Q1 2020 Earnings Call
Good morning, and welcome to Brunswick Corporation's first quarter 2020, <unk> earnings Conference call. All participants will be in listen only mode until the question and answer period. Today's meeting will be recorded when do you have any objections. You may disconnect. At this time I would now like to introduce right well, Vice President Finance and Treasurer.
Good morning, and thank you for joining us.
With me on the call. This morning, our day folks.
CEO and don't after CFO.
Before we began 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 are actual results could differ materially from these expectations.
For the details on the factors to consider please refer to our recent SEC filings in today's press release.
All these documents are available at our website at Brunswick Dot com.
[music] during our presentation will also be referring to certain non-GAAP financial information reconciliations of GAAP to non-GAAP financial measures are provided in the appendix of this presentation and a reconciliation sections of the consolidated financial statements accompany today's results.
I'd now like turn the call over today.
Thanks, Ryan a good morning, everyone.
[music], we thought this morning, I'd like to take a minute to recognize the immense impacts the cobot 19 pandemic, it's had on our employees.
Our business partners and the communities in which we operate.
Brunswick has taken many steps to help those who interact with us on a daily basis in Georgia. During these times and prepare for the resumption of more normal activity.
I couldn't be more proud of our over 12000 global employees for navigating through this dynamic environment.
Juggling family life with work now for staying positive despite everything going on in the world around them.
To support our employees, we implemented prompt coordinated production shutdowns.
An recently progressive orderly restarts.
Since you did a wage continuity program and what quick to mandate work from home policies.
As our employees returned to work in many locations across the globe, we've instituted many health and safety measures, including temperature screening enhance P P and distancing procedures.
Completed the cleaning processes in order to provide a safe environments in which our employees can work productively.
We know this it's a difficult time fraught dealers suppliers and other business partners.
To enable our dealer network to continue servicing that customer base. We've kept open a global distribution business would you live is critical parts and accessories say more next day.
We've also worked with a floor plan lending to extend interest in curtailment payment terms during a time when many products showrooms are closed.
Finally, we're working with our supply base to match purchases with production needs and ensure smooth production ramp up.
[music].
Lastly, we've responded to the needs of our communities and the fight against the virus.
Donated P to local health care facilities in many areas in which we operate.
I know producing pumps electrical equipment and masks to be used by first responders and others dealing directly with the flights.
We're also supporting charts blow organizations that are providing support on the front lines.
The cobot 19 pandemic is materially impacted all business operations around the world.
In the U.S., we temporarily suspended manufacturing at most of our engine of both facilities on March 23rd a states implement it stay at home guidelines.
Oh prompt decision to spend production in short the health and safety you'd be affected employees and allowed us to rebalance inventory levels with anticipated reduction in near term demand.
On April 13, we resumed partial operations mercury supposed to lets you fanta lacking and a Boston whaler.
That's opened additional facilities in the last two weeks.
As of today, all major U.S. manufacturing facilities up back online with new temperature screening distancing P P and cleaning protocols.
Approximately 80% about doing that work is opening some capacity, including providing service with a large majority of these deal is having the capability to take orders and sell boats and engines to that customer base.
Enabled by a distribution businesses.
Which have continued to operate.
If the list with some limitations are able to get boats in the water during a busy time and that's season and get people that's on the water.
Boating is still allowed and even encouraged with some operating limitations in most parts of the country and remaining restrictions like easing, creating more opportunities to boats given the generally better weather conditions versus the unseasonably cold and wet 2019 spring.
Freedom Book Club has also been affected as many locations were closed during April due to local stay at home orders.
Well the company operated locations plan to reopen on May one with new matches in place to protect employee and member health.
We've been focusing on generating excitement with prospective new members, resulting in a recent acceleration in membership growth.
Outside the U.S. all global manufacturing facilities will have resumed production by made a fourth aside from one UK facility.
Belgian distribution hub has remained open and I supporting our dealer network across the continent.
And I, both manufacturing operations in Portugal in Poland have resumed production not delivering boats.
A small horsepower engine manufacturing facilities in China, and Japan remain open although the Suzhou China facility closed three weeks around the Chinese new year as the country was dealing with the initial cobot 19 impacts.
A Chinese supply base, which accounts for less than 10% of our cost of goods is also fully operational and supplying components to all global locations.
Our distribution operations in Canada, and they should sit laser Pacific are also operational.
We reopened our advanced systems group production operations in New Zealand. This week and we plan to reopen up Friendscout crop production facility in Canada on Monday. In addition to our boat production facility in Reynosa, Mexico.
All of global facilities are using the same new health and safety protocols.
In Europe, and Australia, New Zealand, many of our idealism boat Oems, which had been closed since mid March and now starting to reopen as countries relax Shelton restrictions.
We were pleased to see Australia, New Zealand recently announcing some relaxation of boating restrictions.
In light of lower than you had some demand for all products, we've taken certain costs matches with justice spending levels to match lower revenue targets.
Recall that Twentytwenty is already benefiting from the 50 million of structural cost reductions implemented in 2019.
We have furloughed production in salaried staff directly affected by the suspension of production.
We also instituted a salary workforce hiring freeze and canceled annual merit increases the salaried employees.
In addition, we've suspended all delayed low priority capital projects and curtailed discretionary spending.
These measures are contributing to a roughly 15% reduction in operating expenses. This is originally forecast expenses with twentytwenty.
Given our highly flexible and variable cost structure, which bill will discuss whether in a few minutes, we have the ability to make additional expense reductions later in the year should economic conditions aseptic.
We're also benefiting from prudently managing our capital structure. We ended the first quarter with approximately 515 million of cash on hand, including proceeds from all fully drawn revolver.
We expect to maintain sufficient cushion against debt covenants I can see need to monitor and execute on opportunities to Boston liquidity.
Given the retail bond issuances undertaken after the power products acquisition, our maturity profile has been greatly extended with no significant long term debt maturities until 2023.
We completed 34 million of share repurchases in the first quarter price to suspending activities in early March.
However, we're not planning any additional repurchases for the remainder of the due to the current business outlook.
Second quarter dividend has been approved and will be paid in June.
Finally, we've reduced our capital expenditures for the year from over 200 million to between 150 and 160 million.
The remaining spending is largely in support of new product programs and digital initiatives that will drive future earnings growth and market share gains and which we have protected in our actions to date.
We do have the opportunity to further reduce spending if it becomes necessary.
Oh first quarter performance demonstrated the robustness of our marine focused portfolio. Despite the unprecedented disruption of the global economy.
Shifting from the covert 19 pandemic, particularly in the latter part of the call. So.
Prior to the progression of global shutdowns that began in March our business is what performing inline with expectations.
Sales and earnings consistent with our plan provided beginning of the year.
The U.S. retail marine market exhibited strong demand trends Mercury continue to gain significant share and outboard propulsion and I'll parts and accessories businesses remained steady with outperformance of power products.
A premium boat brands led by Boston Whaler and Sea Ray leveraged strong early season boat shows into success at retail and.
Freedom.
Patients and recorded some of its busiest weekend in the history of its operations.
The cobot 19 pandemic had a material impact on our results in the quarter.
Primarily due to lower revenues stemming from the suspension of production up many of our manufacturing facilities.
Almost all of which as I mentioned resumed production in April.
However, our global distribution businesses continue to operate and we were able to offset half of the earnings like pack the production shutdowns through austerity measures and operating expense control.
This enabled us to generate operating margins consistent with prior year, demonstrating the resilience sleep up businesses in an extremely challenged market.
Next I'd like to review the sales performance of all segments by region on a constant currency basis, excluding acquisitions.
In the U.S. total revenues were down 11% well international sales in total were down 2%.
International markets remained relatively resilient, despite the pandemic and we're seeing more bright spots this country's begin to relax or exit stay at home orders.
Revenue performance for most regions was affected by the pandemic, particularly in our North American boat operations.
International sales benefited from strong performance in Asia Pacific, particularly in high horsepower engines in commercial applications.
This table provide some color on the performance of the U.S. marine retail market.
In the first quarter, which comprises less than 20% of the total sales volume for the year retail trends were exceeding expectations prior to the cobot 19 pandemic.
The strong performance in January and February, which make up less than half of the volume in the quarter was offset by slowness in March.
Resulting in industry unit volume for the main powerboat segments big being flat for the quarter versus 29 scene.
Note that less than half of the state's reported much figures, meaning this number is likely to be revised as we move through the second quarter.
As expected outboard product continues to outperform sterndrive inboard with outboard product representing more than 90% of both sold today.
Outboard engine unit registrations were down 5% in the quarter, but registrations for engines over 175 horsepower <unk> up over Q1 2019.
Mercury significantly outperformed the market in the high horsepower categories.
We don't yet have complete information on April, but we believe retail performance is slightly better than initially anticipated.
In addition, based on information from our banking partners and internally Throb, we want to finance business.
Allocations for retail financing have been healthy in April with applications similar to our recently higher than in 2019.
Bill will offer some additional comments on <unk> outlook for the remainder of Twentytwenty later on the call.
I'll now turn the call with the Bill for some additional comments and <unk> financial performance.
Thanks, Dave and good morning, everyone.
For the first quarter net sales were down 8% well operating earnings on an as adjusted basis decreased by 10%.
Adjusted operating margin stayed relatively consistent with prior year at 11.7% as austerity measures and operating expense control offset the impact of lost sales volume and other costs and charges incurred in response to the pandemic.
We finished the quarter with an adjusted EPS of 96 cents per share up 2% year over year, primarily due to lower shares outstanding.
Before I review review segment performance in the quarter I would like to remind everyone that this is the first quarter, we're breaking propulsion and parts and accessories businesses into two reporting segments consistent with the discussion on the January call.
Starting with the propulsion segment.
Revenue was relatively consistent with Q1 2019 as continued strong demand for higher horsepower outboard engine categories and related controls and systems was offset as anticipated by weaker sales lower horsepower outboards and stern drive engines.
As Dave mentioned earlier, we continue to gain substantial market share and higher horsepower engines.
Especially in Salt water markets is demonstrated by our record share performance at the Miami boat show in February.
Mercury was able to leverage its distribution capabilities and existing inventory to continue shipments of engines to meet demand through the ended the quarter and beyond.
Adjusted operating margins and operating earnings were up slightly in the quarter, including benefits from cost reduction activities any more favorable sales mix.
The impact of these items exceeded increase cost, resulting from cobot 19 disruptions, including the temporary suspension of manufacturing and the impact of unfavorable changes in foreign exchange rates and tariffs.
In the parts and accessories segment revenues were down 4% and operating earnings were down 3% versus 2019 as strong sales growth at power products was offset by lower sales in the other businesses.
This performance was affected by stay at home policies, which disrupted both dealer operations and voting activity in many locations towards the end of the quarter any time when seasonal sales are usually accelerating.
The boat segments revenue and earnings were affected by the temporary suspension of manufacturing in shipping and substantially all plants towards the end of the quarter.
Segment revenues were lower by 22% or approximately $80 million exceeding planned reductions.
Adjusted operating earnings were down 23 million, reflecting the impact of lower volume along with higher retail discounts versus the prior year any less favorable sales mix, which exceeded benefits from cost reduction activities.
Our premium brands continue to perform strongly retail, including Boston whaler the market leader in the salt water fishing category.
Comparisons between years reflect the impact of manufacturing disruption disruptions and the ramp up of production of new models in 2020 versus a very strong first quarter in 2019.
As we have referenced on previous calls Boston whaler as launch substantial upgrades to both advantage and conquest product lines, which had been extremely well received by dealers and retail customers.
Freedom. Both club also had another strong quarter contributing more than 2% of sales in the quarter with strong operating margins.
Dealer pipelines ended the quarter with 39 weeks of boats on had measured on a trailing 12 month basis with units lower by 11% versus the first quarter of 2019.
As a result of short term disruptions in demand and production caused by covert 19, we're planning to manage Q2 production levels substantially lower in advance of the model year change over which we may move forward for certain brands.
Our pipeline and earnings projections for the year end assume dealer inventories will be position to accommodate improvements in forward looking demand.
This will likely cause our weeks on hand measured on a trailing 12 month basis to exceed prior year levels at year end.
While this trailing metric may be higher inventory levels will still be reduced versus year end 2019 by low double digit percentage and will be appropriate for improved demand moving into 2021.
Our wholesale shipments and pipeline assumptions are obviously dependent upon how retail activity evolves and we will adjust production and stocking levels as required.
Projecting the demand environment than operating results results for the remainder of 2020 involves the high degree of uncertainty there are still many unanswered questions, including the progression of the print pandemic.
The response of countries in states and the resulting impact on the macro economy.
These factors will ultimately influenced performance of the marine market and the global consumer.
In response, our businesses have been preparing for a range of scenarios and our plan for the remainder of the year is based on the following assumptions.
We anticipate that the global marine market will be down significantly in the second quarter of 2020 with declines moderating over the second half of the year.
We project U.S. Marine industry retail unit demand for the full year to be down high teens to low twentys percent from 2019 levels.
We are assuming that wholesale comparisons will be better than retail in the back half of the year due mostly to the pipeline reduction actions executed in the second half 2019.
We believe that sales of parts and accessories in the second half of 2020 should be slightly below 2019 levels, assuming boat usage returns to more normal trends with the aftermarket portion of the business performing at or slightly above prior year.
At this level of demand we're planning for operating expenses of between 525, and 550 million for the year, which preserves funding for all critical critical product programs that we believe will drive future earnings growth and market share gains.
For the full year, although our formal guidance remains withdrawn we would anticipate revenue comparisons to trend slightly better than you were U.S. retail marine market performance, primarily due to the resiliency of our PNM business.
We expect operating de leveraged to fall between mid Twentys and mid thirtys percent, allowing us to generate free cash flow in excess of 125 million, which includes the funding of high priority projects.
While the second quarter is expected to be challenging.
We anticipate to operate profitably and generate positive cash flow.
This incorporates the strength of our Pn a business benefits from cost actions and the continued safe startup of production as well as other demand factors previously discussed.
It cannot be overstated the level of recovery of the global economy, the resumption of domestic and international boating activity normalize channel operations and the absence of significant additional disruption to our global operations will be the most important factors in determining where we ultimately port performed versus our current market and.
Operating assumptions.
I'd also like to make a few comments about our cost in margin structure, which is definitely a critical advantage in this period of uncertainty.
During the global financial crisis, we substantially lowered our fixed cost structure, which we have continued to manage prudently over the last 10 years.
We've also elevated our variable margins through a series so successful new product investments and operational excellence initiatives. This puts us in a strong position as we operate during this crisis.
Our current fixed cost base totals approximately $800 million measured on an annual run rate basis or 200 million per quarter.
This includes the austerity action Steve referenced earlier.
It also includes a healthy level of R&D spending of approximately 120 million as we plan to continue to strengthen our competitive position by investing in new products across our portfolio.
This cost structure positions, our run rate breakeven point at approximately $2.7 billion to $2.9 billion in sales assuming the pay in a business is less affected by the current demand shock.
It is important to note that we have additional flexibility and manages cost structure substantially lower if required.
And we are aggressively evaluating actions to implement incremental structural actions to further strengthen our cost position.
I would like now like to Deconstructer operating leverage assumptions.
Which will be affected by the following.
Composition of our volume reductions certain operating factors in actions to lower fixed costs.
We anticipate operating de leverage between 25 and 35%.
This assumes based on variable margins that are segments de leverage due to volume in the range of low twentys up to mid Thirtys percentage.
With P. and at the high end of the range propulsion in the middle and boats towards the lower end of the range I would note that each segment could experienced some variability from these estimates due to product and customer mix.
There are a number of operating factors that we anticipate unfavorably impact leverage on an overall basis.
Headwinds include unfavorable absorption due to lower production foreign currency tariffs and covert 19 related costs.
There are also several other factors positively affecting comparisons including pricing efficiency initiatives in commodities.
The unfavorable impacts of these cost factors are being mitigated by reductions in SGN, a versus 2019 of 50 to 75 million.
As I mentioned earlier, we're continuing to evaluate actually actions to flex spending lower if required including structural cost reduction actions.
Our current liquidity position is very strong it is an area of great focus.
Our liquidity planting is influenced by several factors, including our cash position our ability to generate free cash flow and retain full access to revolving credit facility as well as our debt repayment and planned dividend requirements.
We anticipate having total liquidity of over 500 million at the end of the second quarter and between 650 and 700 million by year end.
We ended Q1 with cash balances totaling 515 million versus approximately 330 million at year end.
This includes this reduction includes free cash flow usage in Q1.
A 144 million and proceeds from the $385 million of borrowings under our revolving credit facility.
Q1, it's always been a period of free cash flow usage, mostly due to seasonal working capital needs, including increases in accounts receivable in inventory as well as payment of the previous years variable compensation accruals.
I would point out that our free cash flow performance in Q1 was improved versus 2019.
Our free cash flow projections for the remainder year assume favorable seasonal working capital trends and positive earnings with Q2 being the most challenging period.
The level of borrowing capacity under revolving credit facility is tied to both the leverage test and an interest coverage test. These covenants also pertain to our wholesale financing JV with Wells Fargo distribution finance based on our anticipated earnings generation throughout the year and assume the revolving credit facility is fully drawn we.
We have sufficient cushion versus these tests.
I will conclude with an update on certain items that will impact our PNM and cash flow for the remainder of the year.
Aside from the free cash flow number I just discussed most of these estimates have not changed where have changed only slightly since the January call.
We expect to use between 40 and 60 million of working capital for the year incur between 115 million and 120 million of depreciation and amortization.
Our effective tax rate is estimated to be between 21 and 22% for the year with a cash tax rate anticipated to be in the low double digit percent range.
Our average shares outstanding figure is now 80.3 million shares taking new account shares repurchased in the first quarter.
We've already commented on most of the capital strategy assumptions on this slide which have been adjusted in response to the uncertain environment.
Two items are still worth, noting first as Dave mentioned, we repair upcoming quarterly dividend of 24 cents per share, which is unchanged from Q1 levels.
This decision is enabled by our strong financial position and consistent with our policy objective of sustaining our dividends through an economic cycle.
We will continue to evaluate our dividend policy on a quarter by quarter basis, as a business environment if unfold throughout the year.
Second.
Our net interest expense estimate of 70 million reflects higher borrowings under our revolving credit facility.
We have the ability to repay all or a portion of this facility towards the end of the year, depending upon liquidity requirements.
I will now turn the call back to Dave to continue our outlook comments.
Thanks Bill.
Although we find ourselves in a challenging operating an economic environments.
Business. This is still executing well against the operating and strategic priorities.
The health and safety of our employees as we restarted and continue to operate up businesses of course continues to be our priority across the enterprise.
Amongst the top priorities for all propulsion segment is continuing to expand market share, especially in the greater than 175 horsepower categories and they will buy the added production capacity now online for high horsepower engines with mix improvements arising from our ability to satisfy greater levels of demand in dealer.
Repower and international channels.
Optimizing production and controlling costs through this period of uncertainty is of course a priority.
However, we also remain focused on further developing exciting new products and technologies for engines and relate to control systems that will enable topline earnings growth into the future.
Finally, we remain committed to delivering improved technology and performance in our Sterndrive inboard lineup of engines.
These products have a smaller yet loyal customer base and that remains our goal to retain our market leadership position in this category.
Turning to our parts and accessories segment, our primary objectives remain relatively unchanged.
We anticipate boat usage continuing to be strong even with social distancing matches continuing into the future.
As a reminder, LP in a business is 75% aftermarket based on its well equipped to perform and challenging economic conditions. As boats is continue to use that boats and generate the need for consumables and replacement Pos.
Power products, which is part of the advanced systems group continues to be the market leader and electrical systems and products and is performing well even in these difficult conditions.
Our systems integration business continues to provide growth opportunities as boat Oems face, increasing technical complexity and seek to focus on the differentiating elements of their products.
Our global distribution network provides quick and efficient access to our breadth of products delivering to thousands of points of sale across the globe.
This business, it's an excellent channel for all peony products and provides Oems dealers and consumers with a one stop shop and the ability to efficiently manage inventory levels.
Finally, the advanced systems group, which includes power products and at one group of businesses was formed with the objective of optimizing our operating model in this area for both cost and growth.
Finally, a boat segment will continue to focus on launching profitable new products focus, particularly in its premium brands, while following its roadmap to improve operating margins across the portfolio.
As Bill discussed earlier revenue levels in Twentytwenty will be influenced by the level of retail activity over the remainder of twentytwenty as well as our outlook for 2021.
We will continue to monitor market demands and adjust all production plans as necessary to manage pipeline inventories.
We will also continue to expand freedom book club and execute against the strategic growth strategy.
We have added 15 locations, thus far in twentytwenty, bringing the number of locations to 225.
And I anticipate adding more locations in 2020 and continuing to capitalize on our synergy opportunities.
In closing despite the substantial near term challenges facing our business, we remain confident in our overall strategic plan industry, leading technologies market, leading brands and then the health and resilience of Marine consumer.
Our strong aftermarket businesses highly variable cost structure strong cost discipline, and operating capabilities and adaptable capital strategy position us to generate earnings and cash flow throughout the remainder of Twentytwenty.
Each of our businesses is maintaining flexibility to balanced production to meet market demands, allowing us to capture upside should demand be greater than anticipated.
The strategic portfolio actions and cost reduction efforts executed in the last two years together with our strong pipeline of new products and successful execution of our capital strategy.
Position us well to navigate the need some economic conditions and resume our growth trajectory as we exit covert 19 economic environment.
The environment. This year is substantially different than what we had planned fall back in January but given our solid strategic plan and strong financial position entering this crisis and our track record of taking quick and decisive actions as economic conditions change, but confident that we will exit the year with momentum and a focus on continuing to generate significant shareholder.
Value in 2021 and beyond.
Well, we clearly recognized an are responding to the very significant challenges. This crisis is presenting.
We were encouraged by the fact that the majority of U.S. States now include voting with some restrictions in list of acceptable recreational activities by the progressive reopening of more both dealerships.
Recent increases in online activity and lead generation relates to all products.
Lastly on behalf of myself and the Brunswick team I would like to send heartfelt best wishes to those most affected by cobot 19.
Leading those fighting and recovering from infection and the first responders healthcare workers and essentially employees on the front lines.
Brunswick will continue to do I'll pause and helping our communities persevere through and ultimately recover from this crisis.
I'll now open the lines for questions.
Thank you as a reminder to asking question you'll need to press star one on your telephone to answer your question press the pound Keith Please standby we've compiled kuni roster.
First question comes from.
With Wedbush Securities You May proceed with your question.
Hi, good morning, Thanks for taking my call.
So I was hoping you could hone in a little bit on April commentary I.
The marine Max talking about April being up.
Last week and it sounds like.
At least more recently it sounds like things are maybe turning up a little bit for you guys. I guess, maybe just speak to how that's even possible.
In the current environment and then within the context of your broader guidance I know you have technical guidance, but you've given us a lot of building blocks, most notably the retail is going to be down high teens low twentys.
Im assuming that that presumes that April sort of relative strength is not sustainable how should we think through that.
Hi, James It's Dave.
You know April has clearly been a month of two distinct house borrowed the first half was a little more like the end of March.
Right now he just the first time that we've kind of seen all of the indicates is pointing in a positive direction.
We certainly have seen good lead leading indicators on.
On.
The loan applications, which are up substantially recently versus last year and certainly.
Well getting more pull from dealerships I'd say, particularly in the premium end of the.
Marketplace. So.
Yeah, I would say.
The last.
If we can a half have been significantly different.
Obviously, we're excited about that.
Trajectory, we're hoping that it's sustainable, but we're not completely sure obviously, because there are a number of things that could happen.
You know is it fully know that trajectory is not fully built into.
The the full year guidance that we provided I think our full year guidance is much more.
Have a balance between what we see no CLO.
Longer recent period.
Okay. That's helpful. And then is there any way to think about I mean again, you've given us how to think about the industry for the year right high teens low twentys anyway to think about Q2 within that presumably Q2 is going to be significantly worse than that.
But but how are you thinking about just how how far Q2 could fall before re presumably work our way back up in the in the back half of the year.
Yes, James I guess I'll I'll take that when I think about it if you look at March as a kind of a benchmark marchex aside down mid teens.
Assuming that trends and some of the factors that affected march or more prevalent throughout the course of the month of April the way I think about it is is that it's quite possible that that April will look more like.
Two times the reduction that we saw in March but.
But that's very much of a very much of a guess on my part and I think a lot of what we're seeing is very much of a leading indicator, which should start to benefit I think may and June.
And just I think everybody needs to be careful with.
All of the disruptions associated with shelter at home, there's got to be some impact on the registration process. So I would expect that reporting to be extremely choppy in the next month or two.
But just to be clear and I apologize, but just to be clear if I'm thinking about first quarter being pretty flat.
And then April being down call it 20% and that's it sounds like to get to 20% for the year.
We wouldn't we you wouldn't be factoring in any improvement during the remainder of the year from a retail perspective, I am I thinking about that the wrong way.
I think you'd have to factor in the dynamics of March with with half of the stage reporting James with down mid teens theres. Another half of the states that are likely going to trend the same way so I.
I think with March being flat right now in all likelihood when it gets revise its going to be were revised lower and Martin I guess and the quarter was flat in the quarter with large was down as Bill said mid teens today, if you double that that that doubling up in mid teens down as what we think April would look like.
Actually and then things, presumably getting somewhat better from there.
Correct correct got it okay. Thanks, guys.
Thanks Jade.
Thank you. My next question comes from Joe Altobello with Raymond James You May proceed with your question.
Hi, guys good morning.
Well kind of honing in on your dealer groups, maybe the houses.
Dealers I mean, obviously not speaking your largest.
But beyond that some of the more smaller dealers.
Thank you sell through any sense for work for how their financials looking at either their liquidity situation is looking.
I think were broadly in pretty good shape.
We have still extremely low levels of.
I would say.
And dealer sentiment is certainly last week or two weeks trending more positive I think that more recently, we're seeing kind of mid 80 percents of dealerships open.
Many many dealers have maintained the service and maintenance operations kind of curbside pickup online sales and those kind of thing so I.
I would say bill coming from you, but broadly pretty low right. So we spend quite a bit of time looking at that especially in times like this Joe and.
Things like inventory levels mix of inventory that dealer zone.
The actions taken to defer interest payments and curtailment payments are obviously very helpful from a liquidity perspective most dealers.
Especially smaller dealers have applied for government assistance.
Which I think is helpful. I remember that service and getting both on the water and having boating activity resume in some.
Form or fashion is extremely helpful to most of these dealers and the fact that we're starting to see some uptick in what I would call leading indicators is also very helpful.
Got it Okay. Secondly in terms of the Opex issue you mentioned.
The 525.
I think that's down probably 70 580 million from what you originally have plan how much of that 75 to 80 is structural you thinking how much of that come back next year. It hopefully run on a better environment.
Yes, I don't know.
I would give you an exact number Joe I'd say a portion of it is definitely structural.
These are.
We.
I think as a company and what you've seen from AWS is.
As we tried to make things stake as much as we can the obviously there is some trends here that a very kind of localized around the production disruptions and stuff, but but.
We're working to.
Two.
Try and make sure that we continue the process of.
Oh.
Leaning out our cost base, although I wouldn't give you a number right now.
Thank you. Our next question comes from Scott Stember with CL King You May proceed with your question.
Hi, Thanks, guys for taking my questions.
Let me talk about as you're ramping back up in April and May I guess.
The capacity that you're.
Wrapping backup to at least in the near term compared to where you were before co, but just to try to get a sense of how things are ramping up.
Yes, sure. So on the engine side, we began to ramp up a couple of weeks ago. When we start with the first place. We thought it was the production line that produces anew newest platform. The one some five through 300 on the Fourfifty racing engine.
That was the area, where we've consistently had the highest demand on where inventory levels that got to the lowest.
Point.
We've now restarted.
400, 450 horse power line and then we will progressively introduce other lines I.
I think it obviously, we're managing this to make sure that all of our new protocols for health and safety work and you know weve progressively.
Ramping up but we feel that we're ramping up in a way that allows us to protect the upside.
Here, even illustrating progression.
On on the both sides I would say Oh, one of the things we Didnt really talk about is when we shut down operations fairly abruptly on March 23rd we trapped a lot of retail sold boats on the production line.
And we.
We work diligently during the interim period prior to the restart.
So re racquel production, a make sure that we prioritize getting those retail sold boats.
Off the line.
As soon as we restarted so.
I would say we're in a good position of having being able to restart with quite a significant portion of Q2.
Already covered by retail sole boats.
So that is allowing us to be progressive but puts a ramp up relatively quickly. So for example, apostle formula us as far as I know right. Now every production line is up.
So that might not be the case everywhere suddenly the places that have restarted more recently.
But I would say that we're balancing making sure that everything is supply base is good at the health and safety protocols work, but the good news is that we do have quite a lot of retail sold product that we can prioritize into next.
Several months.
Okay and with regards to the financial arm that you guys have you talked about I guess operate curtailments to some of the dealers maybe just talk about the expected impact and maybe just frame. This.
What your loss experience is where back.
During the financial crisis, and what you would expect this time around.
Yes, Scott I'll take that.
Yes experience was actually pretty manageable on repurchases just but for.
One large deal or that we had an issue with it was a high single low double digits sort of number for a couple of years.
And I would say that entering this.
Crisis, we are much better positioned.
From an inventory perspective, a mix of inventory perspective, and just general health of dealers I think.
Dealers as a lot.
Every cycle gain a little bit more experience they get a little bit more conservative and I think in total industry wide, we just get more discipline.
And I think that that is going to be very helpful. Depending upon how.
Along we need to deal with some sort of a demand shortfall.
Year over year, and I think we're pretty well equipped for that.
You know the curtailment payments are really just.
Putting in place something the loudest de loud dealer to pay against the boat when it's sold as opposed to collecting principal before it's sold.
And the objective here is to try to give dealers. Another couple of months of selling existing product and we're really talking about model year 2019 product. So it's a fairly small percentage.
Product that dealers have on there are lots that subject to do this.
That gives them a little bit of liquidity.
Relief at a time when they probably needed the most.
And the same with interest.
You know deferring the payment of interest until the boats associated with the.
With the interest costs actually gets sold and the caskets generated so they can they can pay up the interest obligation and the boat obligation.
Thank you. Our next question comes from Craig Kennison with Baird. You May proceed with your question.
Good morning, Hey, Thanks for taking my question as well and for taken a shot at framing 2020. Despite all these uncertainties.
It's nice to see the portfolio performing as it was designed.
Face another downturn.
To that end I'm curious if you have any visibility into boat usage I know in some markets. There are marinas that are closed and others boating might be one of the few recreational options available to.
People, so how can that all of that together to think through what.
Voting hours might accumulate a this year.
Hi, Craig it's David I don't if I could netted all lots of boating hours I would say what boating is allowed usage is really strong.
And.
We've we've seen that in a number of places, but it's it's been interesting with.
With Freedom Book Club, you know, we have a bit more access to the consumer and people who want to go boating I think our.
Membership growth in the last week was I think close to double what it had been at the same period last year, so that clearly.
Some people really desirous to get out on the water we've had a lot of excitement around reopening of freedom.
And then two people in the Florida, particularly I think boating has been strong but continued to be strong so.
I would say as soon as though as soon as the stay at home orders.
Oh lifted so they are in some places our.
Subjectively, we subjectively believes that people are going to want to get out there seems to be an awful lot of noise in places where people are precluded from boating people wanting to get out on the water because they viewed as being a safe activity in something again.
So do we fight I was just it was interesting gets a little anecdotally what we were talking earlier one of the staff members was saying I think this is pretty common because we could it that with school in college sports essentially.
Not happening through.
Probably spring and summer with the prospect of not taking international vacations or than people. You know I think number of people have decided to buy the boat that allows them to recreates and maintain distancing.
Which is the north favorable for us obviously as an industry.
Great. Thank you.
Thank you. Our next question comes from Tim Conder with Wells Fargo. You May proceed with your question.
Dave. Thank you for that last comment we're hearing some of the same things to work if there's a you're not taking the destination vacation may be saved on commuting or.
Eating out or whatever people are looking to do some some.
Our sports related things, including boating. So no. Thank you you confirming that.
Back to the original question asked by James on framing the market roughly 60% of the units of the market. It roughly the aluminum related boats. So I guess my real question. There is in your down high teens low twentys outlook.
Is is there any.
Color within that better or worse, if you look at aluminum versus salt water fishing versus other fiberglass any color you could give there and then you talked a little bit already about the outboard engine expectations.
Where are you seeing those large horsepower gains is it domestic is it an international balanced and is this a time right now where you can kind of put them put the pedal down and really accelerate that through this downturn do you feel in good position to do that.
Yes, so maybe I'll take the first the less by the question first on on high horsepower upward, yes, we're seeing market share gains domestically and internationally.
Through the first quarter, I would say I would characterize them as substantial.
Yes, the team up Mercury is absolutely not taking that foot off the pedal and we do see opportunity here.
So yeah. It remains a absolutely a priority. They do you have as you know the capacity to to service all of that channels now and there was no.
No coincidence that the first line that we had to bring back all the first two lines that we had to bring back up where a high horsepower product lines, where inventory at already dropped.
Two relatively low level, so yet domestic and international Weve seen particular strength internationally in Asia.
A lot of commercial applications, but but domestically as well I don't know if we when we were calculating them up back to your first body question and we're estimating the market I don't know if we had tremendous fidelity around the.
Hi, aluminum fiberglass I mean, I think we feel pretty good about our fiberglass categories, especially Boston whaler with a new product launches and a favorable comparisons over the remainder of the year I think thats a place where we're going to see some nice growth we saw spike in interest and see right, Yes Institute.
And I would I would characterize if you think about the way we've talked about outboard share gains.
Saltwater repower and commercial all three of those are benefit or all three of those are driving.
Share gains so.
It is it is unfolding the way we thought it would.
Thank you. Our next question comes from Gerrick Johnson with BMO capital markets. You May proceed with your question.
Great. Thank you good morning.
Sticking with Mercury here I was wondering what your order book looks like from the Oems you supply too and then.
You sold more dollars worth of outboards this quarter than boats. So can we talk about maybe the inventory pipeline out there for engines.
You know the pipe out to talk start with a pipeline. We monitor partly I was just as much as we monitor everything else and we're not.
Materially disconnected between the two.
Eric I think were.
In pretty good shape in both.
And very comfortable with both I think a lot of it has to do with maybe to our view of trailing versus four word.
You know the fact that we've had more growth and outboard sales for tends to kind of what the forward opportunity is retail.
If there is any sort of pipeline growth. It's there it's more about what our opportunity is moving forward at retail versus kind of what I would for to be a disconnect.
And the order books were obviously.
Everybody in the industry is ramping up at the same pace that we are.
And you know order books are building just like we'd expect them to.
Consistent with the way, we see production and everything unfolding here in the second quarter.
Okay, great. Thanks, and one last one from me. If you took you at the end of March and April together.
Where are you seeing geographic performance you see in certain geographies do better than others.
Yeah the U.S.
Oh U.S.
I'm not sure we've gotten that granular.
When I looked at March it look to brief pretty consistent across the board at least the states that it.
Reported.
You know garik it has to be influenced by where there has been restrictions.
In place and where dealers had been allowed to operate I think when we get a hold of April retail in for March.
Those things are going to correlate pretty well.
You know I will say that.
You know voting activity tends to be centered around.
Yeah.
Places, where there are major concentrations of population.
So I think.
You know as I think about people's willingness and ability to boat.
I think that's going to be interesting to see how that plays out in.
Some of the.
So side gain over the next two or three months to see.
Just how much.
Those areas of outperformed areas where.
Restrictions have been the greatest yet you know I would also I would also say that the.
A lot of the big voting area is a lightly to.
Rolex restrictions somewhat.
Faster I think although we were really pleased that.
The New York, New Jersey area open marinas.
Several weeks ago so.
In areas, where the what boating is a significant part of the economy I think.
We're seeing.
Good progress.
Thank you. Our next question comes from Mike Swartz with Suntrust. You May proceed with your question.
Yes, Hey, good morning, guys.
Bill maybe start off with just the commentary around.
Operating de leverage in your outlook. There. Thank you said mid Twentys mid Thirtys.
And historically I think you said over time that should trend more and low twentys. The mid 20 smitti. What's the disconnect there and maybe frame what the maybe lower ended the range me versus the higher end the ranges at all product mix or how should we think about that.
Yes, so that if you think about at the 25 to 35 is essentially kind of the range of what the volume impacts are gonna be.
You know if you mix together how.
Bodes DNA and propulsion will all de leverage you kind of gets you in that 25.
The 35% range.
The level of cost reductions of 50 to 75.
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He is kind of what we're able to do and flex in response to the volume reduction it's really the other operating factors that I'd say the biggest one there is just absorption.
Production shutdowns and pulling down inventories a little bit we are producing especially in propulsion I kind of below where the sales rate is for some period of time and that carries with it a little bit of extra you know under absorption on fixed cost and that's probably the head.
Wind that we would normally kind of each rating on volume against op expense.
Headwinds that we're facing in that operating factor column are a little bit greater than what we normally anticipate.
And not necessarily things, Michael what I would consider to be all kind of run rate factors either so.
Hi, pretty comfortable with where would you levering I think.
We're balancing out all three about the same and.
The volume reduction is a fairly significant volume reduction.
And with a portfolio that skew levering it 25% to 35% you really have to do a lot on the cost side to offset that and we quite frankly I think are at a period, where we ought. It's still continue to play a little law firms instead of just playing defense and the fact that we're maintaining.
R&D.
At 120 $130 million worth of spend and maintaining all of our critical products is the decision we can make because our financial position allows us to and it maintains all the optionality on growth that we expected in our last.
Three year plan so I.
I think all of that stuff is very important then it's just tradeoffs.
Thank you at this time, you would like to turn the call back to date for some concluding remarks.
Well. Thank you very much all of you for attending the earnings call I think as you can see the face the challenges presented by covert 19.
Companies responding decisively with additional actions, but you can particularly see.
The benefits of the changes we made to our business model and I'll portfolio went up cost structure on our capital strategy and our product investments over the last few years.
Well certainly encouraged by the trajectory of the leading indicators in the boat market, but we are maintaining a lot of flexibility as we go forward.
So we have the same great strategy, we have the same great team, we're continuing to invest in new products and technologies and digital initiatives, which will carriers into the future and we will be even for more formidable coming out of this than we were going in.
Thank you all very much.
Thanks, everybody thinks that stay safe.
Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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