Brunswick Corporation (BC) Earnings Call Transcript & Summary

Okay. Well, thank you, and good morning, everybody. Welcome to the third day of the Baird conference. It's great to see you all. I'm Craig Kennison from Baird Research, and I'm so thrilled to have the team from Brunswick here today. We have the CEO, David Foulkes. We also have the CFO, Ryan Gwillim, and then members of the team in the audience. Brunswick is building a marine powerhouse through some premier marine assets, including Mercury, Boston Whaler, Sea Ray, Power Products, Navico brands, Freedom Boat Club and many others. Dave is going to walk through a few slides to give you an orientation, and then we'll open it up for Q&A.

Thank you, Craig, very much. It's great to be here. Thank you, everybody, for taking an interest in Brunswick and giving us your time this morning. I'll start off with -- we're showing some indications of future results here. Actual results may vary, as you know. For sources of difference, please look at our 8-K filings, which are available on brunswick.com. We'll also be using some non-GAAP financial measures. If you'd like to understand reconciliations between GAAP and non-GAAP, please look at our 8-Ks on brunswick.com. Okay. So I know many of you know Brunswick very well. But for those of you who don't know our business quite so well, here's a quick primer on the business. We occupy an unusual position of leadership in the marine industry. We have the leading collection of boat brands, the leading propulsion business. We have the largest and leading marine parts and accessories and distribution business. And we're also now the leading and largest boat club operator in the space. We also have great innovation capabilities, and we have a great collection of marine services. And I'd like to put up some proof points that are, I think, very impactful, that demonstrate that leadership position. So in the U.S. boat park, which is about 10 million to 12 million boats, about half of them are powered by our Mercury Marine engines. And that is the source of our tremendous P&A annuity, that is recurring revenue for our business. We own 3 of the 4 most recognized boat brands in the U.S.: Boston Whaler, Sea Ray and Bayliner. We now operate the Boat Club with 360 global locations. And we're a very innovative company. Just in the last 5 years, we've been awarded 520 patents that really protect our intellectual property in the spaces in which we operate, including future spaces like electrification and autonomy. But we are not complacent about our position in the industry. We're always looking to enhance our position and move the business forward. If you want to understand our strategy, it's really helpful to kind of dissect the U.S. boating ecosystem, which is a good -- it's the largest in the world. It's a good proxy for other large markets, too. So if you look on the lower right of this chart, in the U.S. market, about 200,000 boats are sold every year, 16 feet and above. Our market share of boats is in the low to mid-teens. But we have about 47% of engine share in that market in the U.S. and in Canada. So a really big portion of engine share, and also a lot of those boats contain large amounts of our parts and accessories and systems. So a very dense -- a profit dense way of getting into the market. There are about 55 million fishermen and anglers in the U.S., and it's a growing population. About 2/3 of the boats we sell are fishing boats, either aluminum fishing boats or saltwater fishing boats. We sell those boats into a boat park. I mentioned earlier it's about 10 million boats. Half of them are powered by our engines. So that's a long annuity of parts and accessories in that marketplace. And the more systems we put into every boat we sell, the larger and more profit dense that pool becomes for us. The biggest number on that page is the 140 million people who go boating every year in the U.S. And our opportunity there is to intermediate our participation beyond just selling boats, and that's where things like Freedom Boat Club come in and our connected solutions. We have 4 divisions in our business. All of them are designed to focus on growth and margin expansion in a particular area. So we start with Mercury Marine. This enjoyed tremendous growth mainly through market share gains. It's gained 10 points of market share in the high horsepower just in the last 2 years. But it's gaining not just in the U.S. but globally. AUPs for engines are going up. Our volumes are going up and up. It's a very successful business. We are adding more capacity in Q4 of this year, which will allow us to service even more customers globally. If you look at our Advanced Systems Group, that focuses on providing technologies really beyond propulsion, focuses on electronics, electrical systems and systems integration. We have the broadest collection of highly technical systems in the industry and the biggest opportunity and capability to integrate those into other people's boats, other OEMs' boats. That is growing organically and through acquisition. The biggest acquisition recently was Navico, which essentially doubled the size of that business. So a big acquisition with high technology. If you look at our Boat Group, we have those leading brands in many segments. We've been focusing on differentiated product but also margin expansion, particularly in that part of our business. And we're running at around double-digit margins now, which has been our objective for a while. We've grown those margins really consistently over a number of years. And that Boat Group is also not only satisfying retail but working to refill a very depleted pipeline. Our inventory levels are still less than 50% of where they were historically. So we have a big effort to try and rebuild the pipeline. And finally, Business Acceleration. That's where our service businesses lie, including Freedom Boat Club. Freedom just passed 50,000 member agreements, 77,000 members and 360 locations. And we recently announced that Freedom's -- Brunswick's revenues from Freedom will double in 2022 versus 2021. So it's on a really strong growth trajectory. To support that growth, we're adding capacity, but really strategically and in a smart way. The largest investment is the one I mentioned in high horsepower outboards in our Fond du Lac campus. That will allow us to service more customers. We have customers waiting in the wings to take that product. We're also investing in a new distribution center. Our P&A business is huge. It needs to be efficient. Moving out of our old center allowed us to expand and produce more outboard engines. And then we're also introducing more capacity for electronics manufacturing, PCBAs particularly, to support Navico and other businesses. That allows us to be -- to avoid supply chain issues and to be more flexible in the electronics that we produce. We're also investing in our low-cost boat production facilities, particularly in Portugal and in Mexico, where our lowest cost base exists. It's been notable, I think, how strongly we've performed through the supply chain disruptions. That is partly because we are very vertically integrated. So Mercury is deeply integrated, and we continue to invest in that. But one fact to think about -- of the direct materials in a Brunswick boat, about 45% are produced internally. That means we have much more control of the supply chain for our own products than most other people do. And we're continuing to work with our global supply chain partners very, very successfully to make sure that we get supply. We made a number of acquisitions over the last 1.5 years that have been really on target versus our strategy. Our strategy is to invest and acquire in recurring revenue businesses. That's aftermarket-orientated businesses or subscription-orientated businesses, businesses that advance our ACES strategy. That stands for autonomous, connected, electrified and shared. All of those acquisitions have been squarely in that space. So we've added more than $600 million of run rate revenue, added 2,000 employees who are very conversant in software, content development, cartography, a lot of the really important things for our future. We got off this year with a really quick start on new products. These are just some of the things that were really differentiated that we introduced recently, including a number of products along the ACES lines. The product on the far right is a really nice illustration of how deeply integrated we are. That is the Boston Whaler 360, a 36-foot saltwater fishing boat. As soon as we introduced it in Miami, it was completely sold out for the year. But it has our engines, our digital systems, our electrical systems. It has Navico sonar, radar, displays. Every technical system on that boat is sourced internally. So we have tremendous depth there. And then I mentioned our ACES strategy. We expect to have more than 35 new projects -- products in that space by 2025, and we'll be launching a number of new products even this year, including our line of electric outboards, but a number of other really exciting products. In fact, the last half of this year and early next year will be an unprecedented wave of ACES products and conventional products that I'm very excited about. In our Virtual Investor Day earlier this year and then in our Q1 earnings, we talked about our growth in 2022 top line and EPS and earnings, with an expectation of $7 billion in revenue and around $10 in EPS this year. That's versus about $5.8 billion in 2021. So really strong growth. But you note here the recurring revenue portion of our business. More than 40% of our earnings are associated with recurring revenue and almost 40% -- I'm sorry, associated -- recurring earnings and almost 40% of recurring revenue. And then we also connected our strategy to our 2025 financial objectives. And we put out a revenue target for 2025 of $10 billion versus an expected roughly $7 billion this year and EPS of $17. So considerable growth, kind of low teens CAGR over that period, which is obviously very strong. You see we're also building recurring revenue. We expect by 2025, recurring revenue will account for more than 50% of our total earnings -- I'm sorry, I'm mixing those up. Our earnings will consist of -- our recurring earnings will consist of more than 50% recurring. And then ACES will account for about $1 billion of our revenue in that period. So I will stop there, Craig, if that's all right, and turn it back to you.

Absolutely. Thank you so much, Dave, for that primer on your business. So again, this will be fireside chat. If you have questions, feel free to ask them. You can also send your question on the device here, and I'll try to get to it. Maybe let's just pivot off of this and welcome Ryan into the conversation. Investors have heard a lot this week, and there's a lot of views on potential downside scenarios. I think Brunswick has done more work in that area than most and I think has protected investors by at least framing what it looks like. Maybe, Ryan, you can share that downside to us.

Yes. And the math kind of does itself, right? And everyone in the room can figure out what they think the variables are. But what we wanted to do was clarify the question of if the retail market has a slowdown, what does Brunswick look like? How does Brunswick perform? And the key there is our portfolio is completely different from where it was in 2007, 2008, the GFC, that was much more heavily focused on boat sales. Today, as Dave said, our percentage of recurring revenue, which potentially is really Parts and Accessories, repower on the engine side and Freedom Boat Club and some of the others, that is such a bigger component today that the floor on the earnings has been raised by 3, 4, 5x on what we think it was only 15 years ago. So those scenarios are not meant to be situations. They're not meant to be this is what we think is going to happen. In fact, we actually think that we continue to be in a healthy market and a healthy environment. But they are ways to look at what would happen to our business, which is actually, to be quite honest, quite more positive than I think the investor community thought at a time where economics may not be ideal.

Yes, I think it's helpful. And I think the slide deck you put together on that, for those of you interested, it's well worth your time. So let's talk about current retail trends. We are at an inflection point, it feels, in the economy. And there are a lot of cross-currents, but you're at the tip of the spear. I said this yesterday, nobody needs a boat, and I was scolded.

You should have been scolded. I can't believe you said that.

But nobody [ may need ] a boat. And if that's the case, your demand could be destroyed. So maybe just give a feel for the current retail market today.

Yes. I think a number of components to that. First of all, we're mainly a wholesaler, obviously, and we're completely sold out of wholesale for the full year and many brands into next year. In terms of retail this year, retail is -- kind of boat retail is moving along kind of a bit like 2019, pretty much flat to 2019, I would say, but behind 2021. But we have seen in the last several weeks as weather has improved that, that retail is really accelerating, and a number of really good leading indicators. We saw our P&A sales jump above 2021, an indication that people are going boating and need parts and accessories, which is really exciting. We saw our credit applications jump above 2021 just in the last several weeks or so, which is a leading indicator for boat sales. So a number of -- even if we go all the way back through things like Google search terms, how frequently are people searching for the word boat or the word outboard or the word boat club, all of those accelerated rapidly in the last several weeks. So we're excited about the upturn there. And I'd say that the retailers started off slower than 2021, more consistent with pre-pandemic with an accelerating trend in the last few weeks as the weather has improved.

So that's the factor you think? It's weather. I know we saw an industry statistic which is [ what consumers have to consume ] in April down 27%. We know weather wasn't great in the Northeast. Maybe just your comment is really weather?

Yes. I think that -- well, we have a couple of factors in play, and it's a bit difficult to disaggregate or kind of deconflate everything. One factor we clearly have is extremely low inventory levels. So our inventory levels are less than half what they would be historically. And even by the end of Q2, we expect them to still be below half the historical levels. So there are less boats available, and that is affecting some categories more than others. If you look at fiberglass boats, particularly of boats greater than 30 feet, there's effectively no inventory. So I think that those classes of boats are most affected. Our sales is most affected by lack of inventory. In the northern markets, we had a situation where it stayed cold and there was even ice on lakes much longer. And it was very clear that we had slower sales in the northern markets than we did in the southern markets. And that situation over the past several weeks has begun to alleviate, and so we're seeing accelerating trends in those markets. So it's very clear that inventory is playing a role. It's very clear that weather was playing a role. And hopefully, that is -- that is mitigating now considerably. And then, of course, obviously, we're very cognizant of consumers and consumer health. But at the moment, I would say we continue to see healthy trends and we're excited that as the weather has improved, we've seen more people go boating as evidenced by things like our P&A sales.

So the pandemic was game-changing for a lot of industries. And for your industry, it meant no boat shows. It meant dealers didn't have inventory stocks, so shopping was different. Are there any lessons from the pandemic whereby maybe you say dealers can operate with less inventory or consumers can preorder online through some interactive process, protecting dealer margin, protecting your margin. Just thinking, what have you learned through the pandemic? And what behaviors can change?

Well, I think like most companies, we pivoted strongly to digital online, connections with our consumers in various ways, taking them into a deeper, much richer experience online with boat configurators, with virtual boat shows, with those kind of things that I think will sustain indefinitely. People are very interested in that. The great news for us is the longer we can take -- or the deeper we can take our consumers into the pipeline, the more control we have over that experience, the better we protect our brand, the better they understand what boat they really want before we transfer the transaction over to the dealer. So building that capability has been very, very powerful for us, I think. In terms of inventory, I think, clearly, the important thing is having the right inventory. And one of the things that we've built also to some extent because of the pandemic is a lot of analytics about faster-moving versus slow-moving inventory. How do we make sure that when our dealers do have inventory, it's inventory that is the right inventory for that particular market, with the right content, with the right colors, with -- so it's not going to be slow-moving inventory. What our dealers are telling us now though, and this is not a surprise, is that when -- I mean they pivoted from selling boats in their showrooms to selling production slots because there was no inventory available. But -- and that's fine when everybody else is also selling production slots. But now when some dealers have inventory and they're selling real boats and some people are selling production slots, it's a very different dynamic. So our dealers just want more boats right now. The main message from our dealers is still inventory is incredibly low, just get us more boats. And how the new equilibrium of inventory, how many turns of inventory we carry, I don't know how that's going to develop exactly, but I do know that we'll be much better at having the right inventory in place over time.

And so Brunswick, clearly the industry leader. You have to think like the leader, which means you're responsible in some ways for growing this industry. Talk about what you're doing to expand the appeal of boating to a wider demographic audience.

Yes. A lot of different ways. Obviously, we have very wide variety of boats. We have 17 boat brands, so we have an entry point for everybody. And we have been developing our product to be exciting for every point. So not just focusing our product development on the most expensive boats, but introducing new entry-level boats that allow new people to get into boating, and a very satisfying family experience on the water or fishing experience on the water, whatever it is. So we have that unusual reach and portfolio of entry points. But we've also been very successful, as you know, with Freedom Boat Club, developing a shared access entry point for boating, which is super exciting. We -- as I mentioned earlier, Freedom Boat Club just passed 50,000 members. It was really funny, just anecdotally, we were putting that -- we put together the press release. And absolute truth, the number of members was 49,999. And so we said, this week, Freedom Boat Club will pass 50,000 members. So -- but that's 50,000 member agreements, 77,000 members. That's a huge -- I mean if you think 200,000 boats sold every year, about 77,000 members of Freedom. And Freedom is a younger demographic, about 3 years younger typically than a new boat buyer. Many more women are Freedom members than registered new boats. So we're in the 36%, 37% women are members. It's more ethnically diverse. So it is a kind of adjacent and very exciting demographic for us to be able to introduce to boating. Obviously, the more -- I mean the synergies for us are huge. Freedom's fleet is almost 5,000 -- 4,500 boats. 4,500 boats, that is the biggest recreational boat fleet in the world. And the opportunity is for us not just to get the tremendous direct benefits financially from Freedom but also the synergy benefits of populating that fleet with Brunswick boats, Mercury engines, all the P&A. So this is a great way of getting a new demographic into boating, but it's also a very powerful profit pool for us and an entree, obviously, into our boats over time.

Ryan, I'll shift to you. Maybe let's talk about cash flow and then the balance sheet and your priorities for that cash. Really, the portfolio has changed a ton in the last decade, really since the last time we were talking about a slowdown. But maybe cover some of the highlights and then what your priorities are today for cash.

Yes. I mean the use of cash always starts with investing in our own products, right? I think we are a product company. We're a product technology leader because we invest in our products. And so free cash flow always goes first there, which we've -- I think we've been very successful at. You've seen the Mercury product launches and successes, capacity projects that are enabling us to produce more engines and satisfy the extremely strong demand. From there, we have a lot of different avenues. We have CapEx. We have R&D. We have then the basics of share repurchases, debt repayment. We have maintained a pretty flexible capital strategy amongst a bunch of different economic environments. Right now, our debt load is relatively light. We don't have another debt repayment due until 2023. And so we're able to pivot and spend a little bit more on share repurchases, given our stock price dislocation versus what we believe how we can perform. And so that's something we'll continue to be strong with. And M&A will continue to play a role, although we are going to be -- you do have to weigh the benefits on getting an asset that may work for the portfolio and be strategically beneficial but also what you're paying for in relation to what your own stock is trading at.

It feels to me like Navico filled a big hole in the ACES strategy in terms of giving you, I'll call it, some of the instrumentation, I don't know, to plug into Power Products, which I think of as like the spinal cord of the boat. Are there any holes within the Navico arena where you think, look, I just don't have that capability?

There are a few strategic things that we can still fill. I would -- we haven't really -- we bought Navico around the same time we bought RELiON Battery, a lithium-ion battery manufacturer and distributor that we added to our portfolio that includes Mastervolt as well. So RELiON Battery's revenues this year will be 75% -- or year-to-date 75% higher than they were last year, year-to-date. And that is the combination of their product put into our distribution channels and our systems integration power. And so when we can find ways to enhance the power of that integration, we can find ways to leverage our channel with a product that is a great product that hasn't maybe found the right distribution yet, we can make it really powerful really quickly. So those are the kind of opportunities that we're excited about. Obviously, on the M&A side as well, we've been repurchasing some Freedom franchise businesses, which we think we can grow faster. And that is also a great use of cash for us.

And then maybe just comment on international trends at retail and whether that same inventory dynamic exists. And how do you serve that market knowing that most of your manufacturing base is here in the U.S.?

Yes. So the second biggest market -- recreational marine market is Europe. And then after that comes Australia and New Zealand. The other markets around the world tend to be more commercial. Particularly, Asia is more of a commercial market. But we have both manufacturing -- very low cost in Portugal manufacturing to serve that local market. And so far, despite the fact that Europe's economies have certainly been under pressure and the Ukraine conflict is more local, we have seen the European market standing up extremely well so far. So that's really encouraging. Generally, all of our international markets would like more engines than they're really getting at the moment. I can't overstate the importance of getting that capacity in, in Q4 because we have customers waiting in the wings domestically. We have international markets on allocation at the moment and a lot of customers after that additional capacity. So international plays in strongly to that. And to be honest, profitability of international markets is very strong for us, as is commercial markets. So we're anxious to be able to access those markets even better.

Maybe just to amplify that one point on the engine side. It's our understanding there is definitely a shortage, but some of your customers or potential customers would like to partner with you. You know that, but you can't supply them without starving your current customers. So do you have visibility into market share gains? And how is that -- how far does that extend?

We do have visibility into -- I would say that there is no natural limit to what our market share could be. And as long as we keep producing great new product and we have capacity to sell it, we think those market shares will increase. I mean to be honest, I don't know if you could think of another -- possibly, you could. You guys cover a lot of industries. But it is -- gaining 10 points of share in 2 years in a particular category is pretty extraordinary when you think about the fact that we are not facing insignificant competition. So we have built an incredibly powerful figurative engine in Mercury that is just built for market share gain. Well, a lot of new products coming in, additional capacity, and I don't see any natural limit. If you look beyond the U.S. and Canada where we are high 40s, around the world, we're typically in the 30% to 35% in other markets. So plenty of potential for additional growth there.

Well, I did see that there were some questions I did not get to, so please feel free to join us at the breakout session next. But for now, thank you, Dave. And thank you, Ryan.

Thank you very much.

Thanks, Craig. Appreciate it.