Brunswick Corporation (BC) Earnings Call Transcript & Summary

As for our next presentation from Brunswick Corporation. Brunswick is a leader in the global marine industry with a portfolio of some of the best-known boat brands in the world, including Boston Whaler, Sea Ray, Bayliner and Harris, just name a few. In addition, the company's Mercury Engine business has been growing very rapidly and gaining meaningful market share, while it's Parts and Accessories business has also expanded significantly, both organically and through a handful of very strategic acquisitions. Perhaps more importantly, based on management's guidance for 2022 that was introduced a few weeks ago, as well as the 5-year outlook it provided Monday during its Virtual Analyst Day, it does sound like this momentum is expected to continue for the foreseeable future despite ongoing supply chain challenges that have plagued the industry and Brunswick as well. With that in mind, we're very pleased to have with us today the company's CEO, David Foulkes. And with that, I will hand it off to David.

Thank you, Joe, very much. Good morning, everybody. Thank you for your interest in Brunswick. It's great to see you all. Before I start, my presentation will contain certain forward-looking statements about future results. Actual results may vary. Take a look at our SEC filings for the factors to consider. We'll also be using certain non-GAAP financial information. For reconciliations to GAAP, please also take a look at our recent SEC filings. Okay. So we released our 2022 Investor Day materials on Monday this week. You can see them on brunswick.com. And I'll spend most of my time going through that. But for those of you who are brand new to Brunswick, I thought I'd start with 5 minutes background on the company. So we have a very unique position of marine industry leadership. We have the largest collection of boat brands, the leading marine propulsion business, Mercury Marine, the largest marine parts and accessories business and distribution business, but we're now also the world's largest boat club operator. We also have unique innovation capabilities and an expansive array of service businesses. And I'd like to put a few facts up here to kind of corroborate that industry leadership position. There are about 10 million registered recreational boats in the U.S., about half are powered by our engines, Mercury engines. So there's a tremendous source of P&A annuity from those engines. As Joe mentioned, we have 17 boat brands, but we have 3 of the top 4 most recognized brands in the U.S. Boston Whaler, Sea Ray and Bayliner. Freedom Boat Club operates more than 330 locations now, majority in the U.S., but now 30-ish in Europe, and some in Canada, too. And then in terms of innovation, you'll see that we protect our new products very tightly. Since 2017, we've been awarded more than 450 patents. But despite that position, we wake up every day wanting to enhance the position, we want to make our company better and position it for the future. To understand our strategy, it is helpful to dissect the U.S. boating ecosystem. The U.S. is the biggest recreational boat market in the world, followed by Europe and then Australia, New Zealand. But if you look at that market, there's a lot of focus on this number, which is roughly the number of new boats sold in the U.S. every year -- recreational boats, in the categories that we compete in, about 200,000. We have about 14% boat market share, but more than 45% engine share and an increasing share of wallet with all of the technology businesses that we own in the parts and accessories that we own, not just on our own boats, but on every boat that goes into that market. Those 200,000 boats get sold into the 10 -- the fleet, if you like, of about 10 million registered recreational boats, about half powered by Mercury. So great annuity for us. And every new boat that goes in tends to have more of our stuff on it, which means more stuff to maintain, upgrade, replace in the future. So that annuity opportunity is expanding. And then in the U.S., there are about 55 million people, and growing who categorize themselves as fishermen or anglers. And we have the leading brands in both saltwater and freshwater fishing. And then the biggest number on the page, about 140 million people in the U.S. go boating in some way every year. A huge number. They're obviously not all on their own boat. And so we're looking to intermediate that participation through things like Freedom Boat Club, through new entry into the pre-owned boat market and also through things like our connectivity solutions. We have 4 divisions: Mercury Marine, our Propulsion business, which has benefited from many years of investments in new product and technology and manufacturing capacity; our Advanced Systems Group, which contains some of the most advanced systems in the marine industry, and in fact, in the RV industry as well, particularly focused on electrical, advanced battery technology, digital systems, electronics; and then our Boat business, I mentioned earlier, which has been on a journey of margin expansion, with an objective of getting to 10% margins this year. Business Acceleration is the home for our service businesses, but notably for Freedom Boat Club. And then we have 3 reporting segments: Propulsion; P&A, which is very noncyclical, very high margin; and then our Boat business, which includes business acceleration. So let me switch now to our Investor Day materials. So in May 2021, we launched our Investor Day of 2021 focused on our Next Wave strategy, which is really built on the foundations that I just described, the scale and capability, but sets in place some new growth vectors for us, new very powerful, long-term, sustainable growth vectors. On our Investor Day this year, which we released on Monday, and you can see on brunswick.com, focused on some of the progress we've made just in the last year to really power up that strategy. There are 3 imperatives or elements, if you like, to Next Wave. The first is about enhancing our existing leadership position in the industry. The second is about investing to make sure we continue to win in what we know as a changing world, changing customer expectations, societal expectations and imperatives, technology. And then finally, accelerating the contribution of some of the really important emerging value drivers we've been curating over the last 3 years or so. So let me unpack that one other layer. In terms of enhancing our existing leadership position, we have introduced some unbelievable products just in the last year that are clearly beyond anything anybody else has in the industry, and we have a very full pipeline. We've expanded or are expanding our capacity in boats, engines, distribution and electronics because there is tremendous demand, and we are gaining market share. We have very high backlogs. We have very low -- unusually low field inventory levels. But we're doing it in a really smart way with a focus on ROI, with a focus on our lowest-cost manufacturing facilities. We are elevating the annuity portion of our earnings, both organically through our P&A business and through Freedom Boat Club, and also inorganically through some of our recent acquisitions. And then we're increasing the resiliency of our business, particularly focusing on supply chain. And then unpacking the second component, we've developed a really unique set of consumer insight tools that allow us to understand how to attract boaters, retain boaters, turn non-boaters into boaters. So it's a really unique toolkit. We have online communities that are developed and curated by Brunswick that give us that unique insight. We've invested a lot in our innovation capabilities. We've partnered with leading suppliers, universities and other things. We have the leading-edge technological solutions in the industry, things that take the pain out of applying technology for both our OEM customers and for end consumers. And it can be painful if you're an OEM and you don't understand new technologies, how to put in place a holistic, compatible, comprehensive technical solution. And then we've put in place a really rich, engaging set of digital experiences, everything from websites to apps. We have taken a clear position of industry leadership on sustainability. And we are continuing to work on our culture, DI, many other initiatives, to make sure we maintain our position as an employer of choice, not just in marine, but across industries. And you may have seen in the Forbes rankings of American employers in 2021, we were the #1 in engineering and manufacturing across industries. And then this third component is about rapidly scaling the Freedom Boat Club ecosystem, which now includes our Boateka pre-owned boat online sales platform, transitioning our development work on autonomy, connectivity and electrification to full commercialization, which is already happening. More M&A focused on integrated solutions and annuity earnings, and then deeply monetizing the really deep synergies that we have in our business platform, those are commercial, operational and financial synergies that are uniquely available to us. So let me just go through a couple of proof points here. Here are some of our manufacturing expansions across boat plants, engine, distribution. Just this morning, we announced the expansion of Navico's electronics manufacturing facility in Ensenada, Mexico. But we're doing that in a smart way. We'll add about 1 million square feet of footprint across the business by 2023, but with really strong ROI focusing on low-cost facilities. We obviously have been subject to the supply chain disruptions and inflations that other people have, but I think it's been noted that our performance has been very good. And that's because we are deeply vertically integrated, and we have best-in-class partners because of our scale. So we are going to continue to invest behind our vertical integration, particularly at Mercury, leverage our scale to continue to work with the best partners in the industry globally, and selectively in-source where our scale makes sense. We in-sourced about 30 product lines just last year, where our scale makes sense, where we thought there was a risk of disruption. And then I mentioned our toolkit for consumer insights, but what gives us that power is the breadth of our portfolio, Freedom Boat Club and shared access opportunities, our connected solutions and our investments in digital, together give us the power to get consumer insights that other people cannot access. Here are just some of our integrated technology solutions. On the left is our Fathom e-Power System that replaces the generators that you'll see on many boats, the internal combustion engine generators with lithium ion batteries and power management systems. Our CZone digital switching system that allows you to control your boat from a central location on the boat or even remotely, connectivity applications, many solutions that are not available from anybody else that we can provide to our OEM customers. And here's a little insight into synergies or expanded synergies that I mentioned earlier. I think everybody understands this part. Every Brunswick boat is powered by Mercury engine, has a lot of components and systems from our Advanced Systems Group, and now will contain increasing content from Navico, sonar, radar, displays, and I'll show you an example later. When we quote our margins for our Boat Group, it does not include the margins on those inputs. So we would normally take that boat then and sell it to a dealer and get a margin on the boat. But if instead, we put that boat into Freedom Boat Club, leave it there for 2 to 3 years and then exit it through our Boateka pre-owned boat sales platform, the margin is 3 to 5x higher over that period. So we have a tremendous opportunity by combining all of those things for an unbelievable margin stack. And then I talked about our ACES, autonomous, connected, electrified and shared solutions. You'll see them in the market now. But by 2025, we'll have more than 35 new products in those categories. We made 9 acquisitions last year, 6 in Freedom Boat Club and 3 in our Advanced Systems Group. They all were right in the bull's eye of our acquisition strategy. Our recurring revenue, very aftermarket-orientated, advancing our ACES strategy, and even deeply -- even more deeply integrated technical solutions. We added more than $500 million in revenue on a run rate basis, 2,000 employees. And these are great employees to have, software, electronics development, digital cartography, digital solutions, just what we need for the future of the business. Even just this year, in the first 2 months of the year, we launched new electrified product, autonomy and ADAS product, the first new operating system from Navico which switches from a Linux system to an Android system, which is unique. But the one I want to concentrate on is this one. This is the new Boston Whaler 360 Outrage. It's a very popular boat. We sold every one of them since we launched it. But what's really interesting about it is it's powered by Mercury engines, it has a Fathom e-Power system on it, it has CZone digital control system on it, it has Navico displays, it has a Navico radar, it has Navico sonar. There isn't a single major piece of technology on that boat that doesn't come from Brunswick. So we had a really good year in 2021. And earlier this year, we guided to a really strong year in 2022 with further significant revenue and earnings growth. Revenue up to -- in the range of $7 billion from about $5.8 billion this year. Earnings up significantly. Margins expanded. EPS in the range of $10 versus $8.28 in 2021. We estimate our revenue in 2022 from those ACES products and solutions to be a bit more than $0.25 billion. And we estimate our recurring or annuity earnings to be about 42% of our total earnings in 2022. But we didn't design our operating model just for 1 year of growth, we designed it for multiple years of growth, sustained growth, secular growth. And so we set a vision and targets, estimates for what we could achieve in 2025. And that is around $10 billion of revenue, significantly expanded margins, yielding about $1.7 billion of earnings and EPS in the range of $17, which implies top line growth CAGR in the mid-teens. So really strong growth over that whole period. We also estimate that by the time we get to 2025, our ACES gross revenues will be in the $1 billion, I say gross because of the synergies included in there. So for example, in Freedom Boat Club, we sell boats into the club. We see that as a synergy. And we estimate that our recurring or annuity earnings will be up to more than 50% of our total earnings. In June of 2019, 6 months after I became CEO, we sold our Life Fitness business and became focused on Marine. If we look from that time until the end of last year, our total shareholder return exceeds our peers and indices substantially, and we expect that to continue based on the growth that we're projecting. Obviously, quite a lot has happened in 2022. But we're taking advantage of that situation, we have been aggressively repurchasing shares. We anticipate we'll repurchase somewhere in the range of $80 million of shares just in the first quarter. So we're a great bet, not just in leisure and rack, but across multiple industries, with a sustained growth story that is backed by clear plans over the next 5 years. Thank you for your time.

I guess I'll ask the first one then. Demand, no surprise. Any sense that your core boat buyers being impacted by geopolitical issues or stock market issues over the last few weeks?

Not at the moment. We continue to obviously maintain kind of daily checks with our channel partners. Nothing at all at the moment. So we have our ear to the ground. Obviously, there's a lot going on. But just for context, our Boston Whaler brand is sold out this year, 2022, not just at wholesale, but even at retail. We have a name on every single boat that we're going to produce this year. And although for some of our brands, it's not a full year like that, it is very unusual. We have incredibly depleted pipelines. We ended the year with something like 15 weeks of inventory versus our typical 30 to 35. And that was global. In the U.S., it's about 12 weeks of inventory. So we are down -- we produce about 40,000 boats a year and we're down by about 15,000 units of inventory. So it would take an awful lot of change in consumer sentiment to significantly impact us. Obviously, in the U.S., Northern markets at the moment we're not even in season yet. So we'll continue to watch out, but no signs so far.

How do you see the bulk of your inventory level going forward? Will they go back to pre-COVID level? Or are [indiscernible]?

Yes. I think it's difficult to see them going too much lower than prior, but I think there's a possibility that they will be lower. We think in -- historically, it's been in the 35-week range. We think 30 weeks might be a good kind of target going forward. At the moment, we're in a situation where no dealer has inventory. But if one dealer did have inventory right now, it would be a massive advantage. So everybody wants inventory. They don't want it because they have to maintain it, floor plan it, whatever. But when it comes to competing in the future when inventory is available, they'll want inventory. Just for context, Boston Whaler has effectively no inventory at the moment. They're just buying production slots on the line. If you had a Boston Whaler inventory, you'd sell it. So I think once over time, the competitive environment returns to more normal situation, people are going to need inventory. If you think about us as one company, we have 600 models across our portfolio. So just dealers having 1 or 2 of each model means they're going to have some significant number of -- significant amount of inventory. So there are practical limits to how low you can go. And then when we get back to a more normal situation, which won't be for a while, I would expect inventory to be a strong competitive advantage.

[indiscernible]

We have not seen a strong correlation of the fuel price and sales or even boat usage much in the past. Surprisingly, not as high as you would think. If we go to significantly elevated levels beyond what we've seen, I don't know exactly. But just for context, I think people think that boats use a lot of fuel, and some of them do when they're out. But the ones that are -- use a lot of fuel tend not to be out that much. So if you look at even Department of Energy or EPA data, the average boat uses about 1/4 of the fuel in a year of the average car. And the average entry-level boat uses about 1/4 of the fuel in a year of an average compact car. Remember, there's a season for boating, probably use it at the weekends. So if you look in terms of a family fuel bill, if you have a car and a boat, the boat is about 20% of your fuel bill. So it just isn't the huge driver that people sometimes expect it to be.

[indiscernible]

I -- that's an expensive boat, yes. And more power to those guys, obviously.

Dave, can I ask one more on engines. You mentioned earlier that your market share in the U.S. is 45% on average.

A little bit more than that, yes.

How does -- a couple of questions. On international, how big is that market relative to the U.S.? What is your share internationally? And how do you get it to 45% plus?

Well, it's on the way there. It's been climbing really rapidly. Roughly, Mercury sales is about 70% U.S. and about 30% international. But our market opportunity remains substantial. So we would be in the 35-ish percent range in most European markets. And A&CP, somewhere in that range. Canada would be higher in the 40s, I think. But we continue to have opportunity to expand further into repower, into commercial markets, into international markets, as you mentioned. So no reason -- well, there is a reason at the moment and that is capacity, why we can't gain even more market share. But as many of you know, we're making a huge investment in additional capacity, which will come online in Q4 of this year in Fond du Lac, which will increase the capacity for our high-horsepower engines by something like 60%, I think. So there are a lot of people -- we've gained a lot of share, but now we have to take care of the customers that we have. But there are a lot of people waiting in the wings for us to get that capacity to shift to Mercury. And they're not just domestic, there are a lot of international customers as well where we're making strong inroads.

What's happened to the secondhand boat prices during the pandemic? And [indiscernible].

Yes.

And given what [indiscernible] how much do you think you'll have to worry of sticker prices this year to [Indiscernible].

Yes, we're not really the sticker price people. The channel is the sticker price people. In terms of our costs, though, through 2021, our boat prices went up high single digits. Our input costs went up a little bit below that. Obviously, we're trying to maintain some differential. We're in this for the long term. We're not using this opportunity to take price, except where our premium products like Mercury and Boston Whaler allow us to. So we're trying to make sure that we modulate it in. It's a little early to forecast this year how things are going to go. If you think about input costs this year, we're hedged on some of the big commodities that we use. So we're not going to immediately see huge impacts. We have long-term contracts with things like petroleum-derived products. So it will impact us, probably. It will be more longer term. So I think some of the uncertainties are around the nature of the way current events are developing.

Dave, I think you talked about in Investor Day [indiscernible] Freedom Boat Club and Boatek, if I'm correct. Can you guys talk about the margin structure [indiscernible] develop that business [indiscernible]?

Yes. If you look at -- Freedom North America is the most kind of developed large-scale part of Freedom, if you like, and margins there are similar to our P&A business. So it's a very strong margin structure even without the synergies that we gain from both sales and engine sales into Freedom. So the -- we expect the margins over time as we mature those businesses to be in the 20% range, something like that, yes. Operating margins I'm talking about, yes.

All right. Thank you all very much indeed. Have a great rest of the conference.