?

Dave Foulkes -- Chief Executive Officer

I'll let Bill talk about the form F-10 update.

Bill Metzger -- Chief Financial Officer

Yes. The Form 10, Tim, is, obviously, we filed the initial, we've gone through the review process with the SEC. You would expect there would be an update to that filing to bring forward financial statements more current as well as fill in some other information items that weren't included in the first Form 10. So you should expect to see an update to the Form 10 relatively shortly, I would say.

The second comment relative to -- what was the second?

Dave Foulkes -- Chief Executive Officer

It was really associated with timing. And so I think the opposition is that we are working as diligently and hard as we possibly can to execute both paths. The two paths give us different slightly tales to them, but we are progressing to the plan that we've declared.

Tim Conder -- Wells Fargo Securities -- Analyst

OK. OK. And then from the ramping of the engine business. I think just a little bit more timing, you said that you expect that to be more second half weighted, how much of that is weighing on the start-up, ramp-up cost? And roughly, what type of additional capacity you're adding based on the existing footprint that was, obviously, just expanded in '18?

Dave Foulkes -- Chief Executive Officer

So I think the good news from the Mercury team in Fond du Lac, as usual, they are a little figurative machine up there. So they are squeezing out every last unit they can from the current capacity and in a lot of cases, exceeding where we thought they would be. But really, the next big increase in capacity will be online in Q4 of 2019. Unlike the original kind of capacitization for the new platform, this next tranche is more, I wouldn't say tactical, but we're not building any new walls, anywhere we're essentially adding machines inside Fond du Lac and also adding some capacity to the supply base.

So we're confident in the execution of that, and we do believe that, that will give us adequate capacity to meet demand for the next several years. The good news about that additional capacity is that a lot of that comes at a high margin and our initial capacity because we're able to satisfy demand in some of the channels that have not been fully satisfied so far, particularly the dealer channel, which is a higher margin channel for us. So there's some compounding of the effective adding the balance of the capacity there, but our plan is that we will not be capacity constrained in that product range for the significant future beyond the end of 2019.

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you.

Operator

And our next question comes from the line of Eric Wold of B. Riley. Your line is open.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Thank you. A couple of questions. One, kind of going back to a couple of the topics previously. On the value product softness, any feedback that you're getting from dealers in terms of what they're hearing from consumers that is driving that? Is it a confidence issue? Is it financing given that more of the value product is financed versus the cash buyer?

Dave Foulkes -- Chief Executive Officer

I would say, I don't honestly have extraordinary level of detail on that. We're basically getting initial feedback from shows here, not specifically from dealer commentary. I would say though, and I know you know this but the unit effect of this kind of potential demand softness on our value product is really a minimal, I mean, really a minimal impact on our earnings. So we will be working very, very hard to maintain and improve our share.

We'll do what's necessary in the various market conditions, but I would say just to be, I just want to make sure that, that is -- it's understood that, that is a relatively minimal effect on our earnings in 2019.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Perfect. And then going back to the tariffs. So to make sure I understand, so the $10 million to $15 million incremental impact this year versus last year, that, on an apples-to-apples basis, is what the kind of the reimbursement of the 40-, 60-horsepower tariffs from last year?

Bill Metzger -- Chief Financial Officer

That's correct.

Eric Wold -- B. Riley FBR, Inc. -- Analyst

OK. And then so I'm just thinking about it. Is it too simple that you -- if that indicates the impact last year was about $7 million for mostly the back half. And then to simply to just double that is going to base an impact to '19 before the rise to 25% from 10%, or is that not that simple?

Bill Metzger -- Chief Financial Officer

It's not going to be quite as linear throughout the year as you might think because the timing of when tariffs came online, it's probably a bit more first half weighted than second half weighted but...

Eric Wold -- B. Riley FBR, Inc. -- Analyst

OK. And then just final question on the Fitness spin or separation. I have to assume the biggest factor that you're driving decision due to sale versus spin is the valuation expectations from what your sale would bring versus what you think you could end up getting in a post-spin environment. I guess, on that note, anywhere to frame the level of interest that you've seen from potential buyers, kind of from when you first announced it through to the Form 10, through to now, given all this kind of transpired over the past year?

Bill Metzger -- Chief Financial Officer

I would kind of frame it this way, Eric, that it -- we deem this to be something that should be an attractive asset for somebody to own it. We did and have received inbound inquiries on the process. We would expect as we go through a more formal process, to have a number of folks that are interested in the asset. So we don't consider this to be something that's not going to have an appropriate level of interest from financial buyers or potentially, others, and that's kind of the way I'd characterize it.

Operator

Our next question comes from the line of Joe Altobello of Raymond James. Your line is open.

Joe Altobello -- Raymond James -- Analyst

Great. Thanks, guys. Good morning. Thanks for squeezing me in.

I guess, I want to extend my congratulations as well, Dave, on your first earnings call. Hopefully, market's listening, some were warm, although it's probably not hard to be warmer than Chicago today, I suppose. So I guess... No problem.

First of all, I guess -- first of all, obviously speaking, how does your strategy differ with what's been in place over the last few years, if at all?

Bill Metzger -- Chief Financial Officer

Well, I think.

Dave Foulkes -- Chief Executive Officer

I think, first of all, we've had a team -- obviously, Mark is no longer in the CEO role, but we have tremendous continuity within Brunswick. People I'm with, Bill Metzger is right; next to me, John Piper; Huw Bower, on the Boat side, we've been around for a number of years as we've crafted and put together the pieces of the strategy. And I would say that we are really -- on the marine side, really firing on all cylinders with great products, with capturing new market share, with margin expansion. So you will see us taking full advantage of that.

We think there's plenty of runway in the current -- we refer to it as a platform. Nobody else in the marine industry has the kind of platform that we have, which is a combination of propulsion, now really deep-cycle-resistant P&A and a tremendous portfolio of Boat businesses, nobody has anything close to that in the industry. So we intend to fully capitalize on that. And that is a combination of growth initiatives, which includes new product development, potentially some new categories, along with a rigorous attention to operating excellence and quality.

I think what you'll see, if you're in Miami as well, is that we see potential enlargement of the addressable market, if you like, in marine, through a number of different areas that are appearing, not only in the marine vertical but also in a number of other verticals, autonomy, connectivity, shared access models, they're all things that we'd be talking about in Miami as meaningful extensions to the platform. So I think we've become and are now noted to be the innovator in the marine marketplace, but I would tell you that, that does not mean in any way that we will lose focus on operating excellence and product development in our core business.

Joe Altobello -- Raymond James -- Analyst

That's very helpful. And I guess, just to follow up on that, one of the rationales for entering Fitness was to sort of de-risk the portfolio and take some cyclicality out of the business. Now that you're unwinding that, is there any thought to additional expansion down the road or is the plan now going forward, going to be just a pure play marine company?

Dave Foulkes -- Chief Executive Officer

We are solidly in marine. That is, by far, our primary focus. A couple of our businesses like Power Products do have some product categories that extend beyond Marine, but our entire strategic focus now is on marine. And we honestly believe, as I said, with a platform that we have, that we have a tremendous runway in marine business.

We have really only just begun to exploit like the Power Products acquisition. We have plenty of room to run. I mean, Mercury is not slowing down at all, but the engine launches that you saw in 2018 are going to be followed by new products this year, which are very exciting, and you'll see exactly the same thing next year and the year after. Our Boat businesses, I think -- what's exciting about our Boat portfolio now is that over time, there may have been single large contributors to profitability but now, we have multiple contributors to profitability, much more balanced portfolio and a lot of excitement in the Boat business about our ability to win in new markets, introduce new hybrid products like the Boston Whaler Realm product that we introduced, which is really a whitespace kind of product.

Now we have excitement about attracting millennials into the business. So we have just a tremendous runway and a very, very excited and dedicated team.

Operator

And our next question is from the line of Gerrick Johnson with BMO Capital Markets. Your line is open.

Gerrick Johnson -- BMO Capital Markets -- Analyst

Hi, good morning. On the third quarter, Mark mentioned that you expect retaliatory tariffs would be removed and normal wholesale demand would return some time in 2019, so is that no longer the case?

Bill Metzger -- Chief Financial Officer

Gerrick, I would say that our assumption is that there is going to be some level of demand effect as a result of retaliatory tariffs. We probably are a bit more conservative now than we would have been back in the third quarter.

Gerrick Johnson -- BMO Capital Markets -- Analyst

OK. And on your guidance...

Bill Metzger -- Chief Financial Officer

Again, the margin, Gerrick, I'm not sure it's a big needle mover. At that point in time, there seemed to be quite an impact. Remember, we've taken a fairly dramatic decline here in the second half of the year relative to the Canadian demand. We're anticipating that, that's going to be more stable moving into '19 without a lot of recovery.

Gerrick Johnson -- BMO Capital Markets -- Analyst

OK. And so I should assume that your guidance for international boat sales being flat assumes that those retaliatory tariffs stay in place? And then...

Bill Metzger -- Chief Financial Officer

That is correct.

Gerrick Johnson -- BMO Capital Markets -- Analyst

OK. And, let's say, there was runaway today, what would your international boat guidance be if retaliatory tariffs went away today?

Bill Metzger -- Chief Financial Officer

I guess, the best answer is improved. I mean, magnitude wise, Gerrick, it's difficult to really understand where the consumer interest would be in a different pricing environment. That Canadian market is still a very strong market, especially for the aluminum product and pontoons. I would expect to go back to more normal market conditions.

Dave Foulkes -- Chief Executive Officer

Yes. I would say, in terms of Europe, we do have -- we do produce a lot of the product that we sell in Europe, we manufacture in Europe in our facilities in Poland and Portugal. We don't often talked that much about it, but we have a couple of brands over there, Quicksilver and Uttern that make up the majority of our volume. And so what we're really talking about is the exported volume that tends to be higher margin product for us, and so that would certainly give us an opportunity to richen up the mix in Europe, although I don't think I could quantify it today.

Operator

And at this time, we would like to turn our call back to Mr. Dave for some closing remarks.

Dave Foulkes -- Chief Executive Officer

Well, I -- thanks to everybody on the call for your good wishes. I could not be more excited, both about what we did in 2018, and what we plan to do in 2019. I'm very, very excited to see you all in Miami. It's going to be a great show for us.

We're excited to talk about our strategy in a lot more detail. And I think that we will be able to convey that unbelievable excitement and momentum that we feel on the marine side of that venue. So I'm excited, I know we'll get you excited, I look forward to seeing you all in Miami.

Operator

[Operator signoff]

Duration: 63 minutes

Call Participants:

Ryan Gwillim -- Vice President of Investor Relations

Dave Foulkes -- Chief Executive Officer

Bill Metzger -- Chief Financial Officer

Michael Swartz -- SunTrust Robinson Humphrey -- Analyst

James Hardiman -- Wedbush Securities -- Analyst

Scott Stember -- C.L. King -- Analyst

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Tim Conder -- Wells Fargo Securities -- Analyst

Eric Wold -- B. Riley FBR, Inc. -- Analyst

Joe Altobello -- Raymond James -- Analyst

Gerrick Johnson -- BMO Capital Markets -- Analyst

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