Brunswick Corporation (NYSE:BC) Q3 2023 Earnings Call Transcript

Brunswick Corporation (NYSE:BC) Q3 2023 Earnings Call Transcript October 26, 2023

Brunswick Corporation beats earnings expectations. Reported EPS is $2.42, expectations were $2.36.

Operator: Good morning. Welcome to Brunswick Corporation’s Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Neha Clark, Senior Vice President Enterprise Finance Brunswick Corporation. You may begin.

Neha Clark: Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick’s CEO; and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today’s press release. All of these documents 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 the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today’s results. I will now turn the call over to Dave.

Dave Foulkes: Thanks, Neha, and good morning, everyone. Our businesses delivered a solid third quarter as continued market share gains, strengthen new products, efficient operations at our facilities, comprehensive cost control measures and the resilient composition of our portfolio drove strong earnings and free cash flow despite the ongoing challenging macroeconomic backdrop. We delivered $1.6 billion in net sales and slightly stronger-than-expected adjusted earnings per share of $2.42 in the quarter in the upper half of our guidance range. We also generated strong free cash flow of $143 million in the third quarter, resulting in free cash flow conversion of 84% and delivering year-to-date free cash flow $233 million higher than prior year.

In addition, we continue to be aggressive with share repurchases, executing $220 million of repurchases year-to-date. Mercury Marine has continued to capture solid market share gains this year with U.S. outboard retail market share up 90 basis points year-to-date versus prior year. The new bulk market is on pace to finish generally in line with our estimates of down high single-digits, and Brunswick brands continue to outperform the market. As we move out of the core season, we continue to actively manage our global boat field inventory levels, and we closed the third quarter with 32.8 weeks on hand. We’re working closely with our marine dealers and channel partners to maintain balanced inventory levels exiting 2023, targeting being generally in-line with historical norms which allows each location to carry a good representation of our model portfolio while avoiding overstocking.

In addition, we’re providing strong but targeted promotional support for retail, investing in new products and technology, progressing our operational excellence goals and implementing structural cost reduction actions across the enterprise. I’ll now turn to some of the segment highlights for the quarter. Our Propulsion business delivered top line growth with slightly lower earnings versus a record third quarter 2022, driven by growth in outboard engines, especially in high horsepower categories and controls and rigging, offset by relatively weaker sterndrive sales. Mercury gained 130 basis points of market share in high horsepower outboard engines over 150-horsepower versus 2022 as additional production capacity came online. During the quarter, the business also successfully ratified a new five-year collective bargaining agreements with the union representing workers at its engine production facility in Fond du Lac, Wisconsin and, in addition, continued strong production of Avator electric outboards, with 4,000 units manufactured to-date.

As we move into the off-season, Mercury is seeing some slowing of OEM orders as the OEMs scale back production to control field inventory going into 2024. We expect OEMs to remain cautious as they assess customer sentiment at late 2023 and early 2024 boat shows. While this is a short-term headwind, it is allowing Mercury to gain share in the repower market, especially in high horsepower engines. Our Engine Parts and Accessories Business demonstrated steady performance in the quarter, reflecting an improving sequential trend. Sales for the products portion of the business were up 4% versus prior year as consumers use their boats in the primary season. Distribution business sales were down year-over-year, which showed relative improvement from earlier in the year as dealer and retailer inventory destocking patterns moderated.

Overall, segment sales were up 24% versus the third quarter of 2019. As anticipated, Navico Group posted higher gross and operating margins versus third quarter 2022, despite lower sales. A slower marine and RV OEM orders offset improving trends in aftermarket channels. Retailer stocking is recovering as we move into the fourth quarter, with well-received new product offerings driving strong retail pull-through as we enter the holiday season. Additionally, acceleration of planned restructuring efforts continues to result in reduced operating expenses versus prior year. Finally, our boat business performed to plan, continuing to introduce new models and white-space brands, and gaining share, while adjusting production to manage pipelines. The recently launched Navan premium adventure brand is nearly sold out for model year 2024 and the refreshed Bayliner brand has also been well received.

Freedom Boat Club continues to grow memberships and now has 400 locations and nearly 60,000 membership agreements covering more than 91,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors, stabilizing factors include strong employment, moderating inflation and a reduced pace of interest rate increases, however, despite the promotional environment and stable boat purchase consideration, higher prices, high interest rates and credit availability remain strong headwinds for consumers. On a positive note, boating participation remains strong. Despite a fairly strong main selling season in 2023, buoyed to some extent by promotions, going into the off-season, dealers are healthy but anxious to avoid holding excess inventory ahead of an uncertain 2024, and will also be closely monitoring customer behavior at upcoming and early 2024 boat shows.

With field pipelines replenished, boat OEMs are reducing production rates by taking out weeks of production or shifts in Q4 to align with anticipated retail in 2024, resulting in lower order rates for Mercury engines and Navico Group OEM products. The order softness continues to be greater for smaller, value boats and lower horsepower engines, with larger, premium products not immune but continuing to display relative strength. Given these factors, we are maintaining production discipline which may add pressure in the short-term but will set up for a more predictable first half of 2024. Shifting now to a global view of revenue in the quarter. Overall, we saw a 7% sales decline on a constant currency basis. Year-to-date, the U.S. market is showing relative strength versus international markets, with sales relatively flat to 2022.

U.S. new boat industry retail was flat in the quarter versus 2022 with year-to-date retail generally in-line with expectations of down 7.5% versus 2022, and Brunswick growing share in both periods. Overall, year-to-date, Brunswick has performed better than the industry, picking up share particularly through strong performance by our pontoon, premium fiberglass and tow brands, supported by planned promotions and marketing on select product-lines. Outboard engine industry retail units were up 3% in the third quarter versus prior year, bringing year-to-date unit retail to down 2%. Mercury continues to outperform the industry with third quarter share gains of 160 basis points in greater than 30 horsepower categories. We are actively managing boat pipelines to achieve year-end levels within historical norms and are exiting quarter three with global weeks on hand at a healthy level of 32.8 weeks.

We anticipate ending the year with U.S. pipeline levels in-line with expectations at approximately 36 weeks and approximately 14,000 units versus approximately 35 weeks and 16,000 units on hand at the end of 2019. As is normally the case, international boat pipelines will be higher. Let me shift now to discuss some exciting new growth opportunities across our businesses. We are thrilled to add Flite to our portfolio of brands and product categories. E-foiling is an emerging and disruptive activity that allows for an extended, hours-long surfing experience on inshore or coastal waters without the need for a wake boat or sail-assistance, and Flite is the premium brand in the space with high market share. The Flite team has already extended its product line to an easy-to-ride scooter and has many further developments in the pipeline.

Through Mercury Marine and Brunswick, Flite will have access to manufacturing and product technology, and the world’s largest marine distribution network. As I mentioned earlier, we recently launched our new premium adventure brand and product-line, Navan, at the Cannes International boat show. This class of boat is very popular in Europe and gaining popularity in the U.S., and the two initial products, which have begun serial production are nearly sold out for the 2024 model year. The media reception has been very strong and the new models has been nominated for Best of Boat and European Powerboat of the Year 2024 awards. You may also have seen that just a few days ago we announced Brunswick Finance, an online retail finance solution that can be integrated into Brunswick and dealer partner websites to provide rapid customer finance approvals in addition to supporting promotional financing.

We are beginning to roll-out this solution in Q4. And, finally, Freedom Boat Club continues to expand rapidly in the Australian market, recently announcing its seventh location. We see the ANZP region as a substantial new opportunity for Freedom growth. I will now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Ryan Gwillim: Thanks Dave, and good morning everyone. As previewed at Investor Day last month, Brunswick delivered a solid third quarter despite softening market conditions throughout our businesses. When compared to the record prior year, third quarter net sales were down 6%, and adjusted EPS of $2.42 decreased 9%. Net sales in each segment benefitted from annualized price increases, market share gains, and benefits from well-received new products, offset by lower wholesale orders resulting from field inventory reaching normal levels and softer retail market conditions. Operating earnings and margins were down versus prior year as the impact of the lower sales, slightly higher input costs, higher absorption, and the unfavorable impact of foreign currency exchange rates, more than offset benefits from aggressive cost control measures throughout the enterprise.

Lastly, we had a strong free cash flow generation in the quarter of $143 million, primarily due to stronger working capital generation, resulting in a free cash flow conversion of 84%. Year-to-date results also remain solid despite the uncertain macro-economic environment. Sales are down slightly from the record 2022, with stable adjusted operating margin and EPS resulting from prudent operating expense control across the company, steady gross margin performance, and in the case of adjusted EPS, continued aggressive share repurchase activity. Our strong free cash flow performance is significantly outpacing prior year, reflecting our continued focus on driving cash in this challenging market. Now we’ll look at each reporting segment, starting with our propulsion business.

Revenue was slightly up versus the third quarter of 2022 as benefits from a favorable product mix related to continued strong high-horsepower outboard engine demand and higher sales to repower customers, together with annual pricing, were partially offset by order declines in the low and mid-range horsepower outboard engines and sterndrive product. Operating earnings decreased versus prior year due to lower sales, higher input costs, including expenses related to the successful ratification of the Mercury Fond du Lac labor agreement, and the unfavorable impact of foreign currency exchange rates, which more than offset the benefit from cost control measures. As Dave mentioned earlier, as we exit 2023 and enter 2024, we anticipate that we will continue to maintain our progressive market share gains, but that our propulsion business will be impacted by additional boat OEM production reductions that may not abate until the start of the primary retail selling season in 2024.

This will enable us to sell more engines into the dealer channel, but the overall impact will still be a decrease in market demand for engines. The engine parts and accessories business continues to improve sequentially throughout the year, with Q3 sales down 4% versus 2022, but up 24% over the third quarter of 2019. The high-margin Products business grew sales by 4% versus prior year, and by more than 10% in the United States. Distribution sales were down 10%, but trends continue to improve from earlier in 2023. Segment operating earnings were down versus prior year due to the slight sales decline and transition costs related to the newly opened distribution center. Note that October orders in both the Products and Distribution businesses continue to trend positive as boat usage remains strong and customers in Northern climates begin to winterize their product.

As anticipated, Navico Group had an improved third quarter as aftermarket channel steadiness helped offset expected softness in marine and RV OEM customers. Segment sales were down 9% due to these sales dynamics, but adjusted operating margins were up 110 basis points and adjusted operating earnings were up 3% as benefits from accelerated cost reduction actions and reorganization efforts, together with strong new product performance, more than offset the impact of lower sales. The fourth quarter is an important time for the Navico business as the holiday season drives aftermarket retail sales, and we will continue to watch not only consumer health and desire to spend for the holidays, but retailers’ wholesale reordering patterns at a time where inventory levels are normalized.

Finally, our boat business performed to plan, continuing to introduce new models and white-space brands and gaining share, while adjusting production to manage pipelines. Sales were down 16% versus Q3 2022 given the production reductions, together with continued elevated discounting to drive end-of-season retail. Adjusted operating margins and earnings were down primarily due to the lower sales, partially offset by focused cost reduction activities. Freedom Boat Club, which is included in Business Acceleration, had another solid quarter, contributing approximately 9% of the boat segment’s revenue during the quarter while seeing very steady membership levels despite the macro-economic uncertainty. Although we’re entering the off-season in most of our primary selling regions, we are focused on demonstrating resilient EPS and cash flow in a challenging market while constraining our pipelines to appropriate historical norms and delivering against our strategic initiatives.

The ongoing uncertain market conditions are resulting in measured ordering patterns by our retail channel partners and reduced production schedules with our Marine and RV customers, but we continue to target marketing and promotional activities on select products to support retail sales while remaining steadfast in balancing inventory and pipeline levels. As a result, and as previewed at Investor Day, we anticipate revenue of $6.45 billion to $6.5 billion, adjusted operating margins of approximately 14% and adjusted EPS of approximately $9. We continue to see positive free cash flow conversion and working capital trends and still anticipate generating more than $375 million of free cash flow for the year. Lastly, we also have two full-year P&L assumptions that we have updated.

First, given our continued strong cash flow performance and recent further Brunswick share price dislocation, we are increasing our repurchase target to exceed $275 million of repurchases for the full year. As a result, we anticipate slightly lower average diluted shares outstanding of approximately 70.25 million. Second, with the strengthening U.S. dollar, we now anticipate a slightly larger full year foreign exchange headwind of approximately $35 million. I will now pass the call back over to Dave for concluding remarks.

Dave Foulkes: Thanks, Ryan. Before we close, I wanted to share some examples of recent recognition Brunswick has received for our people, business, culture and products. We’re on pace for over 100 major awards this year, an all-time record. For the fourth consecutive year, Brunswick was named to Forbes list of the world’s best employers ranking in the top 30% of the 700 companies that made the final list. This award is a testament to our enduring commitment to being an employer of choice and creating a world-class environment for our global employees. Brunswick has also been named in Newsweek’s inaugural list of the world’s most trustworthy companies, reflecting our commitment to integrity, safety and quality in our business and was named one of America’s greenest companies, reflecting our numerous sustainability initiatives and commitment to further improvement.

Finally, our products continue to be recognized for excellence on the global stage. I already mentioned our success with Navan, but Boat Group’s new Sea Ray SPX 210 also won the Moteur Boat Magazine Award for Best Boat below 7 meters at the Cannes Boat Show, further evidence of our commitment to leading the way in new products and technology across our businesses. Thank you again for joining the call. We’ll now begin the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Megan Alexander with Morgan Stanley. Please proceed.

Megan Alexander: Hi, thanks for taking our questions. I guess maybe you did give some commentary on 2024. Could you maybe just update us on your base case expectation for a flat retail boat market next year?

Dave Foulkes: Hi Megan, yes, I think, yes, that’s still our base case assumption. I think but obviously, as you’ve seen, we’re trying to match and I think achieving a good match between wholesale and retail as we go into next year. I think basically, the assumption really is obviously, we’re enough for a start, we’re at overall retail levels that are more like 2014. So we’ve been pulled down about 30% since the peak. I think the other thing that leads us to that conclusion really is that the prevailing consumer conditions for most of the selling season this year, we would expect to be pretty similar next year. Price – the price increases that happened have really already incurred. So pricing is now very similar to historical levels, interest rates, we don’t see rising too much more, if it’s all, on balance during next year.

So also next year, we were – Q1, we were not as heavy on promotions as we were later in the year. They seem to be pretty effective. So I think a combination of consumer conditions that are pretty similar to this year, probably some increased promotional activity from us in the first quarter to kind of recognize where the market is, leads us to believe that that’s a reasonable baseline assumption. Of course, it could be different for various reasons. I would say on top of that, the market obviously is not behaving in a homogenous way. We still are seeing more resilience in the premium end of the market. And actually, interestingly, just feedback from the first day in the Fort Lauderdale Boat Show, sales are strong in the first day. That’s obviously a premium show.

So that was encouraging. So those are essentially some of the components that go into our assumptions.

Megan Alexander: Okay. That’s helpful. And maybe a follow-up, if that’s still the case. Can you maybe talk through some of the puts and takes just on the margin line and then maybe getting to the bottom line. You talked about maybe having some destocking in Boats and Propulsion, but you are lapping some significant headwinds in Navico and P&A, which also seemed to be improving. I know you also talked about some interest expense headwinds, but you’re driving strong free cash flow. So is the $9 that we’re looking at for 2023? Is that the right floor to think about as a base case for next year?

Ryan Gwillim: Hey Megan it’s Ryan. I’ll go ahead and take this one. And taking in reverse, I’m not sure we know enough today in October to say that $9 a share would be a floor, but it’s certainly in the set of possibilities or a set of outcomes for next year. So we’ll just have to wait and see what the next handful of months bring us before we give more definitive 2024 guidance, but definitely $9 is in the competition set. The puts and takes, I think you had several of them. I think on the plus side, parts and accessories is really performing kind of as we thought it would. Historically, I think there was some year-over-year comps that spooked people on Engine P&A and now that we’re back to kind of normalized comps, you’re seeing that business grow at a low to mid-single-digit percentage kind of quarter in, quarter out both sequentially and year-over-year.

So as we get into next year, I think you’re going to see goodness on the margins due to Engine P&A business. I think you’ll also see growth on margin on Navico. I think we’ve been pretty planned that Navico is probably near or coming off of its trough position on margins and all of the reorganization and good work that they’ve done, you’re going to get a full year benefit of that as you move forward. I would say that the interest piece is obviously real. We’re going to have to refinance our notes that are at 0.85% sadly, but we’ll be smart and try to minimize the impact there. But the combat that will also continue to be very aggressive on share repurchases given where we’re trading today, I think that’s something that, obviously, on the EPS line, it will help on the margins, but that will be a good benefit there.

So across the line, I think we see retail matching wholesale, which have been pretty clear about some really strong movement in the P&A businesses in Navico and probably offset a little bit of difference in wholesale, retail and Boat and Propulsion. And that’s how you get on margin. It’s pretty sustainable even at 2014, 2015 retail levels.

Megan Alexander: Really helpful. Thank you. I appreciate it.

Operator: Our next question is from James Hardiman with Citi. Please proceed.

James Hardiman: Good morning. Thanks for taking my call. Ryan, that was really good color. I want to, as you can imagine, dig even further on some of that. As I think about your Boat Business, where do we think the delta between wholesale and retail will finish this year? I mean, obviously, there was some replenishment earlier in the year. And I’m just trying to, trying to figure out what sort of a headwind that represents as we look to 2024. I get to about a 3,500 unit headwind, about 10%, is that in the neighborhood to high, to low?

Dave Foulkes: Hi, James, thanks for your question. I think Ryan and I will kind of tag team it. I think in the U.S., we produced 2,000 or so units more wholesale than we did at retail. So but I would say they probably almost entirely value units, so a different mix in terms of dollars. So that obviously represents a headwind as we go into next year, but not a huge headwind. I would say particularly the cost takeouts that we’ve done across the enterprise, including in the Boat Group, were progressive through this year and so there were a higher impact in Q3 and Q4. So on a kind of run rate basis going into 2024; we should have some cost benefits there, Ryan?

Ryan Gwillim: Yes. No, that’s correct. Nothing to add.

James Hardiman: That’s helpful. So suffice it to say, I again, we’re going to learn a lot more three months from now, presumably, it’s going to be real hard for the Boat segment to grow the top line. I guess in previous conversations, and you talked a lot about P&A, Engine P&A and Navico. I guess what’s your level of confidence that propulsion can grow next year. That’s the one where it seemed like at least previously, you had the highest degree of confidence that through hell or high water that, that segment would be up on both the top and bottom line. Where do you stand here today? And what will allow you to sort of outgrow an unpredictable market next year?

Dave Foulkes: I think the market share gains continued – so we clearly have a secular trend on top of some cyclicality here. I would tell you that at the Fort Lauderdale show, Mercury had 57%, I think, share overall, but close to 70% share of engines on the water, which is by far our best showing. And as you know, that is a nice kind of proxy for new boats coming out and where Mercury share might be headed. So I think the secular trends supporting Mercury high horsepower continue to be extremely strong. Of course, in the end, it depends exactly on how the market performs next year. But I would say premium boats generally have higher horsepower engines continues to be strong, not just domestically. We’re also seeing the same thing in Europe, where our higher horsepower customers with more premium boats are also the strongest.

Very difficult to see exactly how the business [ph] all going to net out. But generally, we remain very constructive on that. And we have continued to gain share in repower as we’ve had capacity available, continue to convert OEMs, both new OEMs, but also greater share on existing OEMs. So I think in the end, it’s going to depend on how all of these things net out, but I think we have a lot of positives as well as some potential negatives.

James Hardiman: Okay. And so just to clarify, it seemed like previously you were real confident that Propulsion would grow next year. Now it sort of sounds like depends sort of uptake as we sit here. Obviously, with a lot more data to come in. Is that accurate?