Brunswick Corporation (BC) Earnings Call Transcript & Summary

Good afternoon. I'm Craig Kennison from Baird Research. I'm here to welcome the team from Brunswick. Brunswick builds marine products, a variety of them. They're really building a marine powerhouse through some premier marine assets. I think Dave will talk about them along with Ryan, but that includes Mercury Marine from [ my home state ] also Boston Whaler; Sea Ray; Power Products; Navico; Freedom Boat Club, I'm sure many of you have heard about. We're pleased to welcome the team from Brunswick. We have the CEO, Dave Foulkes; and CFO, Ryan Gwillim. They have a few slides, and then we're going to open it up for Q&A. Go ahead, Dave.

All right. Thank you, Craig. Welcome, everybody. Thank you very much for your interest in Brunswick. Thank you for joining us today. I'm excited to present some information on Brunswick. Before I leave the title slide, I just want to point to our tagline, Next Never Rests, which is a reflection of a signal of our continued investments in innovation and new technology and new products and even new business models. And I'll talk about those in the presentation. Before I start, the materials will contain certain forward-looking statements about future results. Actual results may differ materially. For the factors to consider, you can take a look at our SEC filings on brunswick.com. And I'll use certain non-GAAP financial information. For reconciliations of GAAP to non-GAAP, also take a look at our 8-Ks on brunswick.com. So I'd like to start the presentation with a quick video that highlights some of the areas of leadership that Brunswick has in the marine industry. It also showcases a lot of our great brands that Craig referred to and some of their more recent products. So please enjoy. [Presentation]

I hope you enjoyed that. I get very energized by it every time I see it. So for those of you who may be a bit less familiar with us, this is a great reference slide. That illustrates the structure of our business and also some of our wonderful brands across all parts of the business. We have 5 operating divisions: Propulsion; Mercury Marine; Engine Parts & Accessories; Navico Group, which produces electronics and power management systems; our Boat Group; and Business Acceleration, which is the home to our F&I businesses and importantly Freedom Boat Club. We have 4 reporting segments. You can see along the bottom there. For reporting purposes, we combine Boat Group and Business Acceleration into our Boat segment. Business Acceleration is our smallest division but actually the fastest-growing. You can see the wonderful brands we have across all of our divisions, but that Next Never Rests spirit applies there too, so you see some new ones. You see in -- under Propulsion, you see Flite, which is the leading brand in electric foiling. You saw some of those on the video. We acquired that business and brand last year. You also see under Propulsion Avator. And you may have seen in that video some of our new electric outboards under the Avator brand, we just launched the fourth and fifth models in that electric outboard lineup. Under our Boat Group, you see a brand about halfway down on the right, called NAVAN, which is our new European premium adventure brand. And you also see Veer at the bottom right there, which is our boat built specifically for electrification. So a lot going on. In the segments, the revenues there are inclusive of eliminations of synergy sales, if you like. Those are sales between different parts of our businesses. It's really important and unique part of our business structure. We sell engines to our Boat brands, Navico Group products to our Boat brands, boats into Freedom Boat Club, and the total value of that is about $0.5 billion. So it's a significant advantage for us and something we continue to capitalize on. Within Marine, we have the leading market share in a lot of different areas. Notably, Mercury Marine has the leading outboard share, about 47% in the U.S., in Canada, in Europe, and in other smaller markets as well. Our Mercury Racing brand is, by far, the strongest and high performance in racing propulsion. We have the world's largest marine distribution business and the world's largest boat club, Freedom Boat Club. And I won't completely drain the brands on the slide, but I would say that our brands are the leaders in many segments of the U.S. market and in international markets as well. But despite that really strong market position in a number of areas, we do not rest on our laurels. We're continuing to work at gaining more share and retaining our share. Just in the last 16 months, so last year plus the first months of this year, we received 165 awards for our new products and innovation also for our people and our culture as well. For consecutive years, we've been named one of America's best large employers and most trustworthy companies. In the last 16 months, we've also launched 135 new products across our enterprise. Nobody has our scale or product development cadence and the ability to deliver innovative new products like we can. And in a market like this, which we all know has headwinds. Of course, there's promotional activity, of course there's incentives, but it is really important to have the most exciting technology and the most exciting new products. I mentioned our synergy sales earlier, and this is a really nice slide that kind of brings that to life. This is a typical Brunswick Boat. It happens to be a Sea Ray, but you can see inside that boat how many components and subsystems we source internally. In fact, more than 50% of the bill of material or material content of that boat is sourced internally. And that is a big advantage in terms of the margin stack in our boats. It doesn't all get attributed to the Boat Group, it gets attributed back to the sourcing. It could be Mercury Marine, it could be Navico Group. But it is a huge advantage for us. And since we've acquired Navico, we've continued to grow the Navico group content in our boats. In fact, between of first quarter of this year and the first quarter of last year, we grew the content on a dollar basis by 28%. I mentioned the synergies between Freedom Boat Club and the rest of our businesses. About 90% of the engines in the 5,000 boats in Freedom's fleet are Mercury engines, and about 40% of the boats are our boats. And we are increasing that content as we go forward. We expect to be probably in the 70% range in terms of Brunswick boats in the Freedom fleet over time. A quick word on the new boat market. This slide depicts new boat sales in the U.S. main powerboat segment since 2012, and it's in thousands. So it starts off on the left at 2012 with 131,000. You can see that through 2020, which is COVID year, if you like, kind of famous in boating because there were some tailwinds to boating in that period of time. But actually, it wasn't a huge spike during COVID. It was kind of more or less in line with the increasing trend of new boat sales for the past decade. Since then, of course, we have had inflation, and we've had higher interest rates. So the market has come back down. And last year, 2023 was about 155,000 units, so down bit less than 20% from pre-COVID and that was down 6% from 2022. Our forecast was for the market this year to be roughly flat to last year, really based on not much change in consumer conditions. If you follow SSI data, SSI is the data source for U.S. -- for the U.S. boat market. Through April, SSI data has the market actually down 5%. We are doing a bit better than the market. So we're not far away from our, kind of flat, I think, at the moment, although the next several months are going to be very important to us. We need to see strong June and strong July. You do certainly see the effect of inflation on the dollar value of the boat market. Even though the units have gone down, the boat dollar value has stayed roughly constant. An important additional set of data points on this slide is the purple line at the top. That is annual U.S. boat registrations. So that is the number of people that register their boat for usage every year and that has stayed very constant for the past, well, actually several decades between about 10 million and 10.5 million. That number is very important for us because our Parts & Accessories businesses really depend on people using their boats much more than they depend on people buying new boats. So the data on this slide is very important and certainly supportive of our strong P&A businesses. So with that as a backdrop, we delivered a solid first quarter that we reported on towards the end of April, $1.4 billion in first quarter sales. That was down a bit more than 20% versus the same quarter in 2023. Not because retail was lower, but because in 2023, we were still refilling the pipeline, the inventories in our dealers after COVID and the supply chain crisis. Our EPS was in the middle of our guidance. I would say that no matter what the market is doing is it important that we continue to gain market share and that's what we're doing. I mentioned Mercury's high share of outboard engines in the U.S. market. In the first quarter, we gained another 200 basis points of share. And overall, our boat brands also gained share in the first quarter. We continue with our share price in the kind of $80 range to be pretty aggressive on share repurchases. So we repurchased about $64 million of shares. And then we refinanced also at pretty good rates. Our Only near-term debt -- our debt is paced out very nicely into the future. This number on the bottom right here is an important number. You may have heard about inventory levels in the marine market being high. Inventories of our brands are not high. Inventories of our brands are exactly where they should be at this point in the cycle. 36 weeks is very typical for the end of the first quarter. Units are down. So in 2019, we would have had about 17-or-so thousand units in the field equivalent to about 36 weeks. But this year, about 13,500 is equivalent to 36 weeks. So dealers actually have less inventory per dealer than they did pre-COVID right now. And I'll end with this slide and allow Craig and others to ask questions. Despite market headwinds and a lot of things that have happened over the past 5 years, since we became a pure-play marine company, we have continued through innovation through new products, through new businesses to drive total shareholder return beyond the relevant indices and beyond our peer group, and we certainly intend to do that into the future. So thank you for your attention, and I will throw it over to Craig.

Great. Thank you so much, David. I could ask you to hand me the iPad there. This will be a fireside chat. On this iPad, you can send me a question if you don't want to ask it live. But maybe I'll start, Dave, you had mentioned headwinds and everyone here is managing risk, talk about some of the headwinds this industry faces today.

Well, I think -- I mean, the headwinds really start with the consumer. And I would say, particularly the more value consumer. Obviously, both financing interest rates are high compared with historical norms. Probably if you're paying a typical rate, it would be about 9%. If you think about pre-COVID, that would probably be in the 5% to 6% range. I think interest rates have a couple of impacts on consumers, particularly more for our value product lines. There's the primary impact, which is my boat loan is going to cost more. There's a secondary impact, which is family budgets are probably generally under a bit more pressure because of inflation and financing costs. But other than that, I think that industry channel, for example, is in very good health. We've got a lot of fresh product in the market. And we have tools to try and get that value consumer across the line. We're certainly using promotions and incentives where appropriate to drive that consumer. On the premium end of the market, I would say, the consumer is a bit more robust. And so in the early season boat shows, we saw really good sales of our Sea Ray brand, for example and our Boston Whaler brand.

So that's the risk side of the equation. That gets you to maybe $7 or $8 in earnings per share this year. Ryan, maybe I'll ask you, you've got long-term aspirations to get to as much as $15. What will it take as an industry backdrop and what would it take internally for Brunswick to achieve something like that?

Yes. The plan that we came out with last year 2023 was really based on a unit number of 180,000 boats sold in the U.S. And off of that, obviously, is our engine sales, our continued P&A growth, Freedom Boat Club. It's more of a unit endpoint, if you would, than it is really by year. That plan was predicated on 2024 this year being flat and then slowly growing from '25, '26, '27, very similar and at the same rate as the market grew really from 2014 to 2017 in the same manner, mid-single digits. So continued operating excellence as we've shown throughout all the cycles, continued growth in all of our business in a market that gives us a little tailwind here in the outer years.

And then maybe, Dave, I'm just going to move aside a little bit, so we're interfering so bad, I'm sorry. I wanted, Dave, to ask you just bigger picture. I spent some time with you last month, and it just struck me that there are wide moats around your business that maybe investors don't always appreciate. They may come at you thinking, okay, well, you make boats, which you do. But you talked about it a little bit with respect to your synergy sales, but I'm wondering if you can really bring that home and talk about the moat around the Brunswick assets that makes this company special, and may be different from what else in the market.

Yes. Thank you, Craig. I think it is definitely different, it's a unique business. Maybe I'll start with our biggest business, which is our Mercury Marine Propulsion business. Just in the last, I think, 5 years, we've invested about $750 million in that business. We have, by far, the best, most extensive, high-technology product line in the marketplace and that is showing up in sales and in market share gains. It takes about 5 years -- 4 to 5 years to develop one of those big outboard engines like RV 12. And we protect that technology very rigorously with a lot of intellectual property. So there's intellectual property moat, there's an investment moat, there's a capability moat, and there's a time moat, if you like, around that business as well. And then if you think of our P&A business, that is predicated on that the fact that Mercury has about 50% of all of the engines that are registered every year in the U.S. Now you can't replicate that, you could never replicate it. It's a completely unique asset. Our boat brands as well as pulling through a lot of sales, we have 3 of the 4 best known brands in the U.S. Sea Ray, Boston Whaler and Bayliner, you can't replicate that either. And we continue to invest in those leading brands. And then Freedom Boat Club. Freedom Boat Club is probably 10 times bigger than the nearest of the boat club operation. The scale is huge. We have about 100,000 members now compared with nearest other boat clubs, which are probably in the low tens. So I think across all of our businesses, not just one of them, we have various types of moat, but they're all pretty deep and wide.

And I think of your investment in Navico is maybe an investment in that moat?

It is. We think technology is huge in boats, I don't if know any of you have experienced a modern boat, but most of them have a lot of electronics on board, large displays, radar, sonar, they're controlled with joystick. They have multiple engines on them that are all digitally controlled. And Navico Group has all of the assets beyond propulsion that are essential to make those boats work. All of the digital backbone, all of the power management backbone. We own 2 lithium-ion battery companies that power all of those house systems on those boats. So our ability to deliver integrated systems to those boats is unmatched in the industry.

Have we seen the impact of Navico on your strategy yet? Or do you need a boat cycle to return to that -- for that to really...?

No. Yes, I think you're beginning to see it. I think we acquired Navico bit less than 3 years ago. And just now we're bringing out the products that were developed or gestated during our ownership of Navico versus what we inherited. One of the things we brought out in the first quarter was the first, wide screen format displays in the marine industry. And that would be, for those of you who are interested, most displays like the ones on your laptop are 4x3 aspect ratio. And these are 16x9, more like the kind of thing that you would find in a [ road ] vehicle or maybe a wide screen TV type format thing. It is not straightforward to do that in marine because marine displays need to be marinized, I guess that's a bit of a truism. But they are subject to sun loads and salt water and a lot of things. So there are special requirements for them. In order to facilitate that kind of thing, we've been converting our Navico Group operating system from a Linux-based system to an Android-based system. Many people here would be familiar with Android or the Apple equivalent, which is iOS. Those are operating systems that have an application layer that allows you to do a ton of fun, exciting work, integrating new applications and on the way that the information is presented without necessarily having to change the basic code underneath and that application of an Android system is unique in the industry as well.

We had a question from the audience, and that is what is enabling Mercury to gain share?

We have, by far, the best products in the industry. And you can -- it might be fun if you're interested to go and get some independent third-party kind of verification of that. But by every measure that matters to a consumer, performance, fuel economy, lightweight, compactness, smoothness, quietness, all of those things, our products are better across the product line. And you can go listen to a boat with a competitor engine on it and a boat with one of our engines on it, and you will notice the difference and that is something that applies across the product line and it matters to consumers. We don't put technology in there just for technology sake, we put it in there to make the consumer experience on the boat better and that's exactly what we're doing.

Ryan, a question for you. How should investors think about incremental margin in your business? You don't control the cycle, but if we were to see the industry return to 180,000 boats, I know they're different businesses, but how should investors think about your overall incremental margin?

No, that's a great question. On the overall whole enterprise-wide, we want to increment or leverage up at kind of a 20% plus number and that will vary between the different divisions. Our Parts & Accessories business has an operating margin of about 20 already. Propulsion is -- was working their way up there, and we still think we'll get there. Boats, although their margin structure is a little bit compressed this year was showing very strong 5 quarters in a row of 10-plus operating margins back a couple of quarters ago. So even that business can lever up or incrementals in the 20%.

So yesterday, Bloomberg had a headline that caught a lot of attention, which is that the OneWater, which is the second largest dealer in America had interest in buying MarineMax, which is the largest dealer. It's just a headline. I don't know if it's true. But maybe talk about your exposure to both of those dealer networks and what you think the implications might be.

Yes, they're both partners of ours. So MarineMax is our -- is one of our partners for Sea Ray and Boston Whaler brands and does a little bit of Harris boat brand, not one of the biggest dealers. And OneWater is our partner for Harris. They're both our partners for Mercury distribution, and they both work with us in our P&A businesses and our distribution businesses. So they both are historically strong partners of ours. I won't speculate on the -- whether this is real or not real. I think some level of consolidation in the channel is helpful because boats are getting more and more complicated and it takes quite a lot of -- I mean, for example, Marine, I think we probably produce the most marine technicians in the industry, and I think MarineMax is second. So consolidation is helpful so far as it helps to produce a more professional environment that can elevate the service and maintenance experience as well as the selling experience for the customer. Obviously, if that went too far, there would be other implications.

Ryan, the other headline lately has been tariff news and curious, first of all, what level of tariffs do you face today? And how is the organization set up to handle any future tariffs as they come?

Yes, this is the issue that we started talking -- you and I started talking about in 2018, it just hasn't gone away. It reared its head again this year. Brunswick pays about $40 million in tariffs, which is about $15 million more than last year, which is what our guide was. We had some exemptions that expired as we anticipated here a few days ago. And listen, we're doing everything we can to mitigate the impacts. There's various things you can do, but there's 2 main sources for us are the China 301 tariffs. One is componentry. We leverage the auto supply base for components both in our engines we produce in Suzhou, China, which is a small assembly plant that we make our 40- to 60-horsepower engines and then also componentry that we bring into the United States. So we pay tariffs on both, the components and the 40- to 60-horsepower engines that we bring in. As we move forward, we're going to continue to look for opportunities to mitigate. And as we've said in a couple of meetings, it's not as easy as it sounds to pick up a manufacturing center or certainly a distribution network and try to find other options. But certainly, our supply teams are doing their best to do that and we'll continue to find ways to keep that number as low as possible.

And maybe, Dave, with the time we have left, just talk about the opportunity you have with some of your business acceleration strategy and maybe bring into that discussion, both Freedom Boat Club and Flite.

Yes. So thanks, Craig. So Freedom Boat Club, I mentioned earlier, is really a shared access participation model alternative to ownership, if you like. But it's for people who want to be boating pretty regularly. It's not like a rental model. It's more like joining a golf club. There's a membership fee, and then there are monthly dues. For that, you get access to a fleet of boats at your home location, which could be in New York, it could be in Chicago, wherever it is. But you also get reciprocal access to any of the other 410 locations worldwide. So if you live in New York, but go to Florida for vacation or maybe part of the year or you go visit the South of France or the U.K. or Australia, you can use the Freedom Boat Clubs in those locations. The boats are all about 2 years -- 0 to 2 years old. So they're new boats. And the boat is ready for you when you arrive and then you don't need to gas it up, you don't need to clean it. When you finish with it, you leave it. And that is extremely appealing for those with time pressures and maybe people who don't want to deal with storage and insurance and all of the other things that go along with boat ownership. So it's an exciting, appealing model and incidentally has not been subject to the same effects of inflation and interest rates, obviously, as durable goods purchases have. So it's a really appealing model. Flite we acquired last year, which is electric foiling boards. And a lot of reasons we really like it. One is that wakesurfing continues to be very popular, kitesurfing, all of those things. E-foiling, if you want to buy a wakesurfing boat, it probably costs you $150,000. You could buy Flite board for $6,000. And really, what you're getting is the same, continuous surfing experience. It's not like a wave surfing experience, which is very discrete. You can go for 3 hours on a Flite board, and you can take 5 of your friends with you. People go into ocean, they go on any bodies of water. I'll tell you how easy it is. I've done it. If that is a measure of ease, I can do it. You guys can all do it. I'm pretty sure. But it's really -- it's still a place where electrification really applies. You can't do a Flite board with a combustion engine. You can only do it with electric motors and batteries and we produce all of those things ourselves. So we're very excited about the prospects of that. We will be bringing them into Freedom Boat Club to expand the kind of family experience in Freedom. If you go out on a boat, you often have youngsters, teenagers and maybe some older members of the family, so you want to be able to entertain all of them. So we're excited about those kind of synergies as well.

Perfect. Thank you, guys, very much.

No, thanks.

Thank you.