Brunswick Corporation (BC) Earnings Call Transcript & Summary

Good morning, and welcome to Brunswick Corporation's call regarding the acquisition of Navico. [Operator Instructions] Today's meeting will be recorded. I would now like to introduce Brent Dahl, Vice President, Investor Relations.

Good morning, and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick's CEO; Ryan Gwillim, CFO; and Brett Dibkey, President of our Advanced Systems Group. Before we begin with our prepared remarks, I'd like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings, which 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 available on Brunswick's current report on Form-8K issued on April 29, 2021, which is available at brunswick.com. At the end of our prepared remarks, the operator will open up the phone lines for Q&A. I'll now turn the call over to Dave.

Thanks, Brent, and welcome to everyone joining us this morning. It's an exciting day here at Brunswick. We're extremely pleased to share additional information concerning this morning's announcement of Brunswick's acquisition of Navico. Yesterday evening, Brunswick entered into a definitive agreement to acquire Navico, the specialist marine electronics company for $1.05 billion. The transaction is expected to close in the second half of the year and is subject to usual and customary closing conditions, including regulatory review and approval. When completed, this acquisition will be the largest in Brunswick's history. The acquisition of Navico and its award-winning brands will immediately accelerate our ACES strategy, which we recently reviewed as part of our 2021 Investor Day materials, and will support our vision to deliver distinctive new products and technology-enabled experiences. The valuation reflects Navico's strong revenue and earnings growth profile, majority aftermarket revenue and attractive revenue and cost synergies between Brunswick and Navico. The acquisition will be funded with a combination of debt and existing cash balances, and we expect that our credit ratings will remain unchanged at investment-grade. Our leverage ratio will be approximately 1.7x on a gross basis at close and we're targeting to lower that ratio to 1.5x by the end of 2022. Ryan will provide additional detail on the valuation and our updated capital strategy later in the call. Navico is based in Egersund, Norway and is currently owned by private equity investors, Altor and Goldman Sachs Capital Partners. The company has approximately 2,000 employees across 27 global locations and sells its products in marine markets around the globe. Navico is one of the world's largest providers of marine electronics and sensors and has some of the most recognizable brands in the industry, including Lowrance, Simrad, B&G and C-MAP, to provide consumers with a wide array of products, including fish finders, autopilots, sonar, radar and cartography, with visualization delivered through multifunction displays. Navico's strong brands serve most major powerboat and sail markets and support both recreational and light commercial marine applications. Approximately 2/3 of Navico's revenues come through aftermarket channels, which is a similar profile to our existing P&A business and will therefore help us continue our journey to further reduce the cyclicality of Brunswick's consolidated revenue base. As I mentioned earlier, the acquisition of Navico will immediately accelerate our ACES strategy by filling gaps in sensor technologies and user interfaces. And the addition of Navico's products and data portfolio will further strengthen our ability to provide complete innovative digital solutions to consumers and comprehensive integrated bow-to-stern systems offerings to our OEM customers. Navico would join Brunswick’s Advanced Systems Group, which already has global reach and a broad product portfolio ranging from general marine products to power management solutions. And ASG, our fast-growing integration business, will now be able to leverage Navico's brands and products to create an unmatched holistic boater and OEM experience. The Navico acquisition brings with it an extremely talented, experienced and consumer-focused management team and an equally talented employee base, which is expected to remain in place and play a major role in the execution of our strategy. Now I'll turn the call over to Ryan for additional comments on the financial aspects of this transaction.

Thanks, Dave, and good morning, everyone. Before moving into the financial details of the transaction, I want to remind everybody of the geography for the Advanced Systems Group in our reported results. As you recall, we realigned our segment reporting in the first quarter of 2020 to include a separate Parts and Accessories segment, which includes our ASG business. And as Dave mentioned, Navico will be joining the Advanced Systems Group upon closing of the acquisition. Given the growth and margin profile of Navico, we believe that this transaction represents an outstanding value creation opportunity for Brunswick and our shareholders. Navico is a compelling opportunity to purchase a premier high-performing business that seamlessly matches and advances our strategic goals. The implied transaction multiple is approximately 12x Navico's estimated fiscal year 2021 adjusted EBITDA, net of tax attributes. If you also factor in anticipated run rate synergies by year 4, the multiple is less than 10x. We believe this multiple is reasonable when considering recent transaction comparisons in the P&A space and certainly reflects the strength of this business and its growth potential. We anticipate returns on investment exceeding the cost of capital by year 3. This business has an excellent record of free cash flow generation while operating in a capital-efficient manner, both characteristics that are shared with our existing P&A businesses. Lastly, Navico has strong growth prospects and attractive synergy opportunities. The combination of ASG, Brunswick and Navico will provide global growth synergies via the combination of products, systems, expertise and distribution. We anticipate $30 million to $40 million of synergies by year 4, with those weighted heavier towards revenue synergies. Next, I would like to make a few comments on the initial financing plan for the transaction. Due to Brunswick's exceptional free cash flow, strong balance sheet and robust financial performance in recent years, the company plans to leverage the capital markets to efficiently and economically finance this acquisition. We currently have in place a bridge financing commitment from JPMorgan, our adviser on this transaction and long-term banking partner. Between now and closing, we plan to work with our bank group to issue 3- and 10-year institutional bonds totaling approximately $900 million to finance the acquisition, along with using approximately $200 million of our cash on hand. We expect to retain our current investment-grade credit ratings after concluding the transaction. At closing, our pro forma debt-to-EBITDA ratio will increase to approximately 1.7x on a gross basis. And we plan to lower this ratio to comfortably below 1.5x by the end of next year due to systematic debt reduction we plan to employ as part of our ongoing capital strategy. Concluding with an update on our 2022 strategic plan financial targets. We anticipate our revenue range to increase by approximately $500 million for 2022, putting us firmly over $6 billion in revenue for the first time in company history. While this acquisition is accretive to Brunswick's overall operating margins, we feel that our targets will remain unchanged due to the size of the deal as compared to the overall company results. However, we would anticipate incremental EPS of approximately $0.50 next year, inclusive of additional interest costs. Additionally, we would expect free cash flow to increase accordingly and are now targeting to deliver over $450 million of free cash flow in 2022. Very important to note, we do not anticipate needing to change our capital strategy as it relates to share buybacks, dividends. And we plan to continue to fund additional opportunities to add complementary bolt-on acquisitions to our portfolio, particularly in the P&A, ACES and shared access areas. With that, I'd like to turn the call back over to the operator to open the phone lines for questions.

[Operator Instructions] Our first question is coming from the line of Craig Kennison with Robert W. Baird.

Would love a little perspective on the competitive landscape for some of those key products. What is your market share, for example, for Lowrance or Simrad or some of the other businesses that you've acquired?

Thanks very much for the question. We don't give out specific market shares. But I would say that we are one of the leading players in saltwater and freshwater, certainly the leading player in sail. And one of the real assets of this business is the cartographic business, C-MAP, which we think is a great point of leverage for our ACES strategy. Certainly, having understood the development plans of Navico, we think that we can take the business in a very strong direction competitively, even from the strong position that we're in right now.

Our next question is coming from the line of Xian Siew with Exane BNP Paribas.

Maybe a bigger picture question. As you think about the right mix for the portfolio, how big, as percent of sales, could P&A get? It was 35% in 2020. Can it be over 50%? Or how are you thinking about that?

Well, I think that the -- if we think even bigger than that really -- if you think of us as providing the leading technical -- of leading technology to the marine marketplace and the leading experiences in the marine marketplace, I think we still have opportunities to build out the technology content of our portfolio of businesses. We're in a tremendous position already, particularly with the acquisition of Navico. Nobody else can provide propulsion, electrical backbone, digital control, fuel systems, lighting systems and now sonar, radar, display systems. But there's still a lot of systems on the boat that we can continue to build the portfolio. And then, of course, we're also very interested in building out our shared access businesses as well. So I would not put a specific limit on how big that can go. I think we're continuing to assess targets in the area. As long as they are strategically aligned, as long as they meet our financial profile and as long as they have typically the right aftermarket orientation, we'll continue to consider building out P&A. If you think about the size of the market, in the U.S., it's probably a $6 billion market, still plenty of opportunities left for us.

Our next question is coming from the line of David MacGregor with Longbow Research.

This is [ Julie Woodruff ] on for David MacGregor. Can you talk a little bit about the existing distribution for these brands and kind of the extent to which you feel leveraging off of Brunswick's legacy distribution assets will drive incremental Navico growth?

Certainly, that is a strong synergy. So as you know, Brunswick has the largest marine distribution business in the world, and it's been growing very quickly. And part of our analysis of Navico and analysis of the synergies certainly includes leveraging that distribution. We also have a really fast-growing e-commerce component to that distribution business. So we'll be leveraging that as well. And then obviously, on the cost side, we see that there are potential synergy opportunities with distribution as well. So that is a significant component, I think, of both the revenue-orientated and the cost-orientated synergies. If you think about our business, it's extremely global as well. So when Navico may not have had all the access that they may have needed into some global regions, we certainly have it.

That's great. Here's my quick follow-up. With $30 million to $40 million of synergies, are you able to help us with some high-level discussion maybe on the 2 or 3 largest contributors there?

Yes. So I think the revenue side is somewhat larger than the cost side, although I think we've probably been a bit -- I think there's more than we can find probably in both. There are some components of this that we don't really yet want to talk about, because we think that there will be a competitive advantage for us. But I think on the revenue side, the fact that we can offer a very integrated product offering now where we think that will be very attractive to OEMs and will generate revenues, we think Navico's product lines have applicability in adjacent businesses. As you may know, ASG is about 25% non-marine, particularly in RV and specialty vehicles. And the display systems and digital control are really applicable in there. Distribution leverage, we talked about and e-commerce growth as well. And then on the cost side, we have supply chain efficiencies, distribution, warehousing, logistics and others. So those are some of the components that we're considering.

Our next question is coming from the line of Joe Altobello with Raymond James.

So first question on the sort of background of this transaction. Just curious if there was an auction process or was this a negotiated transaction, since you guys seem to be the most logical buyer here?

It's Ryan. We don't comment on the process. Obviously, we believe Navico is an outstanding asset and certainly lots of interest in the marketplace for it. But in terms of a discussion on the process, we're not prepared to share.

Okay. Understood. And in terms of the financials, maybe you can give us sort of a little history on the growth rate that Navico has been able to deliver over the last few years, pre-pandemic as well as post. The high teens EBITDA margins, what have those looked like over time? Have they trended meaningfully higher, for example?

Yes. This is a company just like all of us really in marine, and frankly everywhere else. COVID put a bit of a shock in the system. But certainly, it came out on the other side quite impressively. The high teens EBITDA margin is something that we think are not only sustainable, but able to grow over time. And so that's why we got really comfortable as it fits right into our end of the margin structure of the P&A business as it's going into. It's funny in terms of top line growth, we just got done with the Investor Day a couple of weeks ago now, given the taping. And you saw that the CAGR for our plan -- 2022 plan was 12% top line. And not shockingly or maybe it is, but Navico is right in line with that, if not a little richer. And so their growth profile matches, again, what we look for, not only organically and within our own company, but what we look for in target. So really strong top line and mix of margins that our strategy, again, that certainly we believe can continue to grow.

The next question is from the line of Mike Swartz with Truist.

Just maybe to the extent that you were a customer prior to the acquisition, were there any eliminations? Or will there be any eliminations to this transaction? And were they included in that $470 million in revenue?

Is the question, what's your -- is your question, what is the percentage of Navico sales that would be the Brunswick today?

Yes. Just are they included in that $470 million number that you gave us or they -- will they be netted out versus that?

Yes. No, it's small. It's really small. A couple of millions.

And understanding you're only going to own this for part of the year, any color or guidance, directionality you can give as to how -- will this be accretive in 2021?

Yes. It's -- Mike, it's going to be basically breakeven, probably a little bit positive once you roll in the incremental interest costs from the debt financing, but it's going to be probably breakeven, a little bit positive. And then the $0.50 of accretion next year is net of that additional interest cost. So it's really nice accretion -- net accretion there.

The next question comes from James Hardiman with Wedbush Securities.

So a quick follow-up to -- I think it was Joe's question, high teens EBITDA margins. I want to say your business is -- your P&A business is materially better than that. Is that sort of structural in terms of what you currently sell versus what they sell? Or is it sort of an operational item that is the source of what you think are going to be synergies under your management?

Yes. That number, James, is -- does not include the synergy opportunities that we just articulated. So we believe that we can relatively quickly bring the EBITDA and EBIT margins of Navico right in line with the segment.

Got it. And then maybe to play devil's advocate here a little bit, just given where we are in this market and how fantastic so many trends have been for some of the outdoor companies, is there a -- was there a potential concern that they might be selling at the perfect time, ultimately at the top of the market? And is 12x -- is that sort of where we are in terms of some of the other deals that you're looking at right now?

Well, I think the characteristics of this business, independent of the kind of shorter-term market conditions, are extremely attractive. The presence in particularly electronics, we're acquiring a company that is, to a large extent, a software company with hundreds of software developers and analysts in there. So it is an incredible future-orientated asset that I think fully deserves that multiple. Obviously, that multiple obviously does not include the synergies that we expect to deliver over the next few years. So I think that we would have expected in any circumstance to pay that kind of multiple. I think we're certainly a company, as I mentioned earlier, that can deliver significant synergies on an opportunity like this, probably larger than some other companies could have done. So I'm very, very comfortable with where we will be on a net basis, given the incredible quality of this asset and the alignment with our strategy. Really we've been talking about ACES a lot previously. This moves us tremendously forward not only from a sensor and display perspective, but if you think about the role of cartography in autonomy, it's huge. We're acquiring not just tremendous product lines that have leading share in their respective marketplaces, but also 2,000 people who are dedicated to software development and advanced controls. I mean that is an unbelievable asset. I'm delighted with the deal we're able to get.

Our next question is coming from Shawn Collins with Citigroup.

Certainly, it looks like an exciting and large-scale acquisition that looks like it fits well with Brunswick. I wanted to circle back to the distribution channels for Navico products sold in the aftermarket segment. Can you talk about some of the retail partners the products are sold through? I'm assuming it's players like Bass Pro shops. And any color there would be interesting.

Yes. This is Brett Dibkey. To your point, exactly, from a retail perspective, they sell through all the usual suspects. Bass Pro is certainly a big and important customer of Navico today. West Marine, the same. I would say there is certainly opportunity as we think about leveraging our scale in those retail outlets. But in particular, I would say, on the direct-to-consumer and e-commerce side, that has not historically been a big area of focus for Navico. We have a very strong and growing business in that space that we think can leverage and drive a fair number of synergies. But from a brick-and-mortar retail perspective, they're certainly selling in a number of the same outlets that we do today.

Our next question is coming from the line of Fred Wightman with Wolfe Research.

Wondering if you could just comment on where Navico is in terms of supply chain. Is there anything that is particularly tight that's driving some disruption in terms of product availability, whether it's semis or something that's specific to the category that we should keep in mind here near term?

Certainly, they use the chips in their product lines, but they've been doing a wonderful job, I think, just as Brunswick has been managing the supply chain situation. They have a very mature supply chain operation. They have a wholly owned manufacturing facility in Ensenada in Mexico. So I think we're in a very advantaged position. And while I would say that they've been closely managing the disruptions just as we have been, I think they're doing an excellent job.

Perfect. And then, David, you described them as a software company. I'm wondering if you could just quantify the mix of business that you'd identify as more service related to recurring revenues within the disclosed revenue contribution?

Well, I don't know if I could quantify the exact component. But of course, with regard the aftermarket business, which is just a bit more than 2/3 of our revenues, that's somewhat recurring in the sense that people tend to change their electronics every kind of 2 to 5 years really on a boat. So there's a strong -- if you think about the fact that unlike other things on your boat, electronics are the things that tend to go through the quickest development cycles, and therefore, people like to update on that boat. That is a strong source of revenue for us. Of course, they do sell physical products, but embedded in those products is a tremendous amount of software, connectivity, cartography. And so my point really is the tremendous opportunity here for us, not only on the hardware side, but to differentiate in terms of visualization, in terms of over-the-air updates, in terms of connected solutions, in terms of leveraging their visualizations on some mobile and smart devices, there's just an ecosystem possibility around this that definitely has tremendous annuity component to it.

Great. And then maybe one final one. Just any comments on sort of the CapEx or investment profile of the business over the past few years? Has that been sort of steady? Has that been increasing, decreasing? Anything to call out?

Yes. This is Ryan. I mean they are heavily invested in the areas where they intend to grow. I would say it fits right into the portfolio that we have, kind of 4% to 5% of sales. But there is -- being part of Brunswick now, there will be an opportunity for us to increase the investment over time and ensure that we get the market share gains that we anticipate. And maybe before we leave to go to one more question, on one of the previous questions on percentage of sales to Brunswick, it's in the mid-single-digit percent. I realized I said dollar earlier, not percent. So mid-single-digit percent goes to the Brunswick group of companies. Thanks.

Thank you. Our next question is coming from Tristan Thomas-Martin with BMO Capital.

Just one question. Can you kind of talk about how bringing Navico in-house will impact your relationship with some of the other suppliers in the space? And then also with some of the other boat brands, so Whaler offers Raymarine now. Are they going to move to Simrad? Or kind of conversely is someone like a Robalo who sells Simrad going to move to something else?

Yes. I think that we have been incredibly successful in providing kind of solutions on an agnostic basis. We have some great supplier partners and channel partners that we intend to preserve relationships with. Of course, part of our strategy here will include increasing the amount of Navico content on Brunswick boats. But I expect that to be done in a way that preserves our relationships. And I think all of our supplier partners recognize us as a very good to do business with in situations like this. And we'll work that through in a way that I think will be advantageous to everybody.

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

Well, thank you all for attending. We're very excited here. Thank you for joining us. This is such a great acquisition. It aligns perfectly with our strategy of providing integrated solutions, elevated boating experiences, building on the noncyclical annuity-orientated aftermarket business. Of course, advancing our ACES strategy, which is very important to us. But it brings with us a wonderful management team and a wonderful group of employees, as I mentioned, very software-orientated, very agile, that I think are a tremendous complement to our existing employee base and will help us with our vision, which you know is to define the future of the marine industry. Thank you all very much.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.