Q2 2020 Brunswick Corp Earnings Call
Two Brunswick.
Corporations second quarter 2020 earnings conference call.
Participants will be in 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 now like to introduce sprint dolls Vice President.
Good morning, and thank you for joining US with me on the call. This morning are Dave folks.
A quick CEO and Ryan Williams 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 the factors to consider.
Please refer to our recent SEC filings in today's press release.
All of these documents are available on our website at <unk> Dot com.
During our presentation, we'll 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 consolidated financial statements accompanying today's results.
Now I'll turn the call over to Dave.
[music] Thanks, Brian the good morning, everyone.
Oh second quarter performance again demonstrated the power of our marine focused portfolio.
Despite the unprecedented disruption to the global economy, resulting from the cobot 19 pandemic.
Our operations and supply chain teams did a wonderful job of quickly and safely restarting a ramping up our global production facilities.
Rigorously applying a cobot 19 health and safety protocols.
We continue to enhance these protocols to keep up 13000 global employees safe and I want to thank them all for their hard work sacrifice vigilance during this challenging time.
[music].
Although businesses outperformed our expectations in the quota.
Our resilience aftermarket driven parts and accessories business stayed strong supported consumers.
They at home restrictions were lifted and boats has returned to the water in force.
Demands in the U.S. retail marine market accelerates it into May and June resulting in robust new boat and engine sales.
Sales to first time purchases are returning last spoke to is representing approximately half of new boat sales.
This surge in demand together with the suspension of production. The most about manufacturing facilities from late March into mid April due to the pandemic.
Resulted in our lowest mid season pipeline inventory levels in almost 20 years with 34% fewer boats and dealer inventory versus the second quarter of 29 team.
[music] this strengthening demand combined with market share gains, especially in Mercury's high horsepower outboard engine lineup resulted in strong topline earnings and cash flow performance than anticipated.
With the business it de leveraging consistent with our expectations shed on the first quarter call.
[noise] uncertainty in the global economy remains as a result, with the unpredictable trajectory of the pandemic. We will continue to focus on controlling costs through structural cost reduction actions, while remaining flexible without capital strategy to enable investments in new products and technology.
[noise], the covert 19 pandemic materially impacted our global business operations in the quarter.
We temporarily suspended manufacturing of most of our engine a boat facilities late in the first quarter a states implemented stay at home restrictions.
On April 13 resumed operations at Macquarie. So once you find a lack of Boston whaler and opens the remainder of all facilities over the following week.
I thought today, all global manufacturing and distribution facilities online with a continued focus on rigorously employing evolving and automating a colby sightseeing mitigation procedures, including temperatures screening distancing PPD cleaning protocols.
[laughter] approximately half of our dealer network was closed in some of the April but the network was fully operational by mid May.
Enabled by our distribution business, which continue to operate throughout the pandemic dealers have been extremely busy selling product and getting fotis I was on the water.
As traveled sports camps, another traditional summer activities have been restricted by the pandemic boats and usage has increased as people look to recreate outside in a social distancing environments.
Freedom Book Club was also affected by the pandemic as many of its locations were closed in April due to local stay at home restrictions, particularly in Florida.
How about once stores reopened several locations had many of the busiest weekends in history with strong membership increases across the network.
Finally, despite focusing on issues related to cope with 90, we've also maintained momentum an investment you probably programs.
We've accelerated our digital initiatives.
Progressing these programs and initiatives is critical and enabling brunswick's continue to differentiate itself.
But clearly the and the recreational marine industry.
I'll now provide some highlights on our segments and the overall marine market.
The propulsion segment continued its strong performance despite closing its primary manufacturing facility several weeks earlier in the quarter.
And having to ramp up production upon reopening.
The results of positively affected by healthy inventory levels entering the quarter, which allowed sales to continue during the shutdown period.
With sales, primarily primarily made the 11 international channels during that period.
Similar to the boat business Mercury's pipeline inventory of outboard engine, the significantly lower than past years, requiring production increases in the back half of the year, an end to 2021 potentially be on to refill pipelines and meet demand.
[noise], but creek continues to gain outboard engine market share, especially in high a false bump categories. While we are focused significant investment the new products and ask the in recent years.
Due to our strong product lineup Mercury has been successful unconvincing Oems to its products with a number of additional conversions and process.
A significant recent OEM when was the partnership with VLP announced in May well Mercury became the global outboard engine supplier of choice for be Lps USA spoke brands aluminum crafted manitou.
Became the exclusive supplier for its Australian tell water brand.
Subsequent to the May announcement Mercury also signed an agreement with Scandinavia, Scandinavian based freedom ball to become the preferred engine parts of the company's both brands thing a non cap in all global markets.
The increase aggressive new product development cadence remains on track with significant new product launches over the next year.
[noise] Propionic segment second quarter results were bolstered by distribution business as very healthy boat usage commenced will stay at home restrictions were lifted.
Our distribution business remained open throughout the pandemic supplying product to support thought deal is the attempted to quickly get boats prep and on the water summer.
Along with supplying essential businesses with critical products as they fought the grown a bars.
The aftermarket portion of our P. in a business had a steady quarter with accelerating demand in may and June.
The smaller OEM portion of the business had a slow start to the quota as boat builders were closed due to the pandemic.
Oh, the sales progressively increase through the quarter as customers came back online and retail demand strengthened.
Including power products LP in a business represented almost 40% of the company sales in Q2.
And was able to hold adjusted operating margins relatively stable versus Q2, 2019, while generating strong cash flow.
In June the business delivered revenue and earnings that's significantly exceeded 2019 levels.
The both segment remained profitable in the quarter, despite significantly lower volume in April juice the production shutdowns.
The business de Levered at a very respectable 25%, even with shutdown unrelated absorption on favorability.
Illustrating the benefits of our recent structural cost reductions despite the headwinds in the first half of the second quarter.
Pipeline inventory levels, a key driver of future wholesale boat sales ended the quarter approximately 23 weeks the lowest level at the end to the second quarter since the early two thousands.
Boston Whaler Sea Ray has seemed very strong retail sales and that dealer inventories are especially low.
Value brands have also performed well at retail and will also require significant pipeline replenishment.
We are hiring additional work because most facilities to ramp up production.
But it will be well into 2021 potentially lights up before pipelines that normalized.
[noise] freedom ballclub continues to exceed our growth expectations.
Freedom recently opened its 231st location and now has 33000 memberships companywide with over 4600, new memberships added in the quarter alone.
Each membership often has multiple members who can enjoy the membership advantages, resulting in an increased installed base for future boxes and more peony generation through increased boat usage.
There are not more than 3000 boats in the freedom fleet with strong sales of Brunswick products into the franchise network.
Finally, our investment in accelerating and improving our digital footprint has yielded strong consumer engagement and lead generation.
Together with other initiatives such as our virtual boat show held last week I'll focus on digital technologies is enabling us to reach and engage with a wider audience of potential new bonuses.
Next I'd like to review the sales performance of our businesses by region on a constant currency basis, excluding acquisitions.
In the U.S. total revenues were down 19% well international sales remained steady and without only 3%.
International markets remained relatively resilient to the quarter, a certain countries restored more normal business conditions earlier than the U.S.
Asia remained a bright spot with strong demand for high horsepower outboards generally for commercial focuses and studied DNA sales.
Finally, although not fully reflected in the revenue figures on this slide.
Canadian businesses have seen a measurable uptick in retail growth since mid June with the positive momentum carrying into July retail sales.
This table provide some color on the performance of us marine retail market.
The second quarter has historically been the largest retail quarter, comprising almost 45% of the token sales volume for the year.
As you can see retail improve significantly as we progressed through the quarter.
April retail was down significantly due to stay at home restrictions, which limited dealer operations and customer traffic.
May sales improved to states reopened a June was one of the strongest single retail months on record.
Note that an independent study of June boat registrations showed that 40% of Brunswick's New boat sales in June what's the first time bulk purchases.
Which outpaced the industry by a considerable margin.
Overall retail volume for the main powerboat segment was down 8% versus Q2 of 29 seen according to the Sai reporting to date.
Note that there is likely a significant amount of lifetime in the reporting as our own internal registration data shows June year to date retail growth for Brunswick brands, while exercise those shows is down 5%.
[noise] outboard engine unit registrations were up 13% in the quarter with Mercury outperforming the market, especially in high horsepower categories.
Finally based on information from our banking partners and internally through all the water finance business application for retail financing continued to outpace 2019 levels in July.
With steady retail demand continuing as we close out the primary retail selling season.
I'll now turn the call over to Ryan for additional comments and our financial performance.
Thanks, Dave and good morning, everyone.
As already discussed the covert 19 pandemic had a material impact on our global business operations in the quarter, making for difficult and frankly less meaningful year over year comparisons.
Net sales in the quarter were down 15%, while operating earnings on an as adjusted basis decreased by 35%.
Adjusted operating margins were 11.9% and we finished the quarter with an adjusted EPS of 99 cents down 32% from prior year.
Our results fared better than anticipated due to surging demand in the latter half the quarter and benefits from cost reduction actions taken in the last 12 months.
Corporate costs were up slightly in the quarter versus the prior year as the impact of cost reductions was offset by mark to market adjustments related to our nonqualified deferred compensation plan, along with expenses related to our long term incentive arrangements.
The pandemic also affected our first half results on a year to date basis net sales were down 12% versus 2019, and adjusted operating earnings were down 24%.
Adjusted operating margins were 11.8%, but despite significant headwinds we did levered at a respectable 28%.
I will now discuss our second quarter performance on a segment level.
Starting with the propulsion segment revenue decreased 14% as continued strong demand for high horsepower outboard engine categories and related controls and systems was offset as anticipated by the impact of production disruptions at Mercury and its OEM engine customers due to the Covance.
18 pandemic.
Operating margins and operating earnings were down in the corner as benefits from cost reduction activities or more than offset by lower sales and the unfavorable impact of absorption, resulting from the production disruptions.
As well as the impact of unfavorable changes in foreign exchange rates and tariffs.
If you remove the impact of incremental tariffs and changes in foreign currency exchange rates. The propulsion segment first half Twentytwenty adjusted operating margins would have exceeded first half 2019 levels.
Finally, despite a challenging quarter. The propulsion segment had a very strong earnings and margin performance in June as volumes increase.
And our recently in parts and accessories segment revenues were down 6% and operating earnings were down 9% versus second quarter 2019, as strong sales growth in the distribution business was offset by lower sales in the other businesses.
Adjusted operating margins held strong at 22.6% only 80 basis points below the prior year quarter with year to date operating margins only 40 basis points behind year to date 2019.
Both revenue and earnings were negatively impacted by staying home restrictions with disrupted dealer retail and OEM operations in many locations in the first half the quarter and offset recent cost reduction actions.
The advanced systems group was more affected by both builder closures in the rest of the segment SG has a higher percentage of sales to OEM customers that the engine DNA or distribution businesses.
Overall this is a very strong quarter for Japan, a segment and as further proof that our focus on growing the parts and accessories portfolio through both organic initiatives and do acquisitions continues to be strong strategy.
These healthy aftermarket driven businesses provide cycle resistance and unique earnings power and cash flow generating capabilities at times when other parts of our industry may be under more pressure.
This results in a more stable marine enterprise capable of consistently delivering value to our shareholders.
Revenues in the boat segment decreased by 32%, resulting from significantly lower wholesale volume due to the temporary suspension of manufacturing and most plants in April and the associated ramp up activities into may.
This segment remained profitable in the quarter, which is a testament to the footprint reduction cost containment and efficiency actions that the bulk of has taken in recent years.
As an aside during and after the GFC the boat business at times had quarterly revenue levels similar to its 2022nd quarter performance.
And the business was not profitable and any of those quarters.
Many of our brands had outstanding retail performance in the quarter, Boston Whaler and sea Ray outperformed their categories lawn continues to be the leader and freemium aluminum fish boats.
And our value brand showed healthy demand.
Retail in the back half of the year may be constrained, especially in our premium fiberglass segments, given lower dealer inventory, we will continue to steadily ramp up production in order to meet retail demand and refill pipelines.
Freedom Boat club, which is part of business acceleration also had another solid quarter as Dave mentioned earlier contributing more than 2% of sales in the quarter.
As a result of the surge in demand dealer pipeline ended the quarter at historically low levels, our lowest mid season pipeline levels and almost 20 years.
The other pipelines ended the second quarter with 23 weeks of both on hand measured on a trailing 12 month basis.
With units infield lower by 34% versus second quarter 2019.
We are ramping up production and all of our facilities to meet demand and refill pipelines.
Our pipeline projections for year end assume that dealer inventories will increase through the back half of the year.
However, given continued retail strengthen July inventory levels are likely not be normalized until after the 2021 primary retail season or potentially later.
Although we are through a majority of the retail selling season projecting to demand environment and operating results for the remainder of 2020 still involved a high degree of uncertainty.
The progression of the pandemic remains fluid and the resulting impact on our dealers OEM partners suppliers and the macro economy remains unclear.
These factors are ultimately influenced the performance of the marine market and the health of the global consumer.
In response, our businesses continued to prepare for a wide range of scenarios and our plan for the remainder of the year is based on the following assumptions.
We anticipate that U.S. marine industry retail unit demand will be up low single digit present for the year, let's stronger demand in the U.S. then it international regions.
We assume that wholesale comparisons will be significantly better than retail in the back half of the year due mostly to the pipeline reduction actions executed in the second half of 2019 as well as the current low pipeline levels that we've discussed.
We expect operating expenses up between 560 and $575 million for the year, which represents an approximate 10% decrease from our initial initial 2020 plan.
While slightly higher than our estimate after the first quarter. This increase represents costs necessary to drive growth in the improved market, while continuing to invest in the critical product and technology programs that we believe will generate future market share gains and earnings growth.
It cannot be overstated at the level of recovery of the global economy normalized channel operations and the absence of significant additional disruption to our global operations will be the most important factors in determining whether we ultimately perform in line with our current assumptions.
Subject to this uncertainty and although our formal guidance for 2020 remains withdrawn we anticipate our second half Twentytwenty revenue and operating earnings to exceed second half night 2019.
As our parts and accessories business should remain steady and our proportionate both businesses will ramp up production to meet demand and refill pipelines.
We believe that that full year free cash flow generation will be an excess of $325 million, which I'll discuss in more detail and a few slides.
I would now like to provide an update on our operating leverage assumptions.
Our operating deleverage in the first half of 2020 of approximately 28% was in line with communicated expectations.
Reductions in production volume resulted in unfavorable absorption in all three segments.
And each segment was also negatively impacted by other covert 19 related costs.
Deleverage in the propulsion and PNM segments was also affected by unfavorable changes in foreign exchange rate and tariffs.
Each segment was able to offset a portion of these impacts by taking cost measures and engaging in efficiency initiatives.
In the second half of 2020, we anticipate operating leverage of between high teens to low twentys percent, which would be in line with historical norms.
We expect production levels to increase in the second half removing the absorption headwinds while structural cost actions taken taken in the past 12 months, we'll continue to provide benefits.
Kobin 19 related costs will still be a headwind as our business has worked through potential supply chain disruptions higher absenteeism, lower productivity and additional training and procedures required to keep our employee population safe.
Our current liquidity position is very strong remains an area of great focus.
Liquidity planning is influenced by several factors, including our cash position.
Our ability to generate free cash flow and retain full access to our revolving credit facility.
As well as our debt repayment and planned dividend requirements.
We anticipate generating free cash flow for the year in excess of $325 million, which many of you will remember was our initial target back in January.
We plan to have total liquidity of almost 850 million by year end.
We ended the second quarter with cash balances totaling $553 million.
Versus $332 million at the end of 2019.
This increase includes free cash flow generation in the first half of $124 million.
And the remaining 185 million of borrowings under our revolving credit facility.
100 million of which was repaid yesterday.
Our first half free cash flow generation was approximately $110 million greater than the first half 2019, principally related to significantly less working cap capital usage, driven primarily by decreases in inventory levels.
Our free cash flow projection for the manger of the year assumes favorable working capital trends and positive earnings.
As a reminder level borrowing capacity under our revolving credit facility is tied to both a leveraged test and interest coverage test.
Based on our anticipated earnings generation throughout the remainder of the year, we have sufficient cushion versus these tests.
I will now conclude with an update on certain items that will impact our PML and cash flow for the remainder of the year.
Aside from the updated free cash flow number discussed earlier most of these estimates have not changed or if only changed slightly since the April call.
The one exception is on working capital, where we now estimate only a slight usage in the year of up to $10 million.
Given the demand and production dynamics inventory levels are down significantly through the first six months beer.
Although we anticipate modest inventory build in the back half of the year and our propulsion and PNM segments, we anticipate only slight working capital usage.
We anticipate between 115 and $120 million of depreciation and amortization.
Our effective tax rate is estimated to be between 21 and 22% for the year, where the cash tax rate anticipated to be in the low double digit percentage.
Our average shares outstanding figure remains at approximately 80 million shares.
Likewise, the capital strategy assumptions shown on this slide have not materially change since our estimate on the debt retire aside from our estimate on debt retirement in the year.
We're now anticipating that we will use $60 million of our considerable free cash flow generation to repay an additional portion of our 2023 term loan consistent with our initial plan to start the year.
This will result in total debt retirement of $100 million for the year with our debt to EBITDA leverage expected to approach one and a half times on a gross basis by the end of the year.
Our capital expenditure assumptions are increasing slightly reflecting the ability to potentially expedite additional capital projects in the year given available cash flow, assuming economic conditions do not deteriorate.
Also as announced last week, we will pay our upcoming quarterly dividend of 24 cents, a share which is unchanged from Q2 levels.
This decision is enabled by our strong financial position and consistent with our policy objectives of sustaining our dividend due out an economic cycle.
We will continue to evaluate our dividend policy on a quarter by quarter basis as the business unfolds throughout the year.
Finally, our slightly lower net interest expense estimate of $67 million reflects the earlier planned repayment of borrowings under our revolving credit facility along with the additional term loan debt repayment just discussed.
I'll now turn the call back over to Dave to continue our outlook comments.
Thanks Ryan.
Oh, it's been a challenging first half of the year of businesses are executing extremely well against the operating and strategic priorities.
In the propulsion segment, we continue to leverage the strongest product lineup in the industry gain market share in the past the market.
We've been historically underrepresented.
I will further growth into saltwater Repower and international commercial markets is being enabled by the capacity added last year.
And we'll be boasted by further investment an exciting new products.
Finally, with lower engine inventory levels across the globe. Our plan is to increase production in an efficient manner to refill the pipeline.
In the DNA segment, we anticipate favorable boat usage trends to continue as people look to remain active outdoors and as socially distancing setting.
Additional hours on the was that drive the need for consumables and replacement parts, which are delivered same day on next to thousands of points of sale across the globe through our distribution network.
We also expect power products to have a solid second half as it expanded systems integration business, which provides both Oems with completes in bespoke system solutions for the boat models.
Both segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger boxes.
Wrapping production to meet demand to refill pipelines and returning to our stated plans to improve operating margins.
We anticipate back half operating margins in the high single digits as additional volume benefits and cost initiatives should drive improved margin performance.
Freedom Ballclub continues to expand and execute against its strategic growth strategy.
We have added 25 locations, thus far in Twentytwenty, bringing the number of locations 235, and we continue to increase the share Brunswick products throughout the franchise network.
We will also continue to further our enterprise wide investments and capabilities in many areas, including digital marketing E Commerce consumer insights and data analytics, while also driving ace is strategy forward.
These initiatives will drive deeper up more seamless consumer engagement and enable future growth.
Again, I would like to thank Brunswick's 13000 employees and their families. In addition to our channel and supply chain partners for their incredible commitments and resourcefulness during this challenging time.
There remain many unknowns and unknowables that may impact our business in the shorter or longer term.
However, we continue to believe that our 2022 strategic plans financial targets remain and reach.
In closing, while we remain very cognizant of potential future macroeconomic headwinds and other uncertainties.
Ill resilient second quarter performance together with the surging marine retail environment has created substantial growth opportunities for the remainder of Twentytwenty and 2021.
Given recent sustained demand celebrated production levels over time will be required to rebuild pipelines.
Together with substantial upcoming new product offerings should drive wholesale growth through 2021 potentially beyond.
I'll focus on structural cost containment, along with our strong financial profile and healthy balance sheet them liquidity.
Enables us to invest in our businesses consistent with us standing objective of driving shareholder value.
While ensuring that we continue to prioritize and devote our best efforts to protecting the health and wealth of our employees in the code 19 environments.
Earlier. This week Brunswick was named Forbes list of America's Best employers for women.
From the thousands of companies that will consider for this on a onethree hundred made the final list.
Brunswick is ranked number 108 overall second in the engineering and manufacturing category and fourth in the state of Illinois.
This recognition come shortly after Brunswick was named by Forbes two it's less of the best employees with diversity earlier this year.
And in 2018, and 29 seeing being named among America's Best employers.
These awards reinforced our dedication and commitment equal opportunity inclusion and diversity across our entire global workforce.
And we will continue to prioritize bulk collections to accelerate progress.
We all recognize that we're operating on uncertain times, we plan to remain flexible so that we can react quickly to change capitalize on market demand and retain our financial strength, regardless of macroeconomic conditions.
On behalf of myself in the Brunswick team I would like to gain Sen continued heartfelt best wishes to those most affected by cobot 90, including those fighting and recovering from infection and the first responders healthcare workers.
Essentially employees on the front lines.
Gross it will continue to do all part in helping our communities persevere through and ultimately recover from this crisis.
I'll now open the lines for questions.
Thank you to ask a question you'll need to press star one on your telephone.
Withdraw your question press the pound.
Again, if you would like to ask a question Press Star then one key on your Touchtone telephone.
Our first question comes from James Hardiman with Wedbush Securities. Your line is open.
Hi, good morning, Thanks for taking my call obviously.
These are unusual times.
When it can make sure I adequately understood some of the.
Some of the numbers you've given us here I guess, let's start with June June was a record month.
For most of your brand and make sure I understand.
Is it a record.
Month of June or is it a record for any month.
Is that units or dollars or both.
And ultimately I'm trying to get at the fact that the industry.
Twice as big as it is today.
Or more at that time continues brands go back a long time whats the history that youre looking at what you're saying.
Good.
Hi, James This is Ryan, yes, you're you're onto it.
It's meant to be that June was in terms of units at retail a record for some of our but many of our brands all the way back to really the GFC, obviously window in the industry with 300000 or 400000 units are completely different scale, but certainly a record in the last 15 years I'd said sense.
Post GFC.
Got it Okay. Just wanted to make sure and then as I try to bridge the gap between what the exercise saying is.
This call it a 7% year to date decline for the industry.
And what you guys are saying, we'll be low single digit growth for the year I guess, if I take the.
Value, we would need double digit growth from the back half year obviously.
Most reliable thinking the world so.
But knowing that you guys. It's typically build some conservatism into include forward looking assumption.
How should I think about that was that more statement of.
The essence side number you're using for the first half is significantly better than that or are you assuming that the second half is still very strong for retail perspective.
Hi, James its debut both I think is the answer.
Our internal registration data is significantly ahead of Esa side, obviously, it's all brands but.
And I believe that all brands the performed very strongly but I think we also believe that there'll be some future revisions to us aside for the first half.
And certainly the momentum that we saw in particularly June is continuing in the marketplace. Obviously, we're getting into the latter half the selling season, but but July is very strong.
Okay, and then I guess last question, what do you think Youre business could do in terms of both retail for the year and I guess, if I just take a step back.
Retail for the industry is now expected to be at or better than it was.
When you originally projected at the beginning of the year your free cash flow numbers are back to where they were although on on lower Capex I believe.
Opex better than you thought I guess.
Possible for you to get back to the original earnings for the year.
I think on Ryan can help me, but I think.
2019 is possibly in reach.
The 2020.
I don't know if we could produce enough.
Products in the back half of the year to to get to 2020, we'll be doing as much as we possibly can obviously.
But I think 2020 is probably.
Not in reach for US, Yes, Dave I would say, that's right and James something to think about I mean, the the absorption impact in some of the costs that we rate that we incurred in the quarter.
Rob having the production.
Probably spend it and then having to ramp up in some and all of our facilities aside from PNM in some of that just going to be very difficult to kind of claw back and jump over to get to an original.
To get to the original guidance.
Got it and the retailers are way to think about how you guys are projecting your own retail for the year.
I think we believe that we will.
Be add or exceed the be industry. Yeah, I think I mean early indicators for as a very strong market performance for the RASM I mentioned earlier I don't think we said it specifically in the slides but.
We are significantly ahead of the broader market in terms of attracting new boats is and I think the.
We own as you know James the three of the foremost recognized brands in the industry and if you think about where new boats it might go.
I think they would go to these kind of recognized brands and what seem to benefit of owning those strong brands now.
Makes a lot of sense. Thanks, guys.
Thank you. Our next question comes from Randy Konik with Jefferies. Your line is open.
Yes, Thanks, a lot I guess, maybe a question for Ryan here.
The press release talk about.
Having.
We take up your expense.
For the year, obviously to kind of help with the.
Higher demand function, but.
That's only slightly higher so can you kind of elaborate a little bit more on.
Fishing season, you're kind of gaining in the business around.
I think those expense reductions and then kind of give us some perspective on.
How we can think about those continuing into the medium term over the next few years assuming that we.
We have a more robust multiyear demand environment that those costs kind of.
To give you your margin expansion, so maybe elaborate a little bit for us.
Patience easier finding and going after in the business.
Well I guess was question for Royal It maybe I'll jump in to take a foot bought us it's they.
So you know above the cost reduction structural cost reduction actions that we implemented in 29 theme with the flow through to 2020 that included a significant reduction in staffing levels throughout the entire organization on a number of organizational initiatives the consolidated.
Functions, particularly in the book grew but really across a number of.
Abroad.
Portion of the enterprise as well.
Just want to give you. Some exact an example of how we tried to put a stake in the ground on structural cost reductions. So we don't allow those increases to happen again.
Around a month ago, we closed one of our.
System supply plants Greenville.
That was supplying our.
Sea Ray both plan in Tennessee, and also in Florida, we have enough space in those two facilities to accommodate what was previously in Greenville, which is the least plan.
And we executed that a complete to that in.
Yeah, we've been in July.
So we are continuing to think about our footprint.
Leaving ourselves plenty of room for capacity expansion, but also looking to put progressive sticks in the ground to make sure that those.
Cost reduction actions that we've taken not just austerity they in fact the fundamentally.
Rich you saw us the structural.
Costs.
Brian Yes, No day, that's that's all correct I would also just add Randy we are still operating kind of a 10%.
Below our plan for the year in terms of Opex and a lot of that ingest day to day efficiency in the plant on the plans and facilities people, having project to take cost out of of everyday manufacturing processes.
And so that will continue I think it to your next point about what it may look like and 2021 and beyond obviously, we would have compensation some other things back to a 100%.
Levels, and and some inflation would come back in but that 50 million to that Dave discussed that we took out during the initiative discuss that should stay out and even if we bring some caught back into the business it would be all and growth initiatives.
Yes Super helpful sites up old wells that bodes well obviously from margin.
So.
Then I was wondering finally about the the demand side equation.
Try to get a little bit more perspective.
You comment.
In the release again.
About the.
Two first time purchasers of both.
Or returning last voters are coming back into the fold, maybe elaborate a little bit more on that anything you're seeing that gives you really interesting data points to share with us around.
Sign ups around the freedom.
Yes.
Business as it relates to demographics anything that you're getting out of your dealer network.
Give us additional perspective.
I'm trying to get out here is trying to think through.
The.
Demand environment, potentially changing or shifting more towards voting on a multi year basis.
Permanent semi permanent basis.
People to market more conviction of.
A lengthening demand cycle that you combine that with the.
Good cost savings there more permanent nature that can lead to a really robust story not just for next quarter, but over the next few years, that's what I'm trying to kind of get towards here.
No. Thank you for the question Great question, So I think.
When we said 50% of both is so people buying both.
Recently.
We're either new boats as our attending lapse boats is that's over a period that extends through two earlier in the year that.
Shift.
Has continued to evolve over the last few months. So if you think about it.
If your new boats or it's not a decision that you probably immediately come to if it's a lot. If you are less both you probably come to a more quickly. It's an obvious thing you've done before that you can reengage with there's more to think about if you're a new boats.
So what we file we now see surveys every month to try and keep a close a track of that and also work with independent third parties, who study that data.
And as I mentioned earlier in June for Brunswick brands, 40% of sales, where it's a new boats is that's not new boats is flip flops, both as its just new bonuses.
And we would significantly ahead of the industry.
Many points ahead of the broader industry.
Some of our value brands, particularly brand like Bayliner, which may be an entry point for a new boats.
In June 60% of baseline as sales with the new boxes.
So this is the breadth about portfolio and the fact that we're able to offer both value in premium across the company with different boating styles I think allows us to access.
Many of these new boats is I think we're going to overindex because of the strength of the Brandon on the breadth of the portfolio.
We believe obviously.
There are a number of things that due to keep these boats in both thing once they buy but I think.
One of the best indicates is when people because continuing in boating is having a great experience whether thats through great New boats, all through a freedom book club and we're providing those great experiences freedom certainly is benefiting hugely with massive membership growth.
Significantly beyond our expectations.
The demographics the freedom there are about twice as many women who are members of Freedom book Club band proportionally own boats. So its a.
Over index on women, we both also over index on younger boats as of Freedom Book Club. So I think a great demographic play for us and certainly our brands, which is some of the best known in the industry are attracting in a lot of new book.
Thank you and our next question comes from Scott Stember with CL King King Your line is open.
Morning, guys and thanks for taking my questions.
Hey, Scott.
Just talking about the new customers I think you said, 40% when new to your tier brands or new to boating could you just talk about the.
The age range that you're seeing from these new customers and maybe the.
Credit worthiness of these new people.
Yes, we have no and there's no change in credit worthiness.
So they're all very solid in terms of age that certainly trending younger.
A significantly younger I would say and also they tend to have larger families. Because there are different life stage, so they're looking for.
On things run about.
Both that.
For multi purposes.
Yes. The this is a new boats is not just need to our brands. So yes, we have a lot of demographic trends that we can share.
On those bonuses, but certainly trending.
Meaningfully younger.
And larger families.
All right and.
With regards to freedom. It seems like you guys are growing rapidly there.
Can you talk about the fleet of boats.
A replacement expansion and how.
Brunswick, we'll take advantage.
With.
The next brands as that expense.
Yeah, we so we know that I mentioned earlier 3000, both in the fleet.
The boats turnover about every two to three years, which means that now they're a.
Something in the range of what more than a thousand boats every year that are coming up to.
To be renewed by new boats, we penetrating.
Uh huh.
Well ahead of our expectations in terms of New Brunswick bodes Sea Ray is particularly popular base baseline as popular.
Our.
Pontoon brands are extremely popular and Mercury engines are penetrating even faster than Brunswick bodes because it's possible to convert non Brunswick bad brands to mccree engines as well so.
We are well ahead of our expectations and on an accelerating trend that sums of penetrating.
Free to bulk up without brands.
But do you think about the fact that weve on freedom for.
Just over a year now which means that we only had a relatively short.
Period to to both market and provide L brands.
I would say would do an extremely well and expect to continue to be beyond our expectations original expectations.
Got it.
And just one last quick one on the boat shows obviously.
Seems like a lot of them getting canceled what's the.
In the event that there are no boat shows or any major boat shows this year, what's how will this affect your.
New product launch cycle.
It will not have an effect meaningful effect on new product launch cycle I think every industry is coming to terms with the.
With digital or.
Kind of social media type launches of products in the absence of physical trade and boat shows now case.
Certainly.
We don't expect it to affect demand as it turns out the.
The impact of the pandemic is effectively substituted any impact that the boat shows might have had on kind of short term demand last week, we held a virtual boat show, which is extremely well attended.
So the attendance that show was like the attendance at the typical boat show and we intend to evolve our capabilities.
We are assuming that some at some point in 2021.
We'll be able to reinstate physical boat shows and there are few on the calendar in 2020 that were watching but we are developing capabilities to launch our products.
And attract a lot of interest.
Online in the absence of physical shows.
And it will not meaningfully affect the way that we launched products.
Okay.
Thank you. Our next question comes from Joe Altobello with Raymond James Your line is open.
Hey, guys good morning.
Joe.
First question.
Price that you talked about wholesale growth.
2021.
Yeah.
Given all the variable.
But that go into that I guess my question.
Well performance.
Impact that our channel inventories just so low at this point.
Get there.
Hello.
Yes run run until Renault should yet even relatively normal demand. If you think about the fact that.
12, 13 weeks behind where we should be which is a quarter of a use production.
So the up you know our ability to add a quarterly use production on top of meeting demand.
It's going to take as well well through 2021, even modest demand scenarios, we just can't.
Produce 125% production and expect to normalize pipelines and meet demand.
In a short period of time this is going to be an extensive along some rebuilding process.
Okay.
As a follow up to that you did mention this morning.
Are you laid out back in Miami are still.
I'm just curious what has to happen.
Both internally at Brunswick, as well as externally from an industry standpoint.
You guys to get there.
You know I lost the Ryan's comment on this but just broadly I think the.
The Noble's would say that the solidly and reach its the unknowables, that's causing us to.
I have a bit more caution about how we.
How we discussed this.
But.
The building blocks that we put in place for those targets that included very modest.
Market growth.
But the room, but the remain drove it was in our hands and remains in our hands and Ryan I Wonder if you want to comment on specific yeah, I mean, Joe if you'll remember the 2022 plan was predicated on very slight market growth call. It flat to up one or 2% the most depending on the year and what you're essentially see.
Saying is a little bit of acceleration in 2020.
Against those targets, but also allowing us to have more wholesale sales and the back half of this year into 21 into 22.
And that is really offsetting some of the capital structure pieces that possibly I really are delayed for instance share repurchases, which were planned in the 2020 plan where are going to be are likely to be shy M&A that was plan potentially delayed.
Into the back half of this year and into 21 and 22, so just a little bit a delay in terms of essence, some other things from capital strategy, but I would say that that is being.
Overcome by some market goodness that you've seen and then aside from that leverage margin free cash flow generation.
Actually given the inventory situation, which obviously helped free cash flows in the quarter. Those are not materially changed. So it's really just a function of a little bit more market.
Allowing us to offset some of the planned capital strategy pieces that are will be pushed out a little bit.
Okay. Thank you guys.
Thank you. Our next question comes from Eric Wold with B. Riley Your line is open.
Thank you good morning, guys.
Just a couple of follow ups on.
Freedom book clubs so.
The kind of 16% sequential increases in membership Q1 did you too.
Essentially what that was coming in on a same store basis, and I guess, what I'm trying to get that is if you're seeing.
Demand coming in to these clubs and kind of the existing club.
Hi, how are the club claims handling that in terms of.
Limiting memberships any sense and kind of wait list for people that want to join kind of a backlog.
How much capacity do they have to you.
Add boats to there to their network.
Hi, good space constrained I guess, Holly getting or announcement second part of the question is.
Okay got you previously on replenishment of the Bogin free to book club is that strictly on the time basis or is it on a usage bases. So if that usage ramps up.
That replenishment could accelerate.
So I think.
We think about this in a couple of ways I think in terms of long term kind of capacity for Freedom book Club I think we've explained before that we think that there are.
Pretty much in order of magnitude more potential locations for Freedom book Club and exist right now.
The U.S. and of course, we're exploring international expansion.
As well, but in the short term, you'll notice 3000 boats and 33000 members. So what we're trying to maintain that 10 to one ratio that we've described of members to boats.
Certainly at the moment.
Freedom is expanding pretty much.
There are several things that a kind of limiting the rates of expansion. If you like obviously, it's expanding math, but one other thing is we in.
New members have a boat.
Classroom and on wants a training.
And conducting that training that's a backlog conducting training takes a day to kind of get through that including four hours or so in the water we need people to train.
We need to make sure people adequately equipped to go out on the water.
And then certainly as some.
Some.
Locations have gone to I would say some less ordinary are extraordinary measures to acquire additional boats, including going to.
Kind of local dealers as opposed to get them getting them, a retail price versus getting them.
At a discounted price so.
Boat availability might affect them a bit, but I think there in a pretty good position overall.
So I would say there apart from a few logistical things there are relatively few limitations on continued growth of freedom and trajectory is very very strong. It's a network effect the mall locations around the more people know about though I know if you notice but the.
It seems like every newspaper that I read or online story that I read has a free to book Club story right now it's one of the stories that the pandemic from my perspective mother off the more people notice from the more people want to join but we are definitely.
Really maintaining the standards that you'd expect to have a premium franchise.
So both availability.
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The the turnover boats is.
Typically two to three years boat usage and freedom, it's high anyway.
So it isn't typically based on numbers of ours, it's just based on.
Some consideration so.
Multi the boat that the members expect and the and the value in the pre owned marketplace.
So I think that there might be an acceleration of of to an over but I think it's pretty steady now tends to be three years for fiberglass I think into use for kind of pump too.
Perfect. Thank you get drove questions appreciate it congrats guys.
Thank you our next question comes from.
Condor with Wells Fargo Securities. Your line is open.
Gentlemen, a in the congrats on a very volatile environment and to the whole or the organization.
A couple of things here.
So pretty clear that it's going to take through the majority of 21, and maybe even longer to get the channels, where there were whatever whatever piece of the business you're talking about.
Sort of back to normal.
At this point.
What type of supply chain constraints in particular labor or you are you not seen here.
As you as you.
Rent that back up and then.
Ryan on FX, we've seen a pretty.
Sharp selloff in the dollar specifically since the end of May I know you guys do a little bit of hedging, but how should we think about the FX contribution here you didn't have anything in there, but as we look into the back half the year and in particular 2021.
Thank you want to pick up yeah, why don't I think the FX is a pretty pretty straightforward, Tim obviously, a bit of a benefit if some of the dollar weekends, especially against against the euro.
But there is some offsetting obviously against the Canadian dollar and others, but certainly there is a there is a little bit of a goodness in terms of outside the U.S sales if the euro would would strengthen.
It doesn't really change materially change our hedging program.
But.
It does provide some good news for international sales.
Thats both question.
I'll labor live oak, starting much so yet so it is I would say that was.
We're seeing some.
Kind of on the margins at the moment evidence of.
Supply chain.
Meeting to work hard to cat to keep pace with us I would say, it's not holding back anything material right now.
But certainly as we ramp up and accelerate we are stretching some of the supply base. So I would say right now not a material issue for us.
But something we watch and monitor.
Every day I think one of the advantages we have is off scale in the marketplace I think we're a big customer.
For.
These marine suppliers and that gives us.
I think a strong position when it comes to obtaining the the components and systems that we need so something that we monitor a lot, but it's not materially holding us back right now.
Are you seeing issue for your own facilities look to hire folks are you seeing any challenges there.
This point.
What we were holding.
I mean, there are some logistical challenges because of covitz. So a lot of virtual job fairs and jump as physical jump as what we maintain distancing and those kind of thing.
Most recently.
Just two weeks ago, Boston whaler help a job.
Actually it was able to make.
Hiring office to about 150 people.
So it takes quite a bit of work in preparation, but we are making considerable progress in accessing high quality new Labour. Obviously, we when we do that we go through a bit of a period when.
They're not as productive as would be an experience.
Workup, but.
That is a small price to pay I think for increasing capacity in the longer term and we expect those kind of hiring.
Issues to be.
Behind us as we accelerates into the second half.
Our into into the more broadly into Q3, so really good progress it isn't completely easing straightforward, but we are making good progress.
Okay. Thank you gentlemen.
Thanks, Tim.
Thank you and we have a question from Craig Kennison with Baird. Your line is open.
Hey, Thanks, you've addressed most of my questions, but Ryan I think you mentioned postponing some M&A and other capital priorities, but you hinted that maybe in the second half for this year.
Pipeline had some.
Acquisitions in it maybe just address whether you know that pipeline is as active as ever.
Yes, Craig I mean as as usual, we don't discuss any specifics in terms of M&A targets, but I will say that you know there there are several areas and we continue to be very interested in from a acquisition standpoint, no primarily in our parts and accessories segment as well as technology things that are.
Business acceleration business unit is doing so yes, I would tell you that coming out as the as the macro economy looks to be still little bit uncertain, but a little bit better than it was 90 days ago I do think there'll be some opportunities in the second half.
Thanks, and then just looking at the election cycle. It would appear that tax policy may be up for grabs how how does that factor into your thinking for 2021, if we see.
No change in intact.
Yeah, It's obviously, a big variable Craig and it's something that our tax group works pretty tirelessly on looking at the a bench the opportunities and and frankly the other the impact of changes in rates are there are given as a global company as ours. We there are different things that we can do a structures wise to make sure.
That.
That we're maximizing both our income opportunity as well as our understanding the tax benefits and potential impacts. So we will be on it obviously on the tax you've done a pretty big sprint when the tax side, new willing to kind of came out over Christmas couple of years ago, and they'll be they'll be up for the task again.
This year I should should there be more changes.
Perfect. Thanks, so much.
Okay. At this time, we would like to turn the call back today for some concluding remarks.
Thank you very much. Thank you all pretending I'll call. We really appreciate it I know, we find ourselves in a very fortunate position of being able to offer.
Bond and diverse recreational experiences compatible with social distancing.
We're very excited about the surgeon to map, the new boats and boating experiences and bringing in new boats is really in.
In.
Recent times unprecedented numbers and our brands and products.
Really shining in that environment. The go to brands and products for new boats is I think we recognize the unknowns in a noble's in the current situation, but we're excited that are 2022 plan remains very solidly.
In reach.
Just one last thing I'd just like they are reflected it we mentioned earlier, but.
Getting these awards from also being the.
Best place to work for women best placed with diversity that means a lot for business like how is it means we can attract the kind of talent to develop the talent we need to stay ahead in the future. So we're very very excited about that.
Lastly, I would say is that many of you know bill Metzger, Oklahoma CFO, it's been an old previous calls with us like to thank bill once more for all those years of exceptional service to Brunswick output developing such a worthy successor in Brian.
Thank you very much pretending.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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