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Brunswick Corp (BC -0.27%)
Q3Â 2018 Earnings Conference Call
Oct. 25, 2018, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to Brunswick Corporation's 2018 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections you may disconnect at this time.
I would now like to introduce Ryan Gwillim, Vice President, Investor Relations. Ryan Gwillim, you may begin.
Ryan Gwillim -- Vice President, Investor Relations
Good morning. Thank you for joining us. On the call this morning are Mark Schwabero, Brunswick's Chairman and CEO and Bill Metzger, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All these documents are available on our website at brunswick.com
During our presentation, we'll be referring to certain non-GAAP financial information, reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results. As a reminder as a result of the June announcement regarding Sea Ray, the results of the entire Sea Ray business are again being reported and continuing operations for GAAP purposes, which matches the basis of reporting used in comparable 2017 periods.
However, as adjusted non-GAAP result exclude the Sea Ray sport yacht and yacht operations that are being wound down. Therefore, for all periods presented in this release, all figures and outlook statements incorporate these changes unless otherwise noted. For more information, please see the form 8-K dated July 19 2018, which includes metrics on a GAAP and an as adjusted basis reflecting these changes.
I would now like to turn the call over to Mark.
Mark Schwabero -- Chairman and Chief Executive Officer
Thank you, Ryan and good morning. Before we start our review of the quarter, as you likely saw in a separate announcement this morning, I have decided to retire as Chairman and CEO of Brunswick at the end of this year. With the separation of Fitness under way and the focus of our future in the marine business, I think now is an ideal time to make this change. As we've discussed before, we have a robust succession planning process in a very rich talent bench. From that talent pool, I'm pleased to announce that replacing me as the CEO will be David Foulkes.
David Foulkes is a bright and talented leader. He and I have worked together for over year 10-years and he has been in an integral part of both of our success and our strategy development. He will lead the team by not only executing the strategy, but building out our business. Between now and the end of the year, I will be actively engaged in the business and working closely with David to ensure a smooth transition.
So with that let's move on to review of a tremendous third quarter. Our third quarter performance reflects the outstanding execution of our marine strategy, evidenced by the strong financial contributions from each of the propulsion parts and accessory in both businesses. We concluded the primary marine retail selling season, leveraging a steady marine market and robust demand for outboard engines into significant top line growth and margin expansion, led by increased production of our new outboard engine lineup, continued success of our leading parts and accessories business, which was augmented by the closing of the Power Products acquisition in August, and the improving operating execution across our businesses, we delivered financial results in the quarter that demonstrate the effectiveness of our strategy.
During the quarter, Mercury overachieved versus planned run rate production on our new 175 horsepower to 300 horsepower V6 and V8 engines, with a substantial demand for these products continuing to far exceed expectations. Despite a mid-teens percent increase in year-to-date production levels of our outboard engines greater than 75 horsepower, we expect that demand will still outpace production for these horsepower categories into 2019, even as we execute against our planned investments and our initiatives to further increase capacity.
Our Boat business delivered a strong top line in earnings improvement in the quarter, led by Boston Whaler to See Ray sport boat and cruisers and Lund. The segment is well positioned moving forward with dealer and consumer sentiment remaining favorable, pipelines appropriately positioned and new product offerings leading to positive momentum in advance of the boat show season.
Our Fitness business posted solid top line growth, while gross margins were down on a sequential basis due to inventory cost adjustments, primarily related to product transitions. The business continues to evaluate and implement initiatives to enhance operating performance, but margin improvement is taking longer than planned. The team continues to execute against its business strategy, as it prepares for separation from the portfolio in 2019.
Finally as evidenced by the recent dividend increase, our pension contribution activity and the financing actions related to the Power Products acquisition, we continue to successfully execute our capital strategy. Our third quarter adjusted diluted earnings per share was $1.28, which was up 31% over the third quarter 2017 and exceeded our guidance by almost 9%. Revenue increased 15% including the benefits from acquisitions with contributions from all three segments. As anticipated, the marine business growth and operating margins expanded strongly, resulting in robust operating earnings growth of 17%.
Now I'll provide our perspective on the US marine market. Based upon the preliminary SSI Data for the third quarter, which on average comprises slightly less than 30% of the year at retail when fully reported, the main power Boat segments grew approximately 7%, leading to a year-to-date growth rate of 3%. Outboard engine growth was consistent with these levels, with increases of 3% for both the quarter and year-to-date.
Mercury outperformed the industry figures by a wide margin taking share as a result of the freshest lineup of outboard engines in the industry. Year-to-date market growth continues to be led by aluminum fish product and pontoons with saltwater fishing product over 23 feet also showing solid gains. Although still down for the year, sales of sterndrive product grew in the third quarter with Sea Ray sport boats and cruisers continuing to take share and drive growth in the 24 foot to 40 foot categories. Finally consistent with the theme throughout the year, SSI Data continues to be incomplete when initially reported with upward revisions almost every month this year when fully reported. We believe this trend will continue as we finish up the year.
Next I would like to share some perspective on our retail data for boats based upon our pipeline inventory activity. Our internal US retail registrations for the third quarter were down 8% against a strong third quarter 2017 and are down 1% year-to-date. Global retail unit sales decreased 3% over the third quarter of 2017 and are flat year-to-date against 2017. Similar to the first half the year, these unit results were influenced by Bass Pro's acquisition of Cabela's in September of 2017, which was a meaningful channel for our low boat brand.
If you exclude the impact of low from these results, our year-to-date growth would be 3% both in the US and globally, which is generally in line with the industry growth as just discussed. We've been actively rebuilding and strengthening our dealer network for low product and look for improving trends in the upcoming model year.
Next I would like to review with you our current perspectives on the regional marine markets. Excluding acquisition and currency impacts, the marine revenue in Europe for the first three quarters of the year is up 3%, mostly driven by engine and P&A sales. We still anticipate flatboat sales in Europe for the full-year due to challenging retail trends and a small impact of retaliatory tariffs on boats imported from the US.
As we noted on the last call, weather impacted the retail selling season in Europe with new outboard engine products beginning to stimulate demand in the third quarter. In Canada, strong retail continues to drive growth and it's outpacing wholesale. We are planning for the second half wholesale boat demand to slope substantially as dealers delay off season stocking order of boats imported from the US due to the retaliatory tariffs.
Currently, a little more than half of the boats we sell annually in Canada are imported from the US with the remainder sold by our Quebec based Princecraft brand, which remains well positioned to serve this market. On balance, the remaining international markets continue to post revenues consistent with a strong 2017, as we continue to benefit from engine share gains, resulting from the new outboard engine launch.
In summary, we continue to expect that full-year 2018 domestic unit growth to be toward the lower end of our initial 3% to 5% guidance range, with global unit growth in line with the US. As demonstrated through our results this year, Brunswick's revenue growth will continue to outperform unit growth figures, as a result of favorable changes in product mix, market share gains resulting from continued focus on new products, particularly in outboard engines and increases in average sales price.
Moving to our Fitness segment, revenue increased by 3% in the first three quarters of 2018, with 2% growth on a constant currency basis. Fitness sales in the US were down 1% year-to-date, primarily the result of lower Cybex sales and softness in several vertical channels. These factors offset solid growth in our strength products and our new life fitness cardio offerings. The US market continues to trend toward flat to slight growth with value oriented clubs outpacing traditional offerings.
European sales experienced modest growth in the quarter. However, revenue was up 6% year-to-date. Asia-Pacific demand remains very healthy, up 8% against the strong performance in 2017. Our plan anticipates that performance in Europe and Asia Pacific slows in the fourth quarter resulting in the overall international sales for the year growing slightly from 2017 levels.
And now, I'll turn the call over to Bill, for additional comments on our financial performance.
William Metzger -- Chief Financial Officer
Thanks, Mark. For the third quarter, adjusted net sales increased by 15%. Our combined Marine business sales grew 18%, with a 4% lift from acquisitions and Fitness sales increased by 5%. Currency had a slight negative impact on third quarters sales growth. For the year, adjusted net sales are up 9%. Sales in the combined marine business are up 11%, with acquisitions in currency providing a 2% and 1% benefit respectively. Fitness sales are up 3% for the year which also includes a 1% favorable currency impact.
Turning to gross margin percentage on an as-adjusted basis, the combined marine business grew 70 basis points over third quarter 2017 levels, with year-to-date gross margins relatively consistent with the prior year. Fitness gross margins remained challenge as compared to 2017 and are below year-to-date performance due to the inventory adjustments which Mark referenced earlier.
Our adjusted operating margin was 11.9%, which was slightly higher than Q3 of 2017, marking the first quarter in the last seven that we've reported consolidated operating margin growth. As Mark stated earlier, operating earnings for the combined marine businesses grew 31% and operating margins increased by 160 basis points, versus the third quarter of last year. These results evidence the strong volume gains, improved cost position of the new Mercury outboard engines and the immediate benefits from the acquisition of Power Products. On a year-to-date basis, adjusted operating earnings were up 5% over 2017, with Marine business adjusted operating earnings up 13%.
Turning to our Marine Engine segment, revenues increased by 20%. Propulsion sales grew by 24% led by outboard engines, as our successful new products continued customer migration to higher horsepower product and a healthy market are driving results. We continue to gain market share in almost all horsepower categories and believe our overall domestic retail unit market share is at the highest levels in almost 20 years.
Our internal outboard engine unit registration data is consistent with this strong growth, with a 13% increase in registrations in the quarter and 7% increase year-to-date. While the Boat business is facing headwinds from the Cabela's transistion, Mercury has benefited from increased share with this customer. The P&A business grew 16% or 5% excluding acquisitions, benefiting from strong pull through of engine control systems and other first fit parts sold through a growing list of OEM partners. Both the products and distribution businesses added to this growth, with Power Products contributing approximately $34 million of the segments sales in the quarter, which represented about seven weeks of results after the closing of the acquisition.
Mercury's adjusted operating earnings in the quarter grew by 28% and operating margins were 18.4%. The increase in operating earnings was a result of higher sales. The favorable impact from changes in sales mix including the benefits from new products and contributions from the Power Products acquisitions. Importantly, after strong third quarter gains Mercury's year-to-date adjusted operating margins are now in line with 2017 and are positioned to expand for the full-year as previously planned.
In our Boat segment, third quarter adjusted revenues increased by 9%. The saltwater fishing business led by Boston Whaler grew by 32% due in part to the impact of 2017 hurricane activity in the US. The recreational fiberglass boat business posted revenue growth of 2% in the quarter, led by solid top line growth at Sea Ray sport boats and cruisers including favorable changes in product mix. This improvement was partially offset by weakness in our European boat brands due to the factors that Mark discussed earlier.
The aluminum freshwater business grew by 2% in the quarter, as solid sales of pontoons and one product offset continued weakness at low to the transition away from Cabela's and slower wholesale demand in Canada due to the tariffs. Global wholesale unit shipment for the third quarter decreased 6% and were down 2% in the US. Year-to-date wholesale shipments are down 4% both domestically and globally against a strong 2017, due mostly to the factors impacting our low brand and Canadian European exports described earlier.
Changes in average selling prices increased by 17% on a constant currency basis in the third quarter and are up 9% for the year. These increases stem from changes in mix across the portfolio as customers continue to migrate to boats with more content and higher horsepower engines, which is adding top line benefits. In addition, we have raised prices in response to cost pressures particularly in pontoon and aluminum fish products.
Dealer pipeline inventories ended the quarter at 27.5 weeks of boats on hand measured on a trailing 12 month retail basis, which is right in line with prior year levels and demonstrates our ongoing discipline over pipeline management. We believe that our pipeline levels are appropriate at this point in time in the Marine selling season. For the year, we are planning for the weeks of inventory on hand at year end to be slightly lower than year end 2017 levels and are assuming retail unit growth rate will outpace wholesale performance, primarily related to lower stocking levels of US imported boats by Canadian dealers due to tariffs.
We expect full-year changes in wholesale and retail unit growth to be consistent with year-to-date trends. The Boat segment's adjusted operating earnings for the quarter were $16.3 million, 65% above Q3 2017 levels, resulting from higher sales and a favorable impact from changes in product mix. For the third quarter, adjusted operating margins were 5.2% which is 180 basis points higher than Q3 of 2017. Year-to-date, our adjusted operating margins of 6.7% were up 60 basis points over 2017.
Shifting to our Fitness segment, sales for the third quarter increased by 4.6%. Global strength sales continue to grow as demand for these products increased reflecting our well positioned product offering and evolving exercise or preferences. Sales of commerical cardio equipment increased slightly in the quarter, resulting from gains in life fitness products sales, partially offset by continued softness in Cybex sales.
Adjusted operating margins for the quarter were at 4.7%, which was 610 basis points lower than a year ago. This margin reduction was caused by a number of factors some of which have been affecting comparisons for several quarters. First, the business continues to be affected by higher freight costs and unfavorable changes in sales mix as it navigates through challenges related to the recent product launches of new cardio products. In addition the business incurred charges in the quarter resulting from inventory cost adjustment primarily related to product transitions. Finally, Fitness continued to face headwinds from cost inflation in manufacturing and efficiencies.
Next I will discuss the impact of foreign currency is having in our performance. In third quarter, sales comparisons were negatively affected by approximately 1% and operating earnings comparisons were negatively affected by approximately $6 million, which was slightly more than our plan. Our estimate for the full-year are slightly less favorable than previous expectations. We are still expecting favorable impacts on consolidated sales of less than 1% and now project a minimal impact on operating earnings. These estimates for 2018 assume that foreign exchange rates remain consistent with current rates.
Our GAAP results include the impact of several items which have been excluded from our as adjusted results. We recorded restructuring exit integration charges in the quarter totaling $17.7 million, mostly related to additional wind down costs associated with Sea Ray, Sport Yacht and yacht operations, and an impairment of the Cybex trade name, which was required due to declines in sales versus our previous expectations including decisions to co-brand the Cybex Arc Trainer product line as life fitness.
We also incurred operating losses of $11.9 million related to the Sea Ray, Sport Yacht and Yacht business in excess of restructuring charges. Our wind down of operations is mostly complete, but some incremental charges may be recorded in the fourth quarter. In connection with the Power Products acquisitions, we incurred $15.6 million of transaction related costs and $9.4 million of purchase accounting costs and intangible amortization. Finally, we incurred costs related to Fitness business including separation costs and other non-recurring charges.
Our third quarter book tax rate as adjusted was 21%, which is consistent with the year-to-date rate. Our tax rate continues to be lower than last year due mostly to the impact of tax reform. Our updated estimated effect of book tax rate for the full-year as adjusted is also approximately 21%, which is based on tax guidance today and is also subject to change as additional regulations and clarifying interpretations of the new tax law become known.
Our estimated cash tax rate for 2018 is still expected to be in the low single digit percent range, reflecting the favorable impact of a tax refund along with deductions from planned capital expenditures and increased pension contributions.
Turning to a review of our cash flow statement. For the first nine months of 2018, cash provided by operating activities was $234 million, which was $21 million less than last year primarily due to planned increases in pension contributions, partially offset by favorable comparisons for tax payments and working capital changes. Capital spending was $125 million, which included investments in new products, as well as capacity expansion initiatives mostly in our Marine segments.
Free cash flow for the first three quarters of 2018 was $149 million, up $10 million versus 2017. The cost associated with the Fitness separation, as well as the Sea Ray, Sport Yacht, and Yacht operations have been excluded from free cash flow as we will be treating those items consistent with our as adjusted earnings metrics.
Let me conclude with comments on certain items that will impact our P&L and cash flow for 2018, focusing on estimates that have changed since the last quarter. We have updated our estimate of depreciation and amortization for the impact of the Power Products acquisition. We continue to exclude -- execute against our capital strategy and debt refinancing plans that we discussed as part of the Power Products acquisition, with no material deviation thus far. Estimated net interest expense remains between $40 million and $45 million as we progress through our refinancing activities related to the purchase which include the retail financing offering completed earlier this month.
As I discussed a few slides ago, our estimated book tax rate is approximately 21% for the year, down slightly from our estimate on the last call. We have raised our guidance for free cash flow and now expect free cash flow to exceed $220 million for the year, which includes improvements in anticipating working capital changes and capital expenditure levels. Our business units remain focused on generating strong free cash flow which will allow us to continue to fund future investments in growth such as plant capacity investments and successfully implement our capital strategy.
Excluding the after tax impact of pension contributions, free cash flow would exceed $320 million. We have made total contributions of $160 million for the year including $125 million of pension contributions in the third quarter, which is consistent with our previous guidance. Accelerated contributions lowered our after tax funding cost of exiting the related plants by over $20 million. There is a residual funding requirement of the $30 million in pre-tax funding to fully exit the plants, which we intend to complete in 2019.
During the quarter, we repurchased 5 million of shares bringing total share repurchases in 2018 to $75 million. As discussed on our Power Products call, we have suspended share repurchases until the second half of 2019, as we focus on debt retirement and complete the Fitness separation. Finally, last week for the sixth consecutive year, we increased our quarterly dividend approximately 10% to $0.21 a share. This action is consistent with our capital strategy objective of increasing dividends as earnings and cash flow improve and reflects our confidence in the ongoing performance of our business.
I will now turn the call back to Mark to continue our outlook comments.
Mark Schwabero -- Chairman and Chief Executive Officer
Thanks, Bill. With three quarters completed, 2018 is shaping up to be another year of record earnings, led by the robust marine revenue and margin growth with excellent cash flow generation. In our combined marine business, we expect top line performance to continue benefiting from a steady global marine market, increases in average selling price, including the benefit from customer migration to higher horsepower engines and boats with increased content.
The market share gains resulting from the unprecedented demand and the acceptance of our new outboard products in our growing parts and accessory business. For the full-year, we anticipate solid improvement in both gross and operating margins in our Marine business given ongoing benefit from the new products and acquisition with pricing actions mostly offsetting the impacts related to cost inflation and tariffs.
In the Fitness segment, we're now planning for full-year revenues to be consistent with 2017 due in part to the anticipated fourth quarter declines in sales to certain value oriented health clubs in international markets, following a strong first nine months along with the continued weakness in Cybex sales. We are protecting our gross margins to be consistent with our year-to-date performance. We're also increasing and narrowing the guidance range for our full-year expectations of our diluted EPS as adjusted $4.65 to $4.70, with consolidated revenue growth of approximately 9% .
Each takes into the count, the expected strong top line growth and operating leverage momentum, generated by our Marine business, the net benefit from the Power Products acquisition, our unchanged estimated impact of tariffs on a remaining 2018 performance and the Fitness business performance inline with the year-to-date trends. In all, this is projected to be another successful year for Brunswick.
Now turning to the discussion on tariffs. Despite additional tariffs being implemented since our start earnings call, our anticipated 2018 net earnings impact has not changed and is estimated at $10 million to $15 million. Tariffs on Marine Engine segment imports from China account for two-thirds of this impact, while the remaining related -- relates to exports of US manufactured boats into Canada and the EU. We have applied for an exemption from the US government on the first waive for the China tariffs on our 40 horsepower to 60 horsepower engines in a wait to government's decision.
Moving to 2019, we currently estimate that the potential -- total tariff cost for the full-year could be between $60 million and $70 million given the tariffs enacted as of today excluding potential indirect exposure through our supply chain partners which we believe is a manageable risk. As with 2018, the large majority of this impact relates to our Marine Engine segment and stems from our 40 horsepower to 60 horsepower engines in parts and accessories.
It also assumes a full-year impact of the first three waves of Section 301 China tariffs, with a rate increase on the way three from 10% to 25% as of January 1, 2019. This does not include the potential way four of China tariffs that have been threatened, but not implemented with way four potentially impacting net earnings, primarily again through our Mercury and Fitness business by mid single digit millions if enacted.
On the Boat side we are assuming the removal of the section 232 retaliatory tariffs on imports of US produced product into Canada and the EU and that normal levels of wholesale demand return sometime in 2019. However offsetting this benefit is likely higher commodity cost resulting from tariffs enacted against foreign suppliers. We do not directly source foreign aluminum or steel, but would be affected to the extent that the tariffs cause domestic pricing to continue to be elevated.
We were able to lock in certain 2018 commodity cost prior to significant cost increases, but would not have similar protection in 2019. And lastly our Fitness business has been affected by higher domestic steel cost resulting from tariffs on foreign produced product and is facing a slight headwind related to the retaliatory tariffs on Fitness equipment sold into China, but is not impacted by waves one through three of the Section 301 China tariffs.
Overall, we're developing plans to offset about half of the tariff cost in 2019, resulting in a net $30 million to $35 million negative impact to full-year earnings. We will use the combination of price increases, supply chain management and supplier negotiations and other cost efficiencies to offset the gross tariff impact and we will continue to look for additional ways to mitigate the tariff effects as we move throughout the year.
We also continued to leverage our government relations team to ensure our policymakers understand the difficulties being caused by these tariffs. Again as stated previously, there are many moving pieces here and this estimate is based on the continued revision and refinement as we move into 2019.
Turning to the outlook for our segment, we anticipate full-year revenue growth of approximately 14% in our Marine Engine segment, including 4% contribution from acquisitions. This reflects the strong revenue growth and margin expansion in the fourth quarter. We are raising our margin expectations for this business and now expect our operating margin improvement of between 30 basis points and 50 basis points for the full-year despite tariffs in other cost inflation, the first half headwinds resulting from the new engine launch and the warehouse management system implementation.
This is a testament to the ongoing strength of the Mercury portfolio particularly its outboard engine and P&A businesses and fortifies our view that this segment will finish with a sound fourth quarter and lead into 2019 with substantial momentum.
Moving to the Boat segment, we're now targeting the annual revenue growth for 2018 at rate slightly below our year-to-date performance, a slight improvement from our previous call. We expect growth in all three primary categories led by increases in average selling prices resulting in part from consumers adding more content and larger engines on to their boats.
We are also anticipating solid improvement in operating margins which for the full-year should be nearing the lower end of our 2020 target range of 7% to 8%. We remain confident in the global marine market and believe that our Boat business will continue to succeed behind the strength of many of the industry's most recognizable brands, our product leadership and our improved operating performance.
In the Fitness segment, we now anticipate flat revenue growth versus 2017 and gross margin performance that's similar to the year-to-date levels, which are both below our previous expectations. We are benefiting from recent cardio product launches as the uptake rate on premium connectable consoles continues to improve, which we believe will benefit refresh activity and enable the business to execute against its digital strategy.
Year-to-date sales to planned Fitness are slightly higher than originally projected during the last earnings call, resulting from our continued strong relationship and product leadership. However, our plan anticipates declines in the fourth quarter which will lead to an overall decline in full-years sales. Going forward, we remain confident that we are well positioned to be the leading partner to support their goals for growth, technology development and improved club operator and user experience.
Before we close, I wanted to provide an update on the status of the Fitness separation process. To start I want to reinforce that Brunswick Board of Directors remain focused on separating the Fitness business from their portfolio in an expeditious and orderly manner with an objective of optimizing shareholder value. In an effort to pertain maximum return on the separation of the Fitness business and to underscore the Board's commitment to execute the separation, Brunswick's Board has created a Management Board consisting of two current Brunswick outside Directors who will directly oversee the Fitness management team and drive completion of the separation in a timely manner.
David Everitt and David Singer have deep management, operational and financial experience across consumer products and manufacturing industries and they will work closely with the Life Fitness management team to ensure that our Fitness business is best positioned to develop and execute its plans, grow into a strong, stand-alone company and create long-term shareholder value.
Separation of the management board also allows the Brunswick management to focus its attention on the development and execution of the marine strategy, which we and the Board believe will provide attractive return opportunities for shareholders. An immediate action item already under way is for the management board and the Fitness management team to undergo a concise strategic review of the business to evaluate what near-term steps will be necessary to maximize the value of the business and to develop an operating plan to implement these changes.
In terms of the process, we anticipate filing in the Form-10 in the first half of November. Our Board remains committed to completing the separation by the end of the first quarter of 2019 or as promptly thereafter as practical within a timeframe that maximizes the value to our shareholders. Our spin remains one of the primary options available to us, but we're also working with our advisors to evaluate other separation options and optimize shareholder value including the outright sale of the business. We'll keep you posted on our progress to complete this operation.
In closing, 2018 is shaping up to be another strong year. The third quarter provided the first look at the tangible benefits resulting from our investment activities in the marine business, led by strong revenue growth and margin expansion throughout the marine business, we anticipate delivering excellent cash flow and record EPS, which will be our ninth consecutive year of EPS growth.
As we highlighted on this call we believe Brunswick substantial momentum into 2019 resulting from robust demand, potential market share gains and increased leverage from our new outboard engine lineup, a strong and steady P&A business bolstered by the Power Products acquisition, a more focused and agile Boat business and a portfolio that will solely focus on the marine industry upon the Fitness separation.
We believe this uniquely positions us to continue to grow earnings even with potential headwinds from tariffs and inflation. I'm excited about the business moving forward, our management team and our 15,000 dedicated Brunswick colleagues are committed to finishing this year of strong in delivering and executing against our growth strategy in a continued effort to deliver value to our shareholders.
And with that I'd be happy to take your questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from the line of Michael Swartz with SunTrust. Your line is now open.
Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst
Yeah, hey, good morning, everyone. Just wanted to focus on the engine business and I have a longer-term oriented question, as you obviously have started really ramping up production deliveries of these new outboard engines and then with the contribution from the Power Products acquisition, I was just trying to get a sense of how you look at the longer-term margin profile of that business, is this something that can carry margins in the 20% plus range longer-term?
William Metzger -- Chief Financial Officer
Yeah, Michael, this is Bill. I'm not sure we're ready to put a long-term target on the business, but when you take a look at what we've done to reset the cost position of the outboard product lineup along with the margin profile of the P&A business, that was bolstered by the acquisition of Power Products. I believe there is potential to continue to act, expand margins into the foreseeable future, there is additional margin opportunity there.
Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst
And then second question is just and I think Mark had touched on this in his remarks, but just with capacity on the engine side, did I hear you say you need to expand capacity, I may have missed that. And if that was correct, are there incremental costs related to that we should be thinking about in 2019?
Mark Schwabero -- Chairman and Chief Executive Officer
Well, yes, we will be expanding some of that, Michael. We'll go through the supply base and tooling and other kinds of things like that, but that will all be within the capital plan and that capital plan is virtually within the guidance that we've given in the past. So I wouldn't expect that you'd see any deterioration to the business.
William Metzger -- Chief Financial Officer
And I would say, Michael, that as we've added in new machines and new capacity, it generally comes online at a higher efficiency than some of the older capacity that we're replacing. So there is cost reduction opportunities there and we've generally been able to absorb the capacity fairly quickly because the demand has been so strong. So net-net, there is certainly some additional cost that could get added in terms of depreciation and things like that, but there is also cost reduction that that follows along with it. And the product that we're building capacity for carries with it a fairly attractive margin profile.
Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst
Okay. Great, thanks. Thanks a lot.
Operator
Thank you. Our next question comes from James Hardiman with Wedbush Securities. Your line is now open.
James Hardiman -- Wedbush Securities Inc. -- Analyst
Hey, good morning. So I have a number of questions on the quarter and on the outlook. But I guess first, Mark, I don't know if this is the last time we'll be talking to you on earnings call or in Miami, but maybe to the extent that you feel comfortable talking about the decision to step down, time frame, how long is this has been in the works, I'm assuming that certainly when David was promoted back in May, that this was something that was on the table, maybe talk about that, hopefully this wasn't a decision you made Saturday night watching House-Day?
Mark Schwabero -- Chairman and Chief Executive Officer
No, I was contemplating other thing that one thing. If you go back, I mean you can start all the way, I mean one of the first things the CEO does when he comes in the job is to start thinking about, you know, succession because it's a very, very critical, an important element. And when I started the stuff coming together really was back in the March, April timeframe when we were announcing the spin, because it was getting clearer and clearer with the spin that fundamentally we're going to have a marine company and is the sole entity of the portfolio going forward.
And so the dialogue I had and had with the Board was basically, we get to a February timeframe of the Miami Boat Show and typically in 2019, we'd be laying out the next three years. And my view was that we were at a real inflection point and the person who is going to lead the marine business going forward for the next couple of years should really be someone who is there and involved and really driving that process, rather than worrying about some other change happening down the road.
And when you look at the third quarter results and you look at the strategy and things we've got in place and fundamentally David is a very known entity, we've worked together 10 years. He's been in the corporate office for year-and-a-half now as CTO, interacting with all the rest of peers and staff. He's been running the Boat business for the last six months and will continue through the end of the year. So fundamentally, it can be a very, very orderly transition. I think David is a great guy to take that strategy going forward and I think it's just a natural place for me to step off and leave the management here in great hands.
James Hardiman -- Wedbush Securities Inc. -- Analyst
That's helpful. It's certainly been a pleasure and hopefully we'll get a chance to see you around. So, couple of questions.
Mark Schwabero -- Chairman and Chief Executive Officer
You may have to put with -- James, you may have to put up with me at Miami just as, but I'll be walking around as a shareholder then, so --
James Hardiman -- Wedbush Securities Inc. -- Analyst
Awesome, awesome, that sounds great. So a couple of questions on the business. I guess just real quick on the tariffs, you're assuming retaliatory tariffs are going away. Why is that a good assumption at this point and how big this -- what's the number if they don't go away. How should we think about the offset?
Mark Schwabero -- Chairman and Chief Executive Officer
Let me do the first part and Bill can do the second, the first part being why we made the assumption, where we've really made the assumption are around EU and Canada and the expectation with the NAFTA replacement and the stuff that our assumption is that the Canada thing will get worked out as part of that agreement. And also the belief that the things between us and the EU will get worked out. The European one is very small because of the fact, you know, most of the products we're selling in Europe boats are manufactured in Europe. So our belief is those are probably valid assumptions on a go forward, to the contrary we haven't made any assumptions of the China tariffs going away.
James Hardiman -- Wedbush Securities Inc. -- Analyst
Got it. yeah, go ahead.
Mark Schwabero -- Chairman and Chief Executive Officer
Embedded in our '18 guidance about a third of that is attributable to some of the restocking activity that's being deferred by the dealers in the second half of this year. Our belief is that some of that is already kind of I would say pre-running what would have happened in '19 if tariffs would remain in place. So, it's a pretty manageable risk going forward if they're not removed. And we also believe that T order right now are just trying to figure out what the rules are, and if they understand that the tariffs are in place permanently, they'll adjust accordingly and start to restock and sell, but they are very apprehensive to start stocking boats in advance of kind of understanding what the long-term landscape is going to be.
James Hardiman -- Wedbush Securities Inc. -- Analyst
Safe to say the biggest risk more so than tariff dollars incentives demand in Canada to that issue?
Mark Schwabero -- Chairman and Chief Executive Officer
While demand in Canada has actually been very strong. I think demand in Canada --
James Hardiman -- Wedbush Securities Inc. -- Analyst
I guess dealer demand, I guess, yeah, sorry.
Mark Schwabero -- Chairman and Chief Executive Officer
The impact of price on retail demand will probably be the biggest factor moving into next year.
James Hardiman -- Wedbush Securities Inc. -- Analyst
Got it. And then Fitness, real quick here, maybe this inventory cost adjustment, maybe what is that, why is that happening, how much was that, maybe walk us through that. And then the big Fitness top line decline that we're assuming for the fourth quarter, you talked about the decline in value customers, I mean it doesn't seem like there is any new news from Planet maybe walk us through some of that.
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, you know, James, I'd say, I'll address the second one first. If you look at fourth quarter demand, Planet is on a full-year basis exceeds 10%, they are over-indexed to the fourth quarter.
We are assuming that we start to see some meaningful changes in our share in Planet. We haven't really seen that yet in the third quarter, but based upon order rates, I feel that that's going to occur more in the fourth. And when you've got that kind of your business being adjusted down on a share basis, significantly it creates a headwind, so that's probably the largest single item that we're facing that's creating headwinds for the fourth quarter.
And then on the inventory side, James, I would say that it's at the end of any sort of -- in connection with any product transition, you have some opportunities for there to be mismatches between what you still have to sell and what customers are willing to buy on a preceding basis. We probably left with a little bit too much of some product that we've chosen to take care of through an excess and obsolete reserve, it's kind of a one-time adjustment that we've taken care of in the fourth quarter or third quarter.
James Hardiman -- Wedbush Securities Inc. -- Analyst
I'll hop in the queue, but what's the size of that adjustment?
Mark Schwabero -- Chairman and Chief Executive Officer
It's a low single digit number.
James Hardiman -- Wedbush Securities Inc. -- Analyst
Okay, low single digit millions?
Mark Schwabero -- Chairman and Chief Executive Officer
Millions, yes correct. Yep.
Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst
Got it. Great. Thanks, guys.
Operator
Thank you. Our next question comes from the line of Craig Kennison with Baird. Your line is now open.
Craig Kennison -- Baird -- Analyst
Yeah, good morning, Mark. Congratulations on a wonderful career and we'll certainly miss you.
Mark Schwabero -- Chairman and Chief Executive Officer
Thanks, Craig.
Craig Kennison -- Baird -- Analyst
James took five or six of my questions, but I'd like to ask maybe about leadership in the future. You've got a really strong team not only at the CEO level of course, but at each of your divisions. Should we anticipate stability in leadership as we look at each division?
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, when you look at the Marine segment, which is really the focus around that, John Pfeifer as Craig, you know well, will continue running the Mercury. We've got Huw running within the Boat business. When I look across the staff I've got here and the strength we have got in the business, no reason to believe that. And in fact we feel very good about the team that's here in the continuity going forward in the marine space.
Craig Kennison -- Baird -- Analyst
Thanks. I'll get back in the queue.
Operator
Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Your line is now open.
Joseph Altobello -- Raymond James -- Analyst
Great, thanks, good morning guys. I also want to congratulate you, Mark, wish you good luck in the future hopefully you can see a few more Cub games than you have in the last few years, so good luck with that. But I want to talk about Power Products and I think if I recall correctly, the accretion this year net of interest was sort of in the $0.10 to $0.15 range. And I am thinking do we double that next year given on the full-year that number -- I'm sorry, of that business or do we see additional upside in synergies. And could Power Products offset effectively the incremental tariff that you're calling for next year?
William Metzger -- Chief Financial Officer
You must be in my head on this stuff, Joe. Yeah, it's fairly close, I'd say that the Power Products -- as we sit around and think about '19 and the tailwinds that are back, not only do we have Power Products, but we also have momentum in the outboard business, which I think we've been able to demonstrate, A), our ability to produce, drop and deliver extremely strong earnings leverage.
I'd say that we haven't talked about it, but part of our ability to outperform in the third quarter was influenced a bit by our pricing power and our ability to offset costs for tariffs and things in the outboard business. So, we feel very strong about our outlook going into '19. And even though we're facing some tariff headwinds, we've got some things that we've already seeing evidence of in the second half of the year which give us confidence moving into '19.
Joseph Altobello -- Raymond James -- Analyst
Okay, that's very helpful. And if I could ask a second one on the Fitness side, you did mention the "full range of separation outcome" that you're evaluating, has there been interest in that segment from a buyer or buyers because I would assume that you've evaluated a sale before announcing the spend.
William Metzger -- Chief Financial Officer
Well, we started with spend obviously driven by some of the tax-free elements of the transaction. We've had inquiries and basically around a sale we've queued those really Joe relative to getting the Form-10 out, which we've said will be out there in the first half of November. So there has been interest, but again in the absence of having all the financial stuff together, we've just kind of queued that up.
Joseph Altobello -- Raymond James -- Analyst
Okay. Very helpful, thank you guys.
Operator
Thank you. Our next question comes from the line of Eric Wold with B. Riley. Your line is now open.
Eric Wold -- B. Riley -- Analyst
Thank you, good morning. Just a couple of questions, I guess one on the engine side, with the ramp in production around the new engine and demand outstripping supply until or into next year, any risk of seeing demand shift either temporarily or medium-term to other suppliers, I'd be sure your relationships are strong enough to push through this. And then any sense of what the kind of adverse impact to growth in that segment has been this year because you could not meet demand and kind of what it could be possibly in the next year?
Mark Schwabero -- Chairman and Chief Executive Officer
Well, a couple of different pieces to that, Eric. First of all the -- we've had substantial increases of production, we've said in the low double-digit kind of numbers. So, one is, we've had the growth. Number two is the fact that there is a lot of demand that's going on that we haven't been able to address. I would say largely to the OEMs and boat builders and stuff. Eric, we've been meeting some of that, it's queued up a little. The fringe places really that we haven't addressed yet is really getting more into reman and some of those. So, do I feel very good about upside and continued on a go forward basis? The answer is, yes.
William Metzger -- Chief Financial Officer
And I'd just point out that our propulsion revenues were up 24% in the quarter. I think we're capitalizing on quite a bit of market opportunity. I think there's probably additional that we can as we bring more capacity online, but we're certainly keeping up and then some relative to what demand is.
Eric Wold -- B. Riley -- Analyst
Okay. And then just a question on the tariffs, sorry, if I missed this, but the $60 million to $70 million of gross tariff impact for 2019, does that assume that exemption is granted for the Wave 1, the 40 horsepower, 60 horsepower engines? And then what does that represent, I guess, if it's granted or if it's not granted?
Mark Schwabero -- Chairman and Chief Executive Officer
Well, first of all, it doesn't assume it's granted, so it's the gross number assuming it would be continuing. In terms of --
William Metzger -- Chief Financial Officer
It would be a meaningful part of the $30 million to $35 million net impact, would be covered by the exemption.
Eric Wold -- B. Riley -- Analyst
Okay. Perfect, thanks guys.
Mark Schwabero -- Chairman and Chief Executive Officer
And so we're just waiting to hear the results.
Eric Wold -- B. Riley -- Analyst
Do you have a timeframe pause, I know political rank being always up, but do you have a timeframe when you think you might hear back?
Mark Schwabero -- Chairman and Chief Executive Officer
Timeframe is unknown.
Eric Wold -- B. Riley -- Analyst
All right. Thanks, guys.
Operator
Thank you. Our next question comes from the line of David MacGregor with Longbow Research. Your line is now open.
David MacGregor -- Longbow Research -- Analyst
Yes, good morning, everyone and Mark congratulations on your retirement. Wish you all the best.
Mark Schwabero -- Chairman and Chief Executive Officer
Thanks, David.
David MacGregor -- Longbow Research -- Analyst
You bet. Two things, can you just talk about kind of the early initiatives on Sea Ray and just what you've done sort of as a plan of departure on the journey there. And then secondly, just talk a little bit about Power Products as a facilitator of OEM wins going forward, and kind of the plan to the extent you feel comfortable discussing that? Thanks.
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah. I'll start with -- let's just block kind of two pieces to the Sea Ray, part of it is just shutting down, closure, everything around the large boats or yachts. And I would tell you that stuff is moving along pretty much exactly as we planned. And the inventory levels that are out in the field are low. So we feel good about all that. On the side of the sport boats and cruisers, we've got launches going on with new product coming in, it's fresh, people will be seeing that stuff down at Lauderdale. We've been getting great support and backing from the dealers wanting to bring some of that product in and get that going.
A lot of attention around the efficiency and performance at the facilities and some leadership talent additions we've put up there. But some of that is again back to the dealer side is even dealers wanting to replace some of the volume they're losing and committing even more to the sport boat, sport cruisers. So, we really feel good about where that's moving, David.
David MacGregor -- Longbow Research -- Analyst
And then Power Products?
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, the Power Products, to the point of I think it opens a lot of doors, because pulling it down is, we've had a great ability to bring a propulsion system to an engine or to a OEM boat manufacturer. Now we have the ability to bring kind of the electrical backbone and the propulsion system. And reality is there's more and more technology there. It's becoming more and more difficult for the individual OEMs to deal with all the technology. And I would tell you that being able to walk in and provide an integrated system to them is going to be another differentiator of us versus some of our competitors. So we feel very good about the opportunities that that can present.
David MacGregor -- Longbow Research -- Analyst
Thanks very much.
Operator
Thank you. Our next question comes from the line of Seth Woolf with Northcoast Research. Your line is now open.
Seth Woolf -- Northcoast Research -- Analyst
Hey guys. Thanks for squeezing me in here at the end. Congrats Mark, and see you in Miami. So, real quick, just had a question on the pipeline inventories. You said it was down slightly. And then when you talked about the retail performance, I think this is the first time that you've broken out what retail did, and then retail ex Lowe. So if you assume that over -- since this didn't happen overnight that there have been some benefits on the retail sales the last couple of quarters that you sold off the inventory that was in those locations or --
Mark Schwabero -- Chairman and Chief Executive Officer
No, I'd say Seth, we faced headwinds relative to Cabela's transition way for Lowe. This has been really going on for about three quarters. I'd say the third quarter, a year ago is when the acquisition occurred. So we're starting I think to get to the point where it's probably the most challenging year-over-year because we look forward into model year '19 with the additional incremental dealers that we've been able to bring on, we should be in much better shape on a comparable basis.
And honestly, Seth, I would say some of that played into our pipeline a bit, but we've also been restocking and rebuilding dealer network without a lot of volume there. So that's a net offset. And I would attribute the decline in inventories at the end of this year more due to dealer restocking activity in Canada, deferring that into '19, that's really going to be what's going to drive our pipeline inventories down year-over-year.
Seth Woolf -- Northcoast Research -- Analyst
Okay. That helps, I guess what I was trying to think through was whether you had some -- did the sell-off that over the last couple of quarters, you were still getting a little bit of benefit, they sold the rest whatever they had in stock off. And then it's out of the inventory, so if ex Lowe your pipeline was up year-over-year, so --
Mark Schwabero -- Chairman and Chief Executive Officer
No, I don't think again, Seth, I don't think that that's -- if you're thinking that that should be driving a decline on a year-over-year hand on a weeks on to hand basis, the point I made about rebuilding the Lowe dealer opportunity that's something that we would have been -- we would have seen some benefit on the wholesale side, but not a lot of sell-through yet in the pipeline. So, I don't think that's a reason to see pipelines decline here in Q3. We are extremely comfortable with where our pipelines are at the end of the model year. We're exactly where we've been for the last four years and very comfortable with pipeline levels exiting the retail season and entering the off-season.
Seth Woolf -- Northcoast Research -- Analyst
Okay. Thanks, thanks for the clarification. Appreciate it.
Mark Schwabero -- Chairman and Chief Executive Officer
Yep.
Operator
Thank you. Our next question comes from the line of Greg Badishkanian with Citi. Your line is now open.
Frederick Wightman -- Citigroup -- Analyst
Hey, guys, it's actually Fred Wightman on for Greg. A couple of different times you've mentioned pricing is an offset to some of the tariff and cost pressures that you've seen. I'm wondering if you could sort of contextualize the price increases that you guys are pushing through this year versus more of a "normal year"?
Mark Schwabero -- Chairman and Chief Executive Officer
The only thing I'd say there, Greg, is obviously they are up a little bit, but I don't think anything is outside of what we're seeing competitors doing as well, but obviously some of the impacts is causing us to adjust our pricing a little. So you can take the numbers of kind of what the tariff stuff amounts to and kind of go backwards into the increase, but it's up a little bit, but it's more of just being offsets.
William Metzger -- Chief Financial Officer
And I'd say the fact that we've got a very fresh product lineup with just a superb new offering that we've just come out with this year. We certainly feel like we're in a position where we can pass along pricing to the extent we need to, right? So our product line is very strong and our brands are very strong.
Frederick Wightman -- Citigroup -- Analyst
Okay. Thanks. And then in the past you've talked about sort of the 12 month to 18 month lag for any hurricane related demand, could you sort of talk about what you've seen from last year's storms versus what you might have expected?
Mark Schwabero -- Chairman and Chief Executive Officer
I don't think we've seen any noticeable recovery impact. In fact if you look at Florida, Florida is down a little bit. And I would expect that still relates to not seeing some of the recovery from last year yet, but there's lots and lots of variables going on, but I wouldn't say we've seen noticeable impact yet. And again we've always talked 12 months to 18 months and we're kind of at the bottom end of that range right now.
Frederick Wightman -- Citigroup -- Analyst
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Your line is now open.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Great, thank you, congratulations Mark, also to David. I had two questions here, one near-term, one longer-term. In the near- term, how did Boat retail progress through the quarter, did you see it strengthen or weaken? And then also from a higher-level, the pushback I often get here is that we're end of cycle or at least not at the beginning of a cycle. So where do you think we are in this current cycle, why should investors be comfortable with where we are in the cycle? Thank you.
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, so Gerrick, if you look at the micros, I mean replacement demand is good, the premium value mix stuff is going on, lot of great new products and even things going on in category rotation now between. So I would tell you a lot of those things including the dealer sentiments, but on a micro level still remain very positive. Even if you go to the macro in the developed countries, particularly things like US, the economies are strong. I would tell you is we either -- we look at a lot of the other variables, employment, unemployment, whichever way you want to look at it, consumer confidence, GDPs, tariffs -- and geopolitical probably are mid-terms or some of the negative. But they're not really cycle related, they're probably a little more point in time. So things that we would assign more to the cycle of those micro and macro we think continue to bode well for kind of a steady growth in the 3% to 5% that we've talked about in the past.
William Metzger -- Chief Financial Officer
And Gerrick, I'll just comment on the retail progressing throughout the quarter, we really haven't seen any change in trends that make us change our kind of short or long-term outlook on the Marine market. I will say that we continue to see strength in categories that are important to us, categories that Sea Ray participates in, sports boats and cruisers, pontoons continue to be strong, Saltwater continues to be strong.
So we're pretty confident here as we closed out the retail selling season. Again I think we got setup for dealers to feel comfortable restocking product. We got a lot of new product that's been introduced that should put dealers in a position where they're going to restock in advance of the boat show season which starts here late in the fourth quarter and then into the first. So we feel like we're pretty well positioned exiting the third quarter and then entering the off-season.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Okay. Thank you guys.
Operator
Thank you. Our next question comes from the line of Tim Conder with Wells Fargo Securities. Your line is now open.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Thank you, Mark. First of all, let me also offer my congratulations and enjoy the grand kids most of all the Ohio state, but I cannot wish you an enjoyable Cubs future as a Cardinal fan. On the business here, I would like to -- a little clarity on the tariff things. In your presentation you had outlined $30 million to $35 million net, which first of all it seems like you're including getting that List one exemption to get in part of that, but then below that on the slide you talked about a $20 million to $25 million incremental, so just may be kind of clarify that?
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, Tim, I'll go back, I mentioned on the prior, we are not assuming we're going to get an exemption.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay.
Mark Schwabero -- Chairman and Chief Executive Officer
So, in the event we got an exemption that would be good news to what we talked about here today, so go ahead with your question.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay, that's a part of it, that helps. So on the slide it says $30 million to $35 million net, but then it says $20 million to $25 million incremental, just may be parse through that the difference there on that slide, it's a little bit confusing I think.
Mark Schwabero -- Chairman and Chief Executive Officer
All that really, 2018 has got the $10 million to $15 million. And so the incremental is over and above the $10 million to $15 million in '18.
William Metzger -- Chief Financial Officer
It's been adjusted for the bottom end of the range Tim, $10 million across the board.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Right. Okay. So, again, OK, the $20 million to $25 million is the true incremental in '19 that we're looking at this point ex any List four coming on?
Mark Schwabero -- Chairman and Chief Executive Officer
Ex any List four it's all based upon -- it's all based upon things like the 10% going up to 25%, it's the full-year impacts of some of what we've seen in 2018, Tim.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay.
William Metzger -- Chief Financial Officer
Yeah. I mean, if you stack up the positives and negatives, Tim, I think you articulated that the exemption would be a positive, correct. And that's mostly what our Wave 1 exposure is, so that you can kind of size. And I would tell you that that is, that exemption would take care of most of the $30 million to $35 million net, a substantial part of it represents the part that could be exempted as part of the process.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay. Okay.
William Metzger -- Chief Financial Officer
And obviously we've got some additional risk related to Wave 4, but we got to characterize that as being manageable, but doesn't materially increase our risk profile.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay, OK, helpful, OK. And then on Fitness, it seems like internally, I know you guys had a lot going on this year from acquisitions to preparing on Fitness and just a lot of things, refinancings and so forth. But it seems like internally may be there's been a little bit of a pause and obviously the delay in the Form-10. Was there a pause and reassessment giving may be inbound interest in purchasing? And has that been the main little pause here that we've seen or any other characterizations, has there been anything fundamentally that's changed that's maybe resulted in the pause on the process of the Fitness separation?
Mark Schwabero -- Chairman and Chief Executive Officer
I would tell you Tim probably the biggest thing, I wouldn't call it a pause, it's just literally getting through everything around the Power Products, the retail financing, all the things getting that in the filings and all the stuff done. The Form-10 has kind of moved from the end of the third quarter with all the stuff we had going on to really in November. And I'd literally wouldn't interpret it as much more than the fact that we just had 10 pounds trying to go through the funnel and we were -- that I wouldn't interpret it as more than that, Tim.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay, OK. And then lastly to circle back to a question on the engine capacity. So, you added a lot of capacity and basically ramped up here very quickly filled that. And just to again to clarify that you're going to be adding additional capacity here currently for '19, but that should not have any material incremental operating cost, because is that what is interpreted correctly from a previous question?
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, that would be a fair statement, Tim.
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
Okay, OK. Well, congrats again, Mark and David incoming and thank you, gentlemen.
Mark Schwabero -- Chairman and Chief Executive Officer
Thanks, Tim.
Operator
Thank you. This concludes our question-and-answer session. I would now like to turn the call back to Mark for some concluding remarks.
Mark Schwabero -- Chairman and Chief Executive Officer
Yeah, just a closing thought. As I said before we went in the Q&A, I'm really excited about the business, the momentum we've got generated. I think the portfolio actions and the product stuff we've got going around the engine business, the Power Products acquisition and reminding you, we all said we'd be at $1.5 million or $1.5 billion and do the 350, all those things have taken place, the portfolio on the Boat side.
So I mean the past 14 years at Brunswick probably are the most rewarding in my entire 40 plus year career. And I've really been honored to lead and have been inspired by all the people that I've been able to work with around the world, including dealers, distributors, suppliers, et cetera. Brunswick is always going to be part of me, but now it's an opportunity for me to go off and spend some time with my wife of 43 years, my daughters and now four grandchildren. So that's what I'm looking forward to. And there is a great -- I'm leaving this in a great hands to a great staff and organization. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.
Duration: 77 minutes
Call participants:
Ryan Gwillim -- Vice President, Investor Relations
Mark Schwabero -- Chairman and Chief Executive Officer
William Metzger -- Chief Financial Officer
Michael Swartz -- SunTrust Robinson Humphrey, Inc. -- Analyst
James Hardiman -- Wedbush Securities Inc. -- Analyst
Craig Kennison -- Baird -- Analyst
Joseph Altobello -- Raymond James -- Analyst
Eric Wold -- B. Riley -- Analyst
David MacGregor -- Longbow Research -- Analyst
Seth Woolf -- Northcoast Research -- Analyst
Frederick Wightman -- Citigroup -- Analyst
Gerrick Johnson -- BMO Capital Markets -- Analyst
Timothy Andrew Conder -- Wells Fargo Securities -- Analyst
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