Brunswick Corporation (BC) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us for the Brunswick presentation/fireside chat. Thank you all for joining us. Before I hand the reins over to the company, I just wanted to remind everybody that if they have any questions, they can start populating it into the queue right now. And once the Q&A starts, we can just run with that. With us today from the company is CEO, David Foulkes; CFO, Ryan Gwillim, and VP of Investor Relations, Brent Dahl. Brent, the floor is yours.

Great. Thank you. Hello, everyone. My name is Brent Dahl, I'm Brunswick's VP of Investor Relations. Before we begin with today's presentation, I'd like to remind everyone that 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, all of which are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in previously issued current reports on 8-K, all of which are available at brunswick.com. And with that, let me hand things over to Brunswick's CEO, Dave Foulkes. Dave?

Thank you very much. Hello, everybody. Thank you for taking an interest in Brunswick Corporation. I know many of you follow us pretty closely, and we'll be up to speed on our Investor Day and second quarter earnings materials. So I just put some slides together to summarize the business for some of you who may be somewhat less familiar. So we have an exceptional position of leadership and scale in the marine industry. We're much larger and more capable than any other business in the industry. We sometimes refer to that as authentic leadership because there are a lot of proof points, and I'll go through some of them. But we have the world's largest recreational boat business, the world's leading marine propulsion business, the world's largest and most comprehensive parts and accessories business and distribution business. And since we acquired Freedom Boat Club in 2019, we're also the world's largest boat club operator. But we also pride ourselves on our innovation capabilities and our services portfolio, which includes F&I and many other services. On the slide here are just some of the key proof points that are very important to our business. So in the U.S., there are 10 million to 12 million registered recreational boats and about half of them are powered by Mercury. And that is the source of our tremendous engine P&A annuity. We own a large portfolio of both brands included in there, 3 of the most recognizable brands in the U.S., that's Boston Whaler, Sea Ray and Bayliner, but that we own many others. Freedom Boat Club now has -- we checked this morning, 319 locations because it goes up weekly globally, and I'll talk about that a bit more. But in terms of our innovation, we have significantly in excess of 300 patents granted since 2017. So a very innovative company, large in scale, very capable, but we don't take any of that for granted. We are continuing to transform the business and make it relevant for the next generation of boaters. If we could go to the next slide. Taking a look at the U.S. recreational boat market is really helpful in understanding our strategy. U.S. is the biggest recreational boat market in the world, followed by Europe and Canada and Australia and New Zealand, which have somewhat similar characteristics. So if you look at how we participate, please start at the lower right of this slide, we have the leading engine, boat, technology and accessories brand with about 14% share in the U.S. boat market, but we have more than 45% of the U.S. marine engine market. And we have the largest portfolio of technology and P&A brands. So those all go into the new boats sold annually in the U.S., which probably will be 220,000-ish this year. About 2/3 of our portfolio of boat brands are fishing. They can be saltwater or freshwater. So I wanted to note this huge population of 50 million people in the U.S. to characterize themselves as fishermen or anglers. That grew by 3 million just last year, so it's a great segment to be in. We sell those new boats into that fleet that I mentioned earlier of about 10 million to 12 million registered boats in the U.S., and that is sort of a tremendous aftermarket portfolio, including engine and other systems. That's very profitable for us. But in the U.S., the big circle here is the 140 million people, about 1/3 -- more than 1/3 of the U.S. population that go boating annually. And some of our strategy is how do we intermediate their participation. They're obviously not all on their own boat. They're using other people's boats. But Freedom Boat Club is one very effective way for us to intermediate participation there. On to the next slide. Just a few points of data that I think are very interesting and differentiating us and how we appeal to a new demographic. So our first-time boat buyers are 3 years younger than the overall industry boat buyers. So we're obviously providing brands and opportunity for new people to come on to the boating ladder. We over-index on female participants in the industry. The average age of our Brunswick boat buyers is 2 years younger than the industry. The average age of a Freedom Boat Club member is 3 years younger than our average boat buyer. And then 35% of Freedom Boat Club members are women, which is more than double the number of women who registered new boats. So we're finding a way towards younger, more balanced demographic faster than our competitors. We do a lot of work to maintain our relevance to this new generation of demographic. We're offering new value product entry points, new modes of participation like Freedom. We are refreshing all of our digital assets and making them fully contemporary. We have many opportunities for digital engagement. We stepped up new communities, for example. Most of our products, particularly our premium products, come as connected products now, so they are off boating -- off boat experiences that you can have. Our Ripl new boat forum is an online forum with now about 4,000 members, and we use that forum to understand the boating sentiment with new and long-term boaters and understand what's driving them and how they might anticipate changing their boat behaviors in the future. We're spending a lot of time and effort and resources investing and developing new technology. You may have heard about ACES strategy: Autonomy, Connectivity, Electrification and Shared access. And then we're looking at how to personalize ownership and service experiences to meet the needs of those new consumers. We've also spent a lot of time. It's very important to us as a company, and I think it's very important to our stakeholders and our customers that we have fully contemporary ESG in the strategy. In 2019, we exited our fitness business, which left us pretty much a pure-play marine company. We did have just 2 divisions: Mercury Marine and our Boat Group, but we added 2 more, Advanced Systems and Business Acceleration. And the idea was that to add new growth platforms that would allow us to explore and deliver on a number of growth opportunities beyond traditional engines and boats. We also, as you see at the lower portion of this slide, added a third reporting segment, which is our P&A segment, which now accounts for about 35% of our revenue and roughly 50% -- or the aftermarket is about 50% of our revenues. And you can see that on this slide, which compares our earnings profile in 2006 and 2020. So on roughly the same overall revenue, you can see our profit -- our earnings more than doubled. So our operating margins are very, very strong now. But the earnings profile has changed a lot. Engines and parts are about 45% of our earnings. Aftermarket costs are about 45%, boats are now 11% versus the 41% that they were about 15-or-so years ago. So fundamentally different profiles. We have the strongest product development activities in the industry and new technology development. I particularly wanted to call out our most recent and very innovative new outboard engine, V12 engine making 600-horsepower and has the first integrated automatic transmission, the first steerable gear case and an outboard. It's much quieter and more fuel efficient than any of its competition or there isn't much competition for it, to be honest. And it is causing our OEM customers to design a whole new class of boats around this engine. Just a few more words on Freedom Boat Club. More than 40 -- likely a high number, there's about 45,000 memberships and about 70,000 members on 319 clubs. And just very recently, we passed a big milestone, which is we now have more than 4,000 boats at Freedom Boat Club, the majority in the U.S. but also in Europe and Canada. And that delivers an experience that is attracting a different demographic. As I mentioned, more women, younger and not a heavy overlap with our new boat buyer population. So it's really all additional and it's not cannibalizing new boat buyers. Okay. I'll hand over now to our CFO, Ryan Gwillim.

Thanks, Dave, and good afternoon, everyone. For those of you that know us pretty well, we have had a pretty balanced capital strategy here for many years, and it really starts with the investment in growth. And you can see the items listed. I won't read the slide. But it always begins with the investment in ourselves, in our product, in our capacity and in the programs we've made successful over the years. From there, we always look to retain a strong financial position. We worked pretty hard to get our balance sheet where it is today. We got rid of pension plan and funded it and transferred to a third party here a couple of years ago. We are investment-grade today. We have taken advantage of that in the debt markets. As many of you know, we just did a 10-year and a 3-year offering for the Navico financing earlier in August and had really good results there. And we're able to leverage the balance sheet for M&A, including Navico as well as a smaller deal such as RELiON and others that we plan to continue to augment what we're doing on the organic growth side. Finally, what we do, obviously, believe it's important to return capital to shareholders, both dividends, which we continue to increase over time as well as share repurchases, which we've been relatively steady at over time. We repurchased about $400 million of shares. At the 2019 after the Fitness, divestitures have maintained relatively stable repurchases since then, with this year likely ending up at the higher end of that $80 million to $120 million range if the share price remains where it is and the market valuation is where it is. So enhanced liquidity, strong flexibility and an outstanding balance sheet have given us a lot of ability to succeed. Here is kind of a busy slide, but really, the theme here is the progress that we have made against our goals as a marine-only enterprise. And even in 2022 updated target, [ where we lag ] a little bit earlier, that even that is a bit updated now with the Navico deal expected to close here in the next handful of weeks, 30 to 60 days. The updated targets on EPS of $8.75 to $9, and a quarter for next year. And you can see what that would do for a 3-year CAGR, strong revenue growth across the 3-year plan and about 25% EPS growth. But the one that I'm even more, I guess, proud of and something that is returning a lot of value to shareholders is the free cash flow conversion from 2020 to 2022 of north of 90%. And this is not an environment where we are starting growth. You can see the cash that we're generating each year, but also the CapEx and R&D and everything that we're spending and still to get to that level is a testament of really outstanding performance in what has been a relatively rocky environment. And lastly, we like this TSR and implied growth slide, as it shows what Brunswick again has done in the last 2-plus years in terms of TSR versus not only our peers but other relevant indices. You can see we performed quite well, and obviously, the stock price has been a big part of that as well as the increase in dividends. But we continue to outperform our peers and the market as a whole. And on the right is just kind of how we think about the growth of earnings over time, the core business giving us high-teens return every year with capital strategy on top of that, getting to a total earnings growth of low 20s, low to mid-20%, which is where you've seen EBIT grow really over the course of the plan and even in previous plans. So really strong growth, and we intend and are looking forward to showing an updated plan in February, hopefully, in person that will take this to 2025. And I would expect to show quite a bit of growth over that plan coming to what you're seeing on this slide. So with that, I will turn it back to Scott. Scott, if you want to open up for questions, we're happy to take them.

[Operator Instructions] But I'll get things started. And again, thanks for joining us, guys. We're starting to see some of the tough comparisons, at least on a year-over-year basis from a retail perspective. But on the 2-year stack, things are still looking really good. Can you just talk about some of these new customers that are coming into the market, what you're seeing and hearing about the stickiness and they are willing to remain in the boating lifestyle?

Yes, certainly. So you are seeing those retail comparisons, but they're not really indicative of raw demand, which remains extremely strong and really indicative of almost no field inventory. And hopefully, we'll be able to rebuild some of that over the next couple of years. In terms of the new boat buyers, we're very excited about that new demographic coming into the market. And all indications are that they will be sticky. Our own surveys and external third-party surveys all suggest that people who were in the market now came in last year and this year are very happy with their boating experience. We've widely quoted a survey that we did with the Ripl community that I mentioned earlier, that more than 90% of people who came in as first-time buyers in 2020 rated their first season as 4 or 5 stars out of a possible 5. In other words, they had a really good first season. There's no kind of regrets. I think everybody who've got a boat is having a great time with it. And obviously, the way that COVID has progressed has meant that they are certainly seeing great use out of their boat this year as well as last year. We also are surveying on a different set of questions now, which I think is really just -- I think just in the last couple of weeks. We asked people about the effects of flexible working and how they were using their boat this season. And 20% of the people that we surveyed said that they worked from their boats this year, 50% of the people that we surveyed said that the flexible working arrangements had allowed them to use their boat more during the week than they had previously. And so we asked them what they anticipated for next season would be the case, and 80% said that they continue to expect to work from their boat and utilize additional time during the week from flexible working to increase their time on the boat. 20% said they weren't sure. And only, I think, 1.5% has said that they would have less time on the boat. So overall, every survey that we take confirms that new boaters are very happy with their purchase, having a good time in the market and are having more opportunities to boat facilitated by flexible working.

All right. I do have a question that popped up about Freedom Boat Club that's coming from the audience. Maybe can you speak to the longer-term potential of Freedom Boat Club and what is likely to be the terminal size of the franchise count?

Yes. So obviously, when we acquired Freedom Boat Club in 2019, we had 170 -- around 170 locations and -- and just 2 years later, we're already at 320. You will have seen recently that we have taken a couple of inorganic actions. We bought back 3 Tier 1 franchise locations in the U.S. And those are locations that we -- so the Freedom Boat Club model is partially franchised and partially minority, a company operated about 20...

About 80/20.

80% to 20%, 80% franchised, 20% company operated. If we see a Tier 1 market where the franchisee maybe is not able to realize the full potential because of investment considerations, we -- in 3 cases already, we bought those back where we're better able to provide the capital to accelerate those markets. But you will also have seen that we bought the Fanautic Boat Club in Spain, which has 23 locations in all major cities and tourist centers. So we see the potential for this club model to expand outside the U.S. as well. In terms of -- in the U.S., there are about 10,000 marinas. So there are really tremendous opportunities for expansion. When we do analytics on Freedom, we see an order of magnitude, more potential locations than we currently have. Now I don't know if we'd go after all those locations, but I would say that there is a -- just 5x probably the number of locations possible for Freedom Boat Club than we have right now. And we're also only part of the way through populating that fleet of 4,000 boats with a bunch of boats. So we'll be increasing our percentage of the fleet as we go forward. That fleet will grow with the size of the clubs. And then you may have seen we launched a preowned digital boat sales platform called Boateka, which essentially takes the boats that exit the Freedom fleet after 2 or 3 years and resells them into the retail preowned market, which gives us another source of profitability. So we see a lot -- plenty of opportunity for expansion domestically, a lot of opportunity internationally and then tremendous opportunities with both in engine sales into the clubs and then also adjacent business opportunities with things like reselling those boats out of Freedom into the preowned one.

I'd just pause for one second. Operator, Chris, I just received an e-mail that people are not hearing the feed coming out of Brunswick. Can you just double check? Make sure things are connected properly. I can hear everything.

We'll double check.

All right. Guys, just hold on for one second.

No problem. If you need us to keep speaking, Scott, just for the sound check, that's fine, too. Just let us now.

I hear you perfectly. I just want to make sure before we go any further.

Okay.

I just got an e-mail telling me that it just returned. So that's fine now. So...

All right. Excellent.

All right. So why don't we move along. There was a follow-up question on Freedom Boat, basically saying there's an opportunity to expand the offerings there. For instance, is there an opportunity to add higher-priced luxury memberships that offer access to larger and more expensive boats?

Yes. Great question. And certainly, we believe there is. At the moment, we're kind of expanding in the categories that we -- that already exist in Freedom. I would say we have plenty of opportunities to expand the model. In the short term, we have to consider the boat availability situation. At the moment, every boat that we can make is pretty much got a name on it. But as we get out of that situation, we see plenty of opportunity to selectively introduce more premium products and even more premium kind of broader offerings, captains offerings, those kinds of things that would be a very nice adjacency to expand Freedom.

All right. Just my question, just shifting gears. For those people that are from a higher level are worried that the boating cycle could peak out. Just talk about, again, how Brunswick is positioned to just benefit from increased boat usage. And as long as people are out on the water, that really is what is going to drive the lion's share of your profits going forward.

Yes. So as I showed on one of the slides earlier, with the 2 kind of [ rides ] that show our current earnings profile versus the profile from some time ago, roughly half of our -- between dealer engine sales into the retail market and our portfolio of parts and accessories businesses, the aftermarket proportion, that accounts for about 50% of our total earnings. Even during the Great Recession, that segment only declined about 5% and immediately bounced back again. So even in the most acute situation that we've experienced, that aftermarket segment was almost untouched. And we obviously are continuing to build out that segment. So Navico, which we just acquired is 2/3 aftermarket. And many of the other businesses that we're building out and will do as tuck-ins in the future, we'll continue to build out that very steady annuity earnings profile, which really just depends, as you mentioned, Scott, on people using their boats. If people use their boats, they need consumables, they break things, they want to upgrade. There are lots of reasons why that is a very healthy segment. Their operating margins in that segment for us are in the low 20s. So it's the highest operating margins in our business. But also, as that slide showed, another big, big contributor with operating margins that are getting very close now to the P&A margins is our propulsion business, which also has a significant, what we call repower, but essentially is an annuity proportion. And then, of course, Freedom Boat Club is also an annuity. Once you remember and you pay your membership dues and we don't lose many members, that is another component to the very robust cycle-resistant annuity portion of our business, which is an increasing proportion of our earnings.

Got it. Okay. Now just going back to boats. You guys have announced some new capacity coming online for engines as well. Can you talk about how -- have we made a dent in any of the pipeline statistics, notably for boats? Or are we still in the same situation we've been in for the last few quarters?

I think the answer is no, we have not really improved the inventory situation. Hopefully, we will as we get into the fourth quarter, which is obviously the off season for most of our northern markets. But even with our best efforts, we expect that we will probably get into the mid-teens of weeks on hand by the end of the year, which will be kind of 70% lower than we would have been historically. So we'll be starting next year from a low base. But obviously, that's not what we want. We want to get as many people out on the watch as we can. So we've announced a couple of tranches of capacity expansion for boats. One, we announced at the beginning of the year that we're executing, that takes us to 44,000 units from our current around 38,000 units a year by 2023. And then subsequently, we announced additional investments that we're making to try and get to closer to 50,000 by 20 -- end of '23, '24. All of these are very modest investment levels. We're not adding new plants. So the entire expansion plan is probably in the $15 million range. It's a very good return. It adds a lot of optionality for us. And it certainly will help to rebuild pipelines. We don't think that we'll rebuild pipelines fully now until the end of '23 or '24, even with the capacity that we're putting in place because we just don't have the overall capacity. I would say that although our own capacity plans are on track, we will be depending on the supply base situation to improve in order to allow us to fully realize the capacity that we're kind of putting in place internally.

Got it. And as far as capacity, you sort of mentioned this earlier about just not having enough product. But in an unconstrained environment, how much higher would retail sales be up in 2021?

It's difficult to say numerically, but very significantly higher. We are highly constraining sales at the moment with capacity. So I could easily say there's 10 points more of opportunity versus, of course, is where we are likely to end up. Sorry, I didn't -- you mentioned earlier, you said boat engine and I forgot to address the engine capacity. We did put a big tranche of new capacity in, in 2018, which has facilitated a lot of growth and market share gains. So we're now at in the mid- to high-40% market share in engines now. But because of the rate at which we're gaining market share, we're upward investing in another tranche of capacity, which is going to add about another, I would say, 15%-ish to our total capacity in the U.S. to produce these high horsepower engines. And that will allow us to address a whole new set of customers who desperately want to get into Mercury.

I think just we're within a few minutes of the end of the presentation. If anybody has a question, please send it in now. My last question is just on margins. Supply chain, labor, raw material constraints. You guys have addressed this and obviously have been doing incredibly well. But any additional comments on what you see for the back half of the year and heading into 2022?

Yes. We have tried really to do our best to -- well, first of all, our intention is to fully cover inflation with price. There are some disruptions that we're experiencing that affect productivity for our boats, I guess, our boats that won't necessarily be fully covered, but all of the material and labor inflation direct will be covered. Now what that has meant, though, is we've tried not to get too far ahead of inflation with pricing because we want to keep boating affordable. Our midyear -- we normally introduced boat pricing midyear when we do a model changeover, which we did, but we will be doing another price increase in the fall, late fall because of the inflation that we have seen just over the past 3 months, essentially 3 or 4 months since we planned the initial price increase. So we essentially are planning to cover inflation for -- on a full year basis by the combination of price increases.

All right. There's no questions in the queue. We are just about out of time. Thank you, David, Ryan and Brent for joining us today. This is very, very helpful and very informative. I want to thank our audience for joining us. And this formally concludes the Brunswick fireside chat. Thank you, everybody, and have a great day.

Thanks, everyone.

Thanks, everyone. Thanks Scott.